Which tax regime to choose for your 2018 tax documentation?

Kamila DOBOSZ
Tax Consultant at RSM Poland

On 1 January 2019, amended provisions of the CIT Act and PIT Act entered into force. When it comes to transfer pricing, the act includes a new chapter entirely dedicated to this topic. New provisions are aimed at adjusting Polish requirements concerning the documentation of related-party transactions to guidelines from the OECD. The implemented changes address, among others, the transaction thresholds, the scope of local and master file records, waiver of the obligation of transfer pricing documentation for domestic entities that do not generate tax losses, and furnishing a benchmarking study. In order to keep the lid on interpretation disputes, the transfer pricing chapter includes legal definitions of terms used in transfer pricing.

In 2019, taxpayers can choose the provisions according to which they will prepare tax documentation for the year 2018 that has just ended themselves. According to the amended provisions of the CIT Act and the PIT Act, taxpayers can apply provisions that are formally in force as of 1 January 2019 to group transactions concluded already in 2018. Preparing tax documentation according to the new regulations may make things easier for the taxpayer; yet, it may also generate new problems and obligations the taxpayer would not have to face, had they used the earlier regulations.

Higher thresholds

Since 2017, the first premise for determining the reporting obligation was the amount of the taxpayer’s revenues or expenditures within the meaning of the accounting regulations. If in the previous fiscal year this amount exceeded EUR 2 million, the transaction threshold, which amounted to EUR 50,000 and was respectively higher for higher revenues or expenditures of the taxpayer, would have had to be verified. Entities that generated revenues or expenditures below EUR 2 million did not have a reporting obligation. As of 2019, the transaction thresholds are higher and uniform, namely PLN 10 million for goods or financial transaction and PLN 2 million for service transactions. There is no mention, however, of any entity criterion or the verification of the entity’s size. As a result, the reporting obligation may apply to entities that are relatively small but nevertheless cooperate with related entities intensely.

No reporting obligation for domestic transactions

The waiver of the obligation to prepare tax documentation for transactions with Polish related entities (provided that they do not generate losses) is surely a helping hand for taxpayers. In the case of domestic transactions concluded between entities that do not do business in special economic zones and do not rely on public aid granted in accordance with the act on the support for new investments, such transactions are excluded from transfer pricing documentation. For taxpayers this clearly means that the reporting burden will be greatly reduced.

Benchmarking study

Under the regulations in force since 2017, any entity whose revenue or expenditure in the previous year exceeded EUR 10 million had an obligation to prepare a benchmarking study for their tax documentation. This meant that smaller entities had to prepare documentation with a much smaller information scope. In line with the regulations in force since 2019, a benchmarking study is a mandatory element of tax documentation, namely the local file, irrespective of the size of the entity.

Identification of related entities

As of 2019, the legislator has introduced the concept of “having a material impact” for the identification of related entities. If having a material impact is realised through holding directly either at least 25% shares in the capital or the profit participation right, it is quite easy to identify related entities. However, in the case in which the definition of “having a material impact” also involves an actual capacity of a natural person to impact the decision-making by a legal person or an organisational unit without legal personality in key economic aspects, it may cause serious problems to determine this “actual capacity”. The assessment of “having a material impact” may be subjective in nature.

Furthermore, as regards personal connections resulting from family relations, the existing restrictions applied only to domestic entities. Since 2019, these connections shall also be identified for foreign entities. This provision extends the scope of related entities, and the identification of foreign personal and family connections may prove truly difficult.

In 2019, the taxpayer is going to choose the tax regime that is more favourable for them for preparing the 2018 tax documentation. Each case should be treated individually, because in certain situations it may be more sensible to apply the regulations in force since 2017 than those from 2019. What should be taken into account is that the method of identifying related entities introduced in the amended regulations may increase the actual number of related entities with which the taxpayer concludes controlled transactions. The increased transaction limit is surely welcome; however, the lack of any entity size criterion may prove to be disadvantageous for some taxpayers. Preparing the documentation according to new regulations, i.e. together with the benchmarking study, may be more costly for the taxpayer than in the case of applying the 2017 regulations.

Summing up, the choice of the tax regime for 2018 tax documentation will totally depend on the individual and case-specific situation, as well as the type and number of transactions concluded between related entities. The benefits the taxpayer obtains from choosing new regulations shall be analysed thoroughly, also in the context of costs resulting from the preparation and preparing complete tax documentation.