The change is significant not only in its scope, which is vast, but also because transfer pricing rules have been stable in Poland for over a decade.
It is also important to mention that, for the first time in many years, some consistency can be seen in the approach of tax authorities towards transfer pricing in Poland.
Before the implementation of the changed transfer pricing regulation, the instructions were issued from the Ministry of Finance to the tax offices to investigate four major areas of related parties transactions, therefore: business restructurings (covered also by changed TP regulation); intra-group financing; intangible transfers and allocation of profits to branches / PEs. This seems like the following law changes were aimed at giving tax offices some legal basis to investigate business restructurings issues. The remaining three areas were already reflected in the transfer pricing regulations in force.
The amended TP regulation is addressed to tax authorities. However it can be treated as a guideline for taxpayers on possible ways to secure their transfer pricing risk. Thus it is important to understand and get to know the amended TP regulation.
Below, the most significant changes introduced by the amended TP regulation, together with practical comments, are presented.
Business restructuring projects
The amended TP regulation introduces a definition of a business restructuring; indicating that they are transfers of commercially significant functions or assets or risks between related entities, which covers not only firm-wide supply chain changes but also less extensive restructurings involving shifts of risks among group companies both locally and between different tax jurisdictions.
The TP regulation requires that during a tax inspection the tax authorities focus on (a) whether the restructuring agreement would have been acceptable to independent companies, (b) business reasons/commercial justification for the restructuring, (c) benefits from the restructuring (including synergy effects), (d) options realistically available to the restructured parties, (e) whether the allocation of risks properly reflects a given entity’s capability to make risk management decisions or financial ability to bear the cost of the risk that has materialised.
The introduction of the restructuring guidelines may increase the number of tax audits at companies that have restructured their business over the last few years, particularly if they involved a transfer of intangibles and/or other assets, business risks or functions between related parties.
The new regulations will bring the discussion on business restructurings (that has been taking place mainly under APA procedures so far) to a new level, including discussions with tax auditors under tax control proceedings which can bring more controversies on the topic.
It is reasonable to be prepared for an audit about business restructurings because no one can predict how well prepared tax auditors can be, but at least companies can prepare through ex-post verification of restructuring assumptions and validation of how strong their project defense file or statutory transfer pricing documentation for restructuring are.
Low value-added services
The TP regulation also introduces a definition of low value adding services indicating that they are “routine services auxiliary to the service acquirer’s principal business, generally or easily available, which do not add any significant value for the service provider or the service acquirer”, and provides a list of examples of such services in attachment. The services listed as examples are either routine services, for example, administrative or accounting services, or more complicated ones such as research and development services or design of IT applications. The catalogue provided in the attachment to TP regulation covers most services that members of capital groups usually acquire; for this reason, tax authorities may be expected to frequently rely on the guidelines.
Additionally, the TP regulation sets out guidelines for tax authorities on how to examine low value adding services acquired by Polish taxpayers. Namely, tax authorities should first examine low value adding services by reference to the documents the taxpayer has provided, which feature various items expressly listed in the TP regulation.
In practical terms, these changes may imply the opportunity to simplify or optimise the scope of the necessary documentation or the need to collect additional documents, according to a company’s current approach.
For this reason, taxpayers should verify the intra-group services they acquire to find out if they fit the definition of low value-adding services provided in TP regulation and review their transfer pricing documentation of the acquisition of intra-group services to make sure that it features the items listed in the TP regulation. On the other hand, for some taxpayers it can mean that more documentation is required to comply with laws and secure the deductibility of costs – depending on the scope and quality of documents prepared so far.
The amended TP regulation expressly indicates that the cost base used for estimating the fee for low value-added services should exclude shareholder expenses. The respective costs cover, inter alia, the costs of organisation of shareholders meetings, group reporting, management and control functions performed solely on account of the ownership interest in one or more members of the group.
Under the new regulation, both service recipients and service providers should examine the pool of service costs to find out whether the costs are actually linked with the services that benefit the service recipients on the one hand, and whether they (the cost base and the remuneration) enable the service providers (usually holding companies) to achieve business efficiency.
The introduction of the shareholder expenses clause in the amended TP regulation offers a basis for tax authorities to examine the structure of costs included in the service fee calculation with scrupulous attention to detail to exclude any shareholder costs. In practice, the local companies will need to rely on detailed intra-group breakdowns of service fees and, in particular, shareholders costs.
Abolition of the hierarchy of methods
The amended TP regulation abolishes the hierarchy of methods of calculating profits in transactions between related parties, although it gives traditional methods priority for the purpose of assessing income in related party transactions. It is particularly important for taxpayers because previous regulations prioritised the comparable uncontrolled price method (CUP) and tax authorities were obliged to verify its applicability in each case. As a result taxpayers were posing a significant transfer pricing risk because of the subjective selection of comparables by tax authorities.
Tax authorities are not forced by regulations to verify the applicability of the CUP method. The tax authorities should analyze each transaction and, based on a functional analysis, assess which method should be used to calculate profits in transactions between related parties.
Additionally, the amended TP regulation provides specific criteria for the selection of the transfer pricing method. During the selection process, tax authorities will consider: (a) the specifics of the transaction, including the parties’ contribution to the transaction, (b) access to reliable data on similar transactions/companies on the market, (c) comparability of the respective transactions/companies.
· Aneta Błażejewska-Gaczyńska - Partner, Transfer Pricing Leader
Tax Advisory Department, EY Poland
· Joanna Pachnik - Senior Consultant
Tax Advisory Department, EY Poland
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