COVID-19 pandemic and transfer pricing

Kamila DOBOSZ
Tax Consultant w RSM Poland

The current pandemic has a significant impact on transactions between affiliated entities. Deadlines for taxpayers’ obligations related to submitting declarations of the local file preparation and information on transfer prices remain effective, i.e. they fall on 30 September 2020. Under Art. 31z of the so-called special act [1], the time limit has been extended until 30 September 2020 for entities beginning their fiscal year after 31 December 2018 and finishing before 31 December 2019.

Decreased revenue, the need to incur fixed costs, downtime in production and higher prices of production materials are only some of the negative effects of the pandemic. This is the reality business entities operating in all sectors have to cope with. The crisis related to the pandemic has already led, or will lead in the nearest future, to decisions on business management and functioning within capital groups. We may already assume that there will be changes concerning the terms of financing within the groups of affiliated entities. The set interest rate should correspond to the changing risk related to, e.g., the repayment of debt by loan borrowers.

Perhaps there will be a change in functions of parties to transactions or in the distribution of risks borne so far by only one of the parties. If – due to the above – there are transfers between related entities of economically important functions, assets or risks, having impact on taxpayers’ income, the obligation will arise to prepare transfer pricing documentation related to this restructuring.

The number of adverse factors that may affect the scale of conducted business activity is currently difficult to be predicted, taking into consideration how long the pandemic will last and how it will affect economies of different countries. However, we may expect that when it comes to transactions between affiliates, there will be a change in supply chains, transaction terms and functional analysis. All these changes are made with the aim to adjust businesses to the functioning at the time of the economic crisis.

It is also important, from the perspective of benchmarking, to consider Art. 11r. UPDOP: the benchmarking and the compliance analysis shall be updated at least every three years, unless the change of the economic surrounding affects the prepared analysis to an extent justifying the update in the year in which the change was made.

The economic surrounding of a business includes a number of processes and factors which together build the company environment. Changes in the surrounding, both in the micro- and macro-economic scale, will in the current situation have an impact on the functioning of affiliated entities. It is now crucial for taxpayers not only to meet the obligations imposed by the law, but also to react accordingly in the face of these changes.

Due to the changing economic environment, certainly there will be a need to verify the transaction terms set by related entities, as well as the set profitability. Will the profitability level achieved in 2019 be achievable also in 2020? Will then the prepared benchmarking remain valid in 2020? These are the issues that must be now taken into consideration. Let us hope that tax documentation for 2023-2025, prepared amid economic growth, will include the benchmarking for the years 2020 and 2021, negatively affected by the economic crisis due to the COVID-19 pandemic.

The business activity of Polish entities, which, if the situation was different, would generate a higher income (and now they may even incur losses), certainly will be negatively affected. The tax obligation related to the preparation of the local file for Polish entities for 2020 may concern a greater number of entities than it did in 2019, as one of the conditions exempting transactions between them from the reporting obligation will not be met.

[1] The Act of 31 March 2020 amending the Act on special arrangements related to preventing, counteracting and combating COVID-19, other infectious diseases and resulting states of emergency and certain other acts.