Should you prepare a benchmark analysis of transfer prices? Practical advice for micro and small entrepreneurs

From this article, you will learn:

• how having the status of micro or small entrepreneur affects the obligation to prepare a benchmark analysis of transfer prices;
• from which tax year the financial data should be analyzed in order to determine whether an entity has the status of a micro or small entrepreneur.

The amendment of The Corporate Income Tax Act in force since 1 January 2022 with regard to transfer prices provisions introduced significant simplifications in terms of prepared documentation. The changes enabled, for example, exemption of micro and small entrepreneurs from the obligation to prepare a benchmark or compliance analysis. Unfortunately, these provisions are not entirely clear and what raises most taxpayers’ doubts in interpretation is the method of determining the status of an entrepreneur. How should it be done? 

How have the provisions changed and what are the new simplifications for some taxpayers concluding transactions with related entities in 2022?

Let us first look at the changes the introduction of which has caused confusion:

In Article 11q of The Corporate Income Tax Act (UPDOP), specifying in paragraph 1 the obligatory elements the local tax documentation should include, the Polish legislator added paragraphs 3a and 3b indicating the premises, on the basis of which the taxpayer’s documentation does not have to contain a benchmark or compliance analysis.

According to the text of the provision in the aforementioned Article 11q, paragraph 3a UPDOP:

In the case of:
1) controlled transactions concluded by related entities who are a micro or small entrepreneur within the meaning of provisions, accordingly Article 7 paragraph 1 point 1 and 2 of the Act of March 6, 2018 - Entrepreneurs' Law, (…) the local transfer pricing documentation does not have to contain a benchmark or compliance analysis.

Moreover, the legislator, at the same time also added a detailing provision, contained in Article 11q paragraph 3b UPDOP. It states that:

The provision of paragraph 3a point 1 applies in the case of an entrepreneur, who within the last tax year fulfilled the conditions specified in Article 7 paragraph 1 point 1 or 2 of the Act of March 6, 2018 - Entrepreneurs' Law.

Can you use the simplification while preparing transfer pricing documentation for 2021?

According to the provisions in Article 57 of the Act of October 29, 2021 amending The Personal Income Tax Act, The Corporate Income Tax Act and some other acts (Journal of Laws 2021, item 2105), the new provisions (Article 11q paragraph 3a and 3b of UPDOP) can be applied to transfer pricing documentation prepared for the tax year starting after 31 December 2020.

Therefore, these provisions could have already been applied while preparing transfer pricing documentation for the tax year 2021.

Is it truly „a simplification” for transactions concluded with related entities?

The taxpayers’ doubts in interpretation are primarily raised by the method of determining the status of an entrepreneur.
Firstly, the entrepreneurs were not sure at what point they should determine the status of the enterprise (to check the possibility of exempting an entity from the obligation to prepare a benchmark or compliance analysis). Secondly, it was also unclear what financial data the taxpayers should use for this purpose.

The provision of Article 11q paragraph 3a of UPDOP, mentioned above, in this respect refers to the definitions of a micro and small entrepreneur, specified in the provisions of Article 7 paragraph 7 point 1 and 2 of the Act of March 6, 2018 - Entrepreneurs' Law (hereinafter also: "UPP"). 

The terms used in the Act mean:

1. micro-entrepreneur – an entrepreneur, who in at least one of the two recent financial years fulfilled the following conditions collectively:
a) annually on average hired less than 10 workers;
AND
b) has achieved the annual net turnover from the sale of goods, products, and services and from financial operations that does not exceed the PLN equivalent of EUR 2 million, or the total assets of their balance sheet prepared at the end of one of those years did not exceed the PLN equivalent of EUR 2 million.

2. small entrepreneur – an entrepreneur, who in at least one of the two recent financial years fulfilled the following conditions collectively:
a) annually on average hired less than 50 workers;
AND
b) has achieved the annual net turnover from the sale of goods, products, and services and from financial operations that does not exceed the PLN equivalent of EUR 10 million, or the total assets of their balance sheet prepared at the end of one of those years did not exceed the PLN equivalent of EUR 10 million;
–and who is not a micro-entrepreneur.

Therefore, the exemption is possible when an entity concluding a controlled transaction in the documented tax year has the status of a micro-entrepreneur or small entrepreneur in accordance with the provisions of UPP.

At this point, attention should be drawn to the provision of Article 11q paragraph 3b of UPDOP, according to which the possibility of exemption from the obligation to prepare a benchmark or compliance analysis is applicable in the case of an entrepreneur who has fulfilled the conditions allowing for recognizing them as a micro or small entrepreneur within the last tax year. 

However, the provisions of UPP (to which Article 11q paragraph of 3a UPDOP refers) indicate that the appropriate conditions should be fulfilled in at least one of the two recent financial years. Therefore, it may seem that the financial and employment data for the last two tax years should be subject to analysis...

The Director of the National Revenue Administration Information Center (KIS) explains and dispels doubts

This dilemma is still not resolved. Therefore, we should gladly accept the individual interpretation with reference number 0111-KDIB1-3.4010.556.2022.1.JKU of January 16, 2023 which dispels the doubts on this matter.

According to the director of KIS, assessing an obligation to prepare a benchmark analysis (or compliance analysis) should be done according to the provisions of Article 11q paragraph 3a and 3b of UPDOP.

In the view of the authorities, these provisions indicate that the evaluation (that is: assessing the status of an enterprise) whether in a given year exemption is possible, should be done for the year, for which the transfer pricing documentation is prepared.

Therefore, the given entity must have the status of a micro or small entrepreneur in the documented tax year. So, in the case of preparing documentation for 2022, the status of an enterprise in 2022 will be assessed.

The authority issuing the interpretation also pointed out that due to Article 11q paragraph 3b of UPDOP detailing the provision of Article 11q paragraph 3a of UPDOP, for the tax payer to be able to use the exemption, the conditions specified in UPP and enabling to qualify an entity into the category of a micro or small entrepreneur, should be fulfilled only in the recent tax year.

Therefore, in the case of assessing the taxpayer’s status in 2022, only financial and employment data for 2021 should be taken into account. What is important, referring the provisions of Article 11q paragraph 3a of UPDOP to the provisions of article 7 paragraph 1 point 1 and 2 of UPP applies only to the conditions the fulfilling of which allows to recognize the given entity as a micro or small entrepreneur. We cannot use these regulations to indicate the periods when the data should be assessed in order to determine if these conditions are fulfilled (since this matter is regulated in Article 11q paragraph 3b of UPDOP).

What micro and small entrepreneurs have to know about the new rules?

According to the view presented by the tax authority in the above-mentioned tax interpretation of January 16, 2023 (ref. no. 0111-KDIB1-3.4010.556.2022.1.JKU), in order to determine whether the given entity which is obliged to prepare transfer pricing documentation in a given year can be exempted from the obligation to prepare a benchamrk or compliance analysis, it must be assessed if the entity has the status of a micro or small entrepreneur in the tax year to which the documentation obligation applies to. This assessment is based on financial and employment data exclusively for the previous tax year.