New transfer pricing regulations: new challenges

Kamila DOBOSZ
Tax Consultant at RSM Poland

The turn of 2018 and 2019 is the time of publishing new regulations on transfer pricing. These regulations are included in Chapter 1a of the CIT Act and Chapter 4b of the PIT Act. On 29 and 31 December 2018, regulations of the Minister of Finance were published in the Journal of Laws, being secondary legislation to transfer pricing provisions. ​

As regards corporate income tax, the following regulations have been published:

• on transfer pricing documentation in the scope of corporate income tax (Journal of Laws of 2018, item 2479),

•  on information about transfer pricing in the scope of corporate income tax (Journal of Laws of 2018, item 2487),

• on transfer pricing in the scope of corporate income tax (Journal of Laws of 2018, item 2491),

• on the method and procedure of eliminating double taxation in the case of related parties’ profit adjustment in the scope of corporate income tax (Journal of Laws of 2018, item 2474).

The aforementioned regulations fail to introduce any revolutionary changes, as it was the case in 2017. The underlying aim of the regulations is primarily to address the different aspects of the method of preparing transfer pricing documentation in a more precise and systematic way. In some respects, the scope of information the taxpayer is obliged to submit has been simplified. Other elements, like e.g. reporting with the TP-R form, will require the entity to provide more detailed data, which is bound to involve a greater work load.

Below I will discuss selected aspects of different regulations.

Regulation of the Minister of Finance on transfer pricing in the scope of corporate income tax

The first discussed regulation defines the elements of local and group documentation of transfer pricing. According to the new regulations, the scope of the local file and master file has not changed much as compared with the regulations in place since 2017. Certain terms have been specified more precisely. An example here is the introduction of a description of the market environment and financial information. Some other elements have been extended, like the “functional analysis”, which – apart from the description of functions performed and the involved assets and risks – should also include essential changes as compared with the previous fiscal year. What is more, an obligatory element of the local file shall be agreements or tax interpretations concerning the controlled transaction. A new thing is the obligation to prepare data for the benchmarking study in electronic format that can be edited. The legislator has also indicated the elements that should be included in the compliance analysis, which shall be prepared if the benchmarking study, cannot be carried out.

As regards the master file, the scope of tax documentation elements required under the Polish legislation has been brought in line with the recommendations of OECD guidelines. That is surely good news for taxpayers. Polish regulations in this respect were much more detailed, and it often proved problematic when there was a need to obtain relevant information from a group of related parties and explain why the Polish legislator is more demanding and meticulous than the OECD regulations. The simplifications include, among others, the description of the financial situation of a group of related entities. The obligation to present a list of credits and loans from independent entities constituting more than 5% of the total external financing has been withdrawn. It has been replaced with the information on relevant financing agreements concluded with non-related parties. It will also be no longer necessary to indicate geographical markets where at least 10% of the profits are generated within different relevant value-added chains.

Regulation of the Minister of Finance on information about transfer pricing in the scope of corporate income tax

The second regulation sets forth what data shall be included in the TP-R form that replaces the CIT-TP/PIT-TP form introduced in 2017. The information submitted to the Head of the National Tax Administration in the TP-R form is much more detailed than the scope of data taxpayers had to provide in the CIT-TP/PIT-TP. The TP-R form provides the tax authorities with detailed data on price determination and verification for a given type of transaction. In practice, the TP-R form includes results of benchmarking studies that are supposed to help tax authorities in selecting entities to be audited, namely those that show the risk of understating income in transfer pricing. And it is pretty clear that completing this form will present serious difficulties.

Regulation of the Minister of Finance on transfer pricing in the scope of corporate income tax

The next regulation provides definitions of such terms as: restructuring, intangible assets difficult to evaluate or arm’s length value. Obligatory elements of a benchmarking study and its stages have been specified. There is also a description of additional factors that must be taken into account in the benchmarking study of intangible assets and intangible assets difficult to evaluate. Chapter 3 of the regulation defines the methods of transfer pricing verification, where apart from the five basic methods, there is also the valuation technique called another method. A novelty that has surely been awaited by taxpayers is the option of calculating the indicator not only in respect of the costs, introduced for the net transaction mark-up method. When calculating the financial indicator presenting the relation of the net profit margin, the taxpayer may refer to a relevant basis, such as: revenues, costs or assets or elements of revenues, costs or assets. Furthermore, the discussed executive act sets forth the stages of a benchmarking study in the case of restructuring.

The Regulation of the Minister of Finance on the method and procedure of eliminating double taxation in the case of related parties’ profit adjustment in the scope of corporate income tax

The last regulation discussed here regulates the rules and principles under which domestic entities shall request for income adjustment in the case of upward adjustment made by the authorities of another state following an income audit in a related party. The regulation defines the scope of information to be included in the request, along with the procedure for submitting the request by the taxpayer and its consideration by the minister.

Summing up, the regulations issued by the Minister of Finance introduce a lot of changes as compared with the regulations in place since 2017. To a large extent, these provisions offer a more precise regulation of issues that have previously been addressed too vaguely. At the same time, under the provisions of the regulation on information about transfer pricing, the taxpayers shall be required to present an entire range of detailed data concerning the whole of their operations, which, in practice, is going to offer tangible benefits only to tax authorities as they will use this tool for selecting taxpayers to be audited.