Transfer Pricing 2021 Comparisons

Last Updated April 09, 2021

Contributed By Baker McKenzie

Law and Practice

Authors



Baker McKenzie is represented in 46 countries and has a leading global transfer pricing practice, providing clients with world-class service in all facets of transfer pricing. Supported by more than 240 advisers, lawyers and economists, the firm's transfer pricing team advises global companies on transfer pricing matters including design/planning, financial modelling, implementation, documentation, audit defence and litigation. It has extensive experience in competent authority procedures and has successfully accompanied and advised clients in numerous sizeable and high-profile advance pricing agreements and mutual agreement procedures. Baker McKenzie's economists specialise in transfer pricing and work in close co-operation with transfer pricing lawyers, providing economic modelling that takes into account specific transfer pricing requirements. Its transfer pricing experts have a unique awareness of international transfer pricing policy. As a law firm, Baker McKenzie's advice is legally privileged subject to local laws and regulations; its lawyers can litigate against tax authorities if disputes arise.

Polish transfer pricing legislation generally follows the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines) and applies where a domestic entity is related to a foreign entity or two domestic entities are related. If intercompany transactions are not arm's length, the Polish tax authorities are entitled to assess the taxable income.

The arm's length principle and the transfer pricing documentation obligations are included in the Polish Corporate Income Tax Act. Detailed provisions on the methodology for applying the arm's length principle and the content of the transfer pricing documentation are included in the regulations issued by the Minister of Finance. These regulations help to implement the principles described in the OECD Guidelines in Poland. The OECD Guidelines do not constitute a part of the Polish legal system; however, in some cases Polish courts will refer directly to the OECD Guidelines.

Consequently, the Polish transfer pricing regulations consist primarily of provisions of the relevant statute, supplemented by regulations and official explanations of the Ministry of Finance. Taxpayers may also apply, in individual cases, for private tax rulings to confirm an interpretation of binding law.

Moreover, an advance pricing agreement (APA) procedure is available in Poland. See 7 Advance Pricing Agreements for further detail.

Polish transfer pricing regulations have undergone frequent and far-reaching changes in recent years. Although the arm's length principle has been the guiding principle for many years, the provisions related to transfer pricing documentation have changed significantly in recent years.

Beginning in 2017, the Polish requirements as to the scope of the obligatory transfer pricing documentation have more closely followed the OECD developments. This was the year in which the obligation to prepare a benchmarking analysis was introduced, which means that – effectively – the burden of proving that a transaction has taken place at arm's length has been transferred to the taxpayer. Moreover, 2017 was the year in which the local file/master file format for the documentation was introduced.

An additional amendment to the regulations came into force on 1 January 2019. After this amendment, the Polish regulations related to documentation closely followed the OECD Guidelines. Moreover, these changes have reduced the compliance burdens for some taxpayers by raising the transfer pricing documentation thresholds for master file and local file submissions and introducing safe harbours.

The criteria for determining the obligation to prepare local transfer pricing documentation has also changed: a taxpayer's turnover is no longer relevant in determining the obligation to prepare the documentation. The obligation to prepare the local file is now based on the value of the transaction and the transaction value thresholds were defined for different types of transactions, as described in 8.1 Transfer Pricing Penalties and Defences.

Although preparation of transfer pricing documentation is more time-consuming under the new regulations (eg, a benchmarking study is now required in all local files), the number of transactions that are subject to documentation requirements has decreased.

The Polish transfer pricing rules apply when one entity has a significant impact on the other entity. Significant impact means the following.

  • Directly or indirectly owning at least 25% of the:
    1. shares in capital;
    2. voting rights in control, management or administrative bodies;
    3. shares or participation rights in profits or assets or the expectancy thereof, including participation units and investment certificates.
  • The actual ability of a person to influence the making of key business decisions by an entity.
  • Being married or having consanguinity or affinity up to the second degree.

Related entities also include partnerships and their partners.

Moreover, if there are relationships between entities that are not established or maintained for justified economic reasons, including those aimed at manipulating the ownership structure or creating circular ownership structures, the entities between which such relationships occur are considered as related entities.

Five transfer pricing methods described in the OECD Guidelines were adopted in the Polish Corporate Income Tax Act and described in more detail in the regulations issued by the Ministry of Finance. These methods include:

  • three "traditional transaction methods" – the comparable uncontrolled price (CUP) method, the cost plus method, and the resale price method; and
  • two "transactional profit methods" – the transactional net margin method (TNMM) and the transactional profit split method.

In addition, in some cases, other valuation methods/techniques may be applied.

The Polish provisions explicitly provide for an exception to the application of the five transfer pricing methods described in the OECD Guidelines and listed in the Polish Corporate Income Tax Act (which are listed in 3.1 Transfer Pricing Methods). According to the exception, where it is not possible to apply the listed methods, another method, including valuation techniques, that is most appropriate under the circumstances shall be used.

The regulations indicate that in selecting the method that is most appropriate under the circumstances, particular consideration should be given to:

  • the terms and conditions that have been established or imposed between the related parties;
  • the availability of information necessary for the correct application of the method; and
  • the specific criteria for its application.

In the Polish transfer pricing regulation, there is a certain hierarchy of methods. First, the application of one of the five methods listed in the Corporate Income Tax Act must be considered (see 3.1 Transfer Pricing Methods). As to selection of one of the five methods, the most appropriate method for the documented transaction should be applied.

Only if it is not possible to apply one of the methods listed in the Act, shall another method, including valuation techniques, most appropriate in the given circumstances be applied.

The use of ranges and statistical measures is necessary when it is required by the applied transfer pricing method. In such a situation, an indication of the range resulting from the analysis together with a description of the statistical measures, if applied, is necessary.

According to the Polish transfer pricing regulations, transactions may be deemed comparable if any differences between the transactions or entities being compared could not significantly affect the price in such comparable transaction, or if reasonably accurate comparability adjustments can be made to eliminate any significant effects of such differences.

Consequently, a comparability adjustment should be made if it is necessary to achieve a higher degree of comparability.

The typical adjustments recognised in OECD papers – such as working capital adjustments, adjustments for accounting differences or country risk adjustments – are acceptable in Poland.

The Polish transfer pricing regulations include some specific provisions relating to the transfer pricing of intangibles. In particular, there are some differences with respect to comparability analysis and the preparation of transfer pricing documentation for transactions involving intangibles.

In transactions involving intangibles, the comparability analysis should cover the assessment of the parties' ability to perform a given function and bear the given risk connected with intangibles.

The Polish transfer pricing regulations include specific provisions relating to hard-to-value intangibles. Hard-to-value intangibles are defined in Poland as intangible assets for which, at the time of their transfer between related parties:

  • there were no reliable comparables and forecasts of future cash flows, or anticipated revenue from those values, or
  • the assumptions used in the valuation of these values were subject to a high degree of uncertainty, as a result of which the final economic result from the transfer of these values was difficult to determine.

In transactions involving hard-to-value intangibles, the comparability analysis should cover an assessment of whether unrelated entities in comparable circumstances:

  • would recalculate the initially determined price based on a contractual clause concerning the price change;
  • would renegotiate the originally agreed conditions; or
  • would accept contingent payments for the settlement of a comparable transaction.

It is also necessary to determine if the transfer price forecast as of the date of the transaction took into account all predictable circumstances, affecting the level of the price.

Moreover, the tax authorities are entitled to a retrospective verification of a transaction if there is a discrepancy between the forecast and actual data. Reassessment of a tax basis is possible if the difference in the transfer price in hard-to-value intangibles transactions amounts to at least 20% of the transfer price calculated on the basis of the forecast data.

Polish regulations do not contain a specific pricing method regarding cost sharing/cost contribution arrangements. The tax authorities may analyse the comparability of the conditions set out in the cost contribution agreement concluded with the related entity with the conditions that would be established between non-related entities.

Polish regulations refer to cost sharing/cost contribution arrangements in the context of an advance pricing agreement (APA). It is possible to cover a cost contribution agreement with an APA.

Generally, transfer pricing adjustments should be made before the annual tax return is filed. In Poland, legal entities file their annual tax returns by the end of the third month after the end of the tax year.

The taxpayer may, however, recognise the transfer pricing adjustment in the tax books of the tax year to which the adjustment relates and correct the previously filed annual tax return for that year, provided that numerous conditions are met.

Transfer Pricing Adjustment – Requirements

Beginning from 2019, a rule was introduced stating that a transfer pricing adjustment is a revenue or deductible expense, as appropriate, in the year to which it relates. However, formal conditions were introduced to recognise in tax settlements such transfer pricing adjustments.

Therefore, in order to benefit from the above rule, the following conditions must be met jointly:

  • in controlled transactions conditions were established which would be set by unrelated entities;
  • there has been a change in material circumstances affecting the conditions established during the tax year or the costs actually incurred or revenues obtained that are the basis for the calculation of the transfer price, and to ensure their compliance with the conditions that would have been established by unrelated entities, it is necessary to make a transfer price adjustment;
  • at the time of the adjustment, the taxpayer has a statement from the related entity that it has adjusted the transfer prices in the same amount as the taxpayer; and
  • the affiliated entity has a place of residence or seat of management on the territory of Poland or in a country or on a territory with which Poland has concluded a double taxation agreement and there is a legal basis for the exchange of tax information with this country.

Therefore, the provisions introduce an approach whereby the transfer pricing adjustment should be included in the period to which it relates and not in the period when the correcting invoice or other document confirming the adjustment was issued.

Thus, transfer pricing adjustments have been excluded from the general rule applicable in Poland, according to which:

  • if the adjustment is caused by an accounting or other obvious error – the adjustment is made in the period to which it relates; and
  • in other cases – the correction is made in the accounting period in which the correcting invoice was issued or, if there is no invoice, in the period in which another document confirming the reasons for the correction was issued.

Guidance to Be Issued by the Ministry of Finance

The Ministry of Finance is working on some guidance related to the application of the above regulations on transfer pricing adjustments. As part of this work, the Ministry has published draft guidance with explanations.

In the draft guidance the Ministry has clarified when the taxpayer is required to have a statement from the related entity that it has adjusted the transfer prices in the same amount as the taxpayer. The Ministry explains that the taxpayer should have the statement no later than the date on which the adjustment is entered into the tax books. However, according to the draft guidance, only if the taxpayer does not have the statement at the time of the annual tax return submission should it not include that adjustment in its annual tax return for the period covered by the adjustment.

Moreover, the guidance confirms that upon receipt of the relevant statement from a related entity, the taxpayer may include the adjustment in the tax year to which the adjustment relates and correct its annual tax return.

It is important to note that the draft guidance indicates that the statement is required for a taxpayer who makes an "in minus" correction. A taxpayer who makes an "in plus" correction does not need to have a statement.

Moreover, according to the draft guidance, the statement may take the form of an email or a letter received from the related entity signed by an employee of the related entity responsible for recognising the adjustment in the tax books of this related entity or by an employee of the accounting office/group entity to whom the related entity outsources its bookkeeping.

Moreover, if a related entity issues an accounting document (eg, a debit note or an invoice documenting the correction) which constitutes the basis for making the correction and provides the taxpayer with this document, this document constitutes the statement. However, if an in minus correction is made without the taxpayer receiving an accounting document, the taxpayer should obtain the related entity's statement.

The EU Directive concerning the mandatory automatic exchange of information in the field of taxation (Directive 2014/107/EU) has been implemented in Poland. Poland has applied a uniform global standard for tax information exchange, including automatic information exchange.

The Polish regulations on exchange of information are to a large extent similar to those in force in the EU and OECD member states, as well as in other countries that have committed to exchange tax information in co-operation with the OECD.

Poland participates in the exchange of information under the Common Reporting Standard and the US Foreign Account Tax Compliance Act (FATCA). Country-by-country reporting was also introduced in Poland.

Poland has an advance pricing agreement (APA) programme that allows taxpayers to conclude an agreement with the tax authorities regarding transfer pricing.

Taxpayers may request an APA in order to negotiate and agree on a transfer pricing approach to related-party transactions. The Polish regulations provide for the possibility of concluding unilateral, bilateral and multilateral agreements. APAs may cover present and future transactions between related entities. A taxpayer applying for an APA must submit complete documentation for the transaction in question and pay the appropriate administrative fee. The process of obtaining an APA is time consuming.

The only competent authority for conducting the APA proceedings and concluding the arrangements is the APA department in the National Tax Administration, where a dedicated team of experts operates.

In Poland there is co-ordination between the APA process and mutual agreement procedures. It is possible to meet with representatives of the Ministry of Finance for both procedures jointly, which may ensure that both procedures are conducted more efficiently.

Filing an application under the mutual agreement procedure does not interfere with filing an APA application. Both procedures can run at the same time.

An APA may not be issued for controlled transactions:

  • completed before the date of application; or
  • which commenced prior to the date of filing the application and which, on the date of filing the application, are subject to tax or administrative court proceedings for the period of any of the applicant's two most recent tax years preceding the tax year in which the application is filed.

APAs may cover a maximum period of five years starting from the beginning of the applicant's tax year in which the application is filed.

The APA procedure is subject to a fee corresponding to 1% of the value of the transaction concerned. However, the fee may not exceed the minimum and maximum amounts specified. The fee ranges:

  • from PLN5,000–50,000 for APAs relating to transactions between domestic entities;
  • from PLN20,000–100,000 for transactions involving a foreign entity; and
  • from PLN50,000–200,000 for bilateral and multilateral agreements (proceedings involving authorities from other countries).

An APA may cover up to five years.

An APA may have limited retroactive effect as it may cover the period from the beginning of the applicant's tax year in which the application is filed. Past years, however, cannot be covered by an APA.

Personal Liability

The persons responsible for finance management and tax issues in an entity (eg, members of the board or the financial director) who:

  • do not submit the required documentation on time;
  • do not submit the transfer pricing statement confirming preparation of the local documentation, and transfer pricing information (TPR report);
  • submit a statement or TPR report after the deadline; or
  • certify information that is untrue,

may bear penal-fiscal liability and be punished with a fine.

According to the Polish Penal Fiscal Code, in FY 2021 the fine may amount to a maximum of PLN26.9 million.

This is particularly important since, as of FY 2019, in the above-mentioned statement confirming preparation of the local documentation, the board not only confirms that the documentation has been prepared, but also that the prices used are market-based (ie, meet the arm's length principle).

Consequently, the board may be personally liable in the case of a transfer pricing audit if the transfer prices do not correspond to market conditions.

Additional Tax Liability

Apart from the above personal liability of the persons responsible for finance management and tax issues in an entity, in the case of overstating the tax loss or not showing taxable income in whole or in part as a result of incorrect pricing in a controlled transaction, a decision on additional tax liability may be issued.

Additional liability may amount to 10% of the amount of the overstated loss or understated income (ie, in the case of an assessment: taxation at the standard corporate income tax (CIT) rate plus an additional penalty). These provisions are applicable where the additional income on the related-party transaction has been assessed by the tax authorities, whether or not the transfer pricing documentation has been duly presented. In certain cases, the additional tax liability may double or triple, and thus amount to 30% of the amount of overstated loss or understated income. Such cases include a situation where transfer pricing documentation has not been prepared at all, as well as in a situation where the basis for determining additional tax liability exceeds PLN15 million (in respect of the excess over that amount).

In Poland there are three levels of transfer pricing documentation, which in addition to the local and group documentation also includes country-by-country reporting based on the OECD's template.

Local File

Transfer pricing documentation is required in Poland. The obligation to prepare a local file for a transaction arises when the transaction value exceeds the following thresholds:

  • PLN10 million for commodity transactions and for financial transactions; and
  • PLN2 million for service transactions and for all other transactions.

By way of exception, in certain cases preparing documentation for transactions concluded between Polish entities is not obligatory. To take advantage of this exception, the parties to the transaction may not benefit from a CIT exemption and may not report a tax loss in the year in which the transaction is carried out.

A local file must include certain essential information, including:

  • a benchmarking study;
  • a description of the related entity;
  • a description of the transaction, including analysis of functions, risks and assets;
  • financial information.

Documentation should be reviewed on an annual basis to determine if the functional and economic analyses are still relevant. A benchmarking study should be updated every three years or upon a significant change of economic circumstances.

Transfer pricing statement

Within nine months from the end of the tax year, taxpayers have to submit a statement confirming that:

  • the local documentation has been prepared; and
  • transfer prices of controlled transactions covered by the local documentation meet the arm's length principle.

As a rule, in the case of companies, the statement must be signed by all management board members and submitted electronically (through the official platform). The statement may not be submitted by an attorney.

The documentation itself should be filed with the tax authorities within seven days upon their request.

Master File

Group documentation must be attached to a local file developed by taxpayers who belong to a group of companies which prepares consolidated financial statements, and which earned in the previous year consolidated revenues of more than PLN200 million (or the equivalent in a foreign currency).

While the local documentation must be prepared in Polish, the master file may be submitted in English. The tax authorities may, however, request a translation into Polish, which has to be submitted within 30 days from such a request.

Transfer Pricing Report

Moreover, the transfer pricing information (TPR report) should be filed within nine months from the end of the tax year. Taxpayers submitting the report are required to indicate a range of information on controlled transactions. The report covers general financial information of the entity for which the form is submitted, including values of financial indicators measuring the financial situation (eg, operational margin, return on assets, return on equity).

Country-by-Country Reporting

Where the turnover of the capital group for the preceding tax year exceeded EUR750 million, a country-by-country report (CbCR) should be filed in one of the EU countries or in the country which introduced the CbCR obligations and concluded the agreement on exchange of information with Poland.

The CbCR must contain a wide range of information about the whole group, including information about every entity in the group such as basic financial data and scope of business activity.

If the CbCR is not filed in the applicable country, the Polish entity is obliged to file the CbCR in Poland within 12 months from the end of the tax year.

In addition, a Polish entity belonging to a group of entities will each time be obliged to submit by the end of a given tax year a notification indicating the company which will submit the CbCR for that year as well as the country in which the CbCR will be submitted.

Polish transfer pricing regulations do not significantly deviate from the standards set by the OECD Guidelines. However, Polish regulations are very concise compared to the OECD Guidelines and do not address many of the issues raised in them.

The Polish regulations explicitly refer to the OECD Guidelines on several points, which confirms that the OECD Guidelines are a model for Polish regulation and can be a useful tool when problems of interpretation arise.

It is possible to refer to the OECD Guidelines directly before the tax authorities or administrative courts, as in many cases the authorities and courts refer to them in the justifications of their decisions and rulings.

However, due to the fact that the OECD Guidelines do not form part of the Polish legal order, they are only of an auxiliary nature and cannot constitute an independent basis for interpretation of the law.

In Polish tax law, there is a primary, basic transfer pricing rule, which is the arm's length principle, according to which affiliated entities are obliged to set transfer prices on terms that would be agreed between unrelated entities. The regulations provide some, very limited, exceptions to the application of this rule (eg, applicable to controlled transactions, in which the price or method of determining the price of the subject of such controlled transaction results from the provisions of laws or normative acts issued on their basis).

Although OECD standards cannot be applied directly in Poland as they are not an official source of law, the impact of BEPS Actions 8–10 and Action 13 on Polish transfer pricing regulation was significant.

BEPS Action 13 was implemented to the greatest extent into the Polish transfer pricing regulation through the introduction of three-level transfer pricing documentation with a local file, master file and country-by-country reporting (see 8 Penalties and Documentation for further detail). Some of the Polish regulations in this regard are a direct translation of the model legislation proposed by the OECD.

Moreover, several solutions proposed in the BEPS Actions – which related to intangible assets, risk allocation or high-risk transactions – were introduced into the Polish regulations.

Polish transfer pricing regulation does not address the situation in which one entity bears the risk of another entity’s operations by guaranteeing that other entity a return. Such structures are generally not accepted by the Polish tax authorities (ie, in minus corrections of the results of a Polish entity related to an entity which are not transaction-based would not be accepted as a tax cost).

The UN Practical Manual on Transfer Pricing did not have a notable impact on Polish transfer pricing regulation.

Polish transfer pricing regulations include safe harbour measures for low value-added services and interest on loans between related parties. If using the safe harbour measure, there is no obligation to prepare a benchmarking study.

Low Value-Added Services

In the case of controlled transactions that constitute low value-added services, the tax authority may not question the taxpayer's income with respect to the amount of the mark-up on the cost of these services if the following conditions are jointly met.

  • The mark-up on the costs of such services has been determined with the use of the cost plus or transactional net margin method and amounts to:
    1. not more than 5% of costs – in the case of the purchase of services; and
    2. not less than 5% of costs – in the case of the provision of services.
  • The service provider is not an entity resident, established, or managed in a territory or country with harmful tax competition.
  • The recipient of the service prepared a calculation that includes the following information:
    1. the type and amount of costs included in the calculation; and
    2. how the allocation keys were applied and the rationale for the selection of the allocation keys for all related parties using the services.

Low value-added services can only be services from among the following categories:

  • accounting and auditing services;
  • corporate finance services;
  • human resources-related services;
  • IT services;
  • communication and promotion services;
  • legal services;
  • fiscal services; and
  • administration and office services

Moreover, to qualify as low value-added services, the services:

  • must have the character of services supporting the economic activity of the recipient;
  • must not be the main subject of activity of a group of related entities;
  • provided by the service provider to unrelated parties must not have a value that exceeds 2% of the value of those services provided to related and unrelated entities; and
  • must not be subject to further resale by the service recipient, excluding resale of services purchased on their own behalf, but for the benefit of another related entity (re-invoicing).

It is necessary to provide the tax authorities with relevant information needed to verify that low value-added services have actually been provided.

Safe Harbour for Interest

The regulation of safe harbours for loans was introduced in Poland in 2019. The Ministry of Finance indicated that this regulation is addressed in particular to small and medium-sized taxpayers.

The tax authority may not question a taxpayer's income in terms of the interest rate of an intercompany loan if several conditions are met in total.

  • The interest rate of the loan on an annual basis as at the date of conclusion of the agreement shall be determined on the basis of the base interest rate and margin specified in the announcement of the Ministry of Finance valid as at the date of conclusion of the agreement – based on the current announcement of the Ministry of Finance, from the lender perspective the minimum margin is 2%, and from the borrower perspective the maximum margin is 2.3%, and the base rates are EURIBOR 3M, LIBOR 3M, WIBOR 3M respectively.
  • No provision has been made for the payment of fees other than interest in connection with the granting or servicing of the loan, including commissions or premiums.
  • The loan was granted for a period not exceeding five years.
  • During the financial year the total amount of liabilities or receivables of the related party under the principal of loans with related parties, calculated separately for loans granted and borrowed, is no more than PLN20 million or its equivalent.
  • The lender is not an entity with its place of residence, registered office or management in a territory or a country that applies harmful tax competition.

Poland does not have specific rules governing savings that arise from operating in Poland. Generally, the Polish tax authorities follow the OECD papers related to location savings.

The Polish tax authorities strongly prefer the application of a Polish comparable, if available.

Starting from 2018, limitations on the deductibility of intra-group service/licence fees were introduced in Poland. Although these limitations are formally not included in the transfer pricing provisions, they apply only to certain transactions with related parties.

Where the total amount of intangible asset costs exceeds PLN3 million per annum, a 5% EBITDA limit is imposed on tax deductible expenses incurred directly or indirectly by affiliated entities in excess of PLN3 million for the tax year resulting from:

  • market research, consultant services, advertising services, management and control, insurance, guarantees and sureties, data processing, and similar services;
  • all kinds of fees and charges for the use or right to use a copyright or related property rights, rights set out in industrial property law, licences, and value equivalent to know-how in the field of commerce, industry, science or organisation; or
  • transferring the debtor's insolvency risk due to loans other than those granted by banks and co-operative savings and credit unions, including liabilities resulting from derivative financial instruments and similar services.

EBITDA is calculated as the difference between:

  • total revenues decreased by interest revenue; and
  • tax deductible expenses decreased by tax deductible amortisation costs and interest expenses.

The restriction does not apply to:

  • service costs, fees and charges directly related to the production of goods or the provision of services;
  • re-invoiced costs;
  • costs incurred by the company forming the tax capital group for other companies in the group; and
  • costs to the extent that an APA covers the correctness of the calculation of the remuneration for services, fees or charges.

Moreover, expenses for all services, fees, and charges are not excluded from tax deductible costs if they do not exceed the threshold of PLN3 million per annum.

Consequently, only taxpayers that exceed PLN3 million in the fiscal year for the costs described above, incurred directly or indirectly for affiliated entities, cannot deduct any cost surplus above 5% of EBITDA.

However, it is possible to carry forward costs that were not deducted in a given tax year due to the above limitation for deduction in the next five tax years.

Import transactions between two related entities are treated as related-party transactions for customs valuation purposes. The price declared for the imported goods in such transactions may be examined by the competent authorities to determine whether it is affected by that relationship. Consequently, co-ordination between transfer pricing policies and customs valuation is required.

A transfer pricing audit is performed in Poland as part of each CIT audit and may also be initiated as a result of an audit conducted at a related entity. Many of the audits initiated in recent years have focused solely on transfer pricing. Transfer pricing audits are often conducted by specialised transfer pricing units created within regional Customs and Tax Offices.

The tax authorities are allowed to issue notices requiring taxpayers to provide specified information or documents. Moreover, the authorities may also request documents regarding periods other than those covered by the audit (eg, the authorities demanded the submission of transfer pricing documentation for years that were not covered by the ongoing tax audit).

Burden of Proof

The burden of proof regarding irregularities relating to tax liabilities generally rests with the tax authorities performing the audit. This principle means that the tax authority must prove a breach of tax law, if this has taken place.

As a significant exception to this rule, taxpayers are obliged to include in the transfer pricing documentation a benchmark analysis documenting the arm's length nature of the remuneration in intercompany transactions.

Proceedings before the Tax Authorities

If irregularities are found by the tax authorities, which are not corrected voluntarily by the taxpayer, the tax audit ends with the issuance of a tax decision specifying the level of tax arrears and default interest. The amount arising from the tax decision needs to be paid together with the interest on the tax arrears up to the date of payment of the amount of tax due.

Within 14 days after delivery of a decision with which the taxpayer disagrees, the taxpayer has the right to file an appeal against the decision issued by the tax authority of the first instance. The appeal is submitted to the tax authority of the first instance and is then forwarded to the second-instance body which reviews the case.

The issuance of a negative decision specifying the duty to pay tax arrears usually also entails a threat of the initiation of a tax crime investigation of the members of the management board or persons responsible for the discovered tax shortcomings.

Proceedings before the Administrative Court

If the taxpayer is not satisfied with the outcome of the appeal procedure, a complaint may be filed with the voivodeship (provincial) administrative court within 30 days from the date of delivery of the decision by the tax authority.

Payment of the tax is not suspended by the submission of a complaint against a negative decision.

The court with jurisdiction over the case is determined by territorial rules and the taxpayer has no choice in this regard.

Most importantly, the complaint must:

  • contain a brief description of the facts;
  • show the breach of the law or legal interests; and
  • satisfy all formal requirements.

The tax authority responds to the charges raised in the complaint. The court reviews the complaint and issues a verdict (this usually takes up to several months).

The taxpayer may file to the Supreme Administrative Court a cassation petition within 30 days from the date the transcript of the unfavourable judgment by a voivodeship administrative court being delivered to the taxpayer.

The petition can only be based on either of the following grounds:

  • a breach of substantive law or its erroneous interpretation or inappropriate application; or
  • a breach of the provisions of the proceedings, if the infringement could have a significant impact on the result of the case.

The judicial precedent on transfer pricing is not well developed in Poland.

With respect to transfer pricing in Poland, many of the court rulings issued so far concern rather specific formal issues related to, for example, documentation obligations. Moreover, many of the judgments issued over the past years have lost their relevance to the current legal state as a result of recent changes in the regulations.

Transfer Pricing Judicial Verdicts

Supreme Administrative Court verdict dated 13 October 2016

In this judgment, the Supreme Administrative Court ruled that the application of the 50% penalty rate (ie, the old penalty rate before the current rule of a 10% additional obligation was introduced), applicable in situations where the taxpayer's income is additionally assessed and there is a lack of transfer pricing documentation, must be delivered to the taxpayer within three years from the end of the calendar year in which the tax obligation arose.

Supreme Administrative Court verdict dated 27 August 2020

In this judgment, the Supreme Administrative Court questioned the possibility of recognising, in tax settlements, transfer pricing adjustment based on the profitability of a Polish-related entity. This court verdict represents an approach often taken by the Polish tax authorities by which in minus corrections of the results of a Polish-related entity based on profitability (not transaction-based) are not accepted as a tax cost.

Tax Authority Rulings

It should be noted that apart from court verdicts, rulings issued by the tax authorities have a significant impact on the application of transfer pricing regulations in Poland. There are two types of rulings issued by the tax authorities:

  • the tax authorities, at the request of the taxpayer in an individual case, issue a private tax ruling that protects only the taxpayer who requested it; and
  • the Minister of Finance may issue general tax rulings that provide protection to all taxpayers.

Private tax rulings

A taxpayer applying for a private tax ruling is required to describe exhaustively the facts or future event and its standpoint as to the legal evaluation.

A private ruling covers an evaluation of the applicant's standpoint. In case of a negative evaluation of the applicant's standpoint, the authority describes and justifies the position it considers should be adopted. If the taxpayer does not agree with the ruling, it is possible to challenge the ruling before an administrative court, which is often the case.

General tax rulings

The application for a general tax ruling needs to cover the presentation of an issue requiring general interpretation and an indication that the application of the provisions in question by the tax authorities in decisions, rulings and private tax rulings is not uniform.

A particularly significant recent ruling was the general tax ruling of 24 January 2018, No DCT.8201.1.2018, in which the Ministry of Finance resolved an important issue concerning the transaction value threshold, above which the transaction needs to be documented. Thresholds were set for one type of transaction. The question was whether the value of individual transactions of the same type concluded with different subsidiaries should also be added together.

The taxpayers argued that transactions with different subsidiaries should be treated separately. However, the Minister ruled that a transaction of one type covers all transactions of a given type – even if they are concluded with different related entities. Consequently, the transaction value threshold above which documentation is required is more likely to be exceeded.

Poland does not restrict outbound payments (eg, royalties) relating to uncontrolled transactions.

Certain outbound payments are subject to withholding tax. As a result, a foreign corporation may be liable for Polish income tax, even if it does not conduct business activity in Poland, if it derives from Poland:

  • interest, royalty or dividend income; or
  • income from rendering services, such as management, control, guarantee, advisory, market research, or similar services.

Withholding tax (WHT) applies to controlled and uncontrolled transactions.

Based on the Polish domestic regulations:

  • dividends paid abroad are subject to 19% WHT;
  • interest paid abroad is generally subject to 20% WHT; and
  • management fees are subject to 20% WHT.

However, under a number of conditions it is possible to apply the reduced tax rate or an exemption from WHT.

WHT Collection Rules

According to the Polish CIT Act implementing the EU Directives (Parent Subsidiary Directive and EU Interest & Royalties Directive), a full WHT exemption applies to interest/dividend payments made by Polish resident entities to non-resident entities, provided that, in particular, the following conditions are jointly met.

  • The interest/dividend paying company has its seat or place of management on the territory of Poland.
  • The interest/dividend recipient company has its worldwide income (irrespective of the place where it is derived) subject to income taxation in an EU or EEA member state other than Poland.
  • For interest:
    1. the interest paying company has a direct minimum shareholding of 25% in the capital of the interest recipient company for an uninterrupted period of at least two years;
    2. the interest recipient company has a direct minimum shareholding of 25% in the capital of the interest paying company for an uninterrupted period of at least two years; or
    3. a third company, being subject to income taxation on its worldwide income (irrespective of the place where that income is derived) in an EU or EEA member state, has a direct minimum shareholding of 25% both in the capital of the interest paying company and the interest recipient company for an uninterrupted period of at least two years.
  • For dividends – the dividend recipient company has a direct minimum shareholding of 10% in the capital of the dividend paying company for an uninterrupted period of at least two years.
  • The above holding results from ownership title to the shares.
  • The interest/dividend recipient company is not exempt from income tax on all its income, regardless of its source.
  • The interest recipient company is a beneficial owner in terms of the interest received.

In the event the uninterrupted holding period of two years lapses after the date of payment, the above-mentioned WHT exemption is also applicable.

To benefit from the WHT exemption on interest/dividends, based on the Polish CIT Act implementing the EU Directives, the relevant double tax treaty needs to allow for an exchange of tax information between the tax authorities of Poland and the country of the payment recipient.

The application of the above exemption is conditional upon possession by the Polish interest/dividend-paying company of:

  • a certificate of tax residency of the interest/dividend recipient, issued by the relevant tax authorities; and
  • a written statement confirming that the interest/dividend recipient company is not exempt from income tax on all its income regardless of its source.

New Requirements

The Polish tax regulations that apply to WHT collection were changed by switching from the tax relief method to a refund method. However, under the special regulation of the Ministry of Finance, the application of the new WHT collection rules has been postponed until mid-2021.

Under the new WHT regime, in the case of interest/dividend payments exceeding in one tax year PLN2 million (approximately Euro460,000) to one foreign recipient, WHT will have to be collected by the paying entity in the full amount (20% or 19%) and no reduced rates or tax exemption would be available.

A foreign recipient as a taxpayer (or in certain cases a Polish tax remitter) will have the right to ask the Polish tax authorities for a refund, provided a number of formal requirements are met. The tax should be refunded within six months after the refund application is filed.

In some cases, however, the Polish tax remitter will be allowed to apply the reduced rate or tax exemption at the moment of payment:

  • by submitting a written statement to the tax authority (under pain of criminal fiscal liability) that it holds all the documentation required to apply the reduced tax rate/exemption and also confirming that all additional requirements have been met (among others regarding the business substance of the recipient); or
  • by obtaining a special opinion from the tax authority (which should generally give protection for three years) authorising it to apply a tax exemption.

It is particularly important to note that in order to apply a reduced rate or exemption, the recipient of the payment should conduct a genuine business activity according to the criteria described below.

Changes Already in Force

While the introduction of the above-mentioned new WHT collection mechanism was postponed, some changes to WHT introduced at the beginning of 2019 are already in force. This refers to the obligation of the paying agent (income tax remitter) to exercise due diligence before making payments. New substance requirements and a new definition of "beneficial owner" were also introduced.

According to the new definition, a beneficial owner is an entity that:

  • receives the receivables for its own benefit, including deciding on their use and bears the economic risk associated with the loss of the receivables or of a part of them;
  • is not an intermediary, agent, trustee or other entity legally or de facto obliged to transfer all or some of the receivables to another entity; and
  • conducts a genuine business activity in the country of the seat, if the receivables are obtained in connection with the business activity.

The existence of a genuine business activity may be assessed by the tax authorities based on, among other things, the following factors:

  • the existence of appropriate infrastructure (sufficient office space, computers, printers, means of communication) and employees, proportionate to the given business activity;
  • the business activity functions based on an economically justified structure (which is not artificially designed);
  • concluded agreements are business driven, reflect economic reality and are in line with the general business goals of a given entity; and
  • the company is able to conduct business independently, based on its own resources and competent directors (ie, it does not outsource its most basic functions).

Poland does not restrict arm's length outbound payments (eg, royalties) relating to controlled transactions.

With respect to withholding, the same rules apply to controlled and uncontrolled transactions, as described in 15.1 Restrictions on Outbound Payments Relating to Uncontrolled Transactions.

Poland does not have specific rules regarding the effects of other countries’ legal restrictions.

Poland does not publish details related to APAs or transfer pricing audit outcomes. Only summary/statistical data is published.

The use of secret comparables is not possible for either the tax authorities or taxpayers. When conducting a benchmarking study, comparables, their source, how they were obtained and any other information used for this purpose shall be disclosed. A benchmarking study based on external data needs to cover comparables that are publicly available.

The COVID-19 pandemic has affected the transfer pricing landscape in a variety of ways, as the pandemic has a direct impact on the profitability of many multinational groups and their members.

Reporting Losses by Low-Risk Entities

Since many multinationals active in Poland operate transfer pricing models based on a non-Polish principal and low-risk Polish contract manufacturer (or Polish routine distributor), Polish entities with routine functions and limited business risks are expected to earn a small but fixed profit margin.

While low-risk Polish subsidiaries affected by various difficulties caused by the pandemic, including subsequent lockdowns, may report operating profits lower than expected or even losses, results below the target operating profit margin would need to be explained to the Polish tax authorities.

The tax authorities in Poland are often ready to accept well-grounded benchmarking adjustments related to extraordinary expenses or losses, as indicated by their practice to date. The authorities should not question the position when low risk entities report short-term genuine losses due to legitimate business reasons.

The unfavourable economic conditions triggered by COVID-19 should be regarded as such legitimate business reasons. The COVID-19 pandemic is an unforeseen and unprecedented event and its impact on the economy cannot be regarded as a typical business risk allocated between the related parties in the transfer pricing model.

However, to provide a successful defence during a future tax audit, it will be necessary to document the impact of COVID-19 on operating results using a quantitative analysis showing that the lower profit margin or loss was triggered by difficulties resulting from the outbreak of the pandemic.

Benchmarking Studies for the Year 2020

The preparation of benchmarking studies documenting results in the year 2020 requires a specific approach to reflect the COVID-19 outbreak. Since the results achieved by a tested entity in the whole of 2020 are evaluated against the results of comparable independent companies, the 2020 related-party transactions cannot be tested against the FY 2017–2019 financial results of comparable entities which have not been affected by the COVID-19 crisis.

The impact of COVID-19 on operating results may be reflected in a benchmarking analysis in two ways.

  • The first approach would be to include the results from 2020 in the analysis of the financial data of comparable entities, which may be difficult due to a lack of available data at the time of preparing the analyses.
  • The preferred approach will be to adjust the results of the tested entity to reflect the extraordinary expenses incurred due to the difficulties caused by the pandemic or to reflect other negative impacts on the margin – such adjusted 2020 results may be tested against the FY 2017–2019 financial results of comparable entities.

It is therefore advisable to collect detailed data on the impact of the difficulties caused by COVID-19 on the financial situation of Polish entities. Appropriate records need to be kept on a regular basis, which will make it possible to prepare documentation protecting against the risk of disputes with the tax authorities.

Since the beginning of the COVID-19 pandemic, certain simplifications have been implemented in the field of transfer pricing. However, these measures have had only a limited effect.

The simplifications introduced due to COVID-19 are as follows.

  • The possibility of taking advantage of the documentation exemption for domestic transactions without the necessity of meeting the condition of not incurring a tax loss – this means that for domestic transactions, transfer pricing documentation will not be required, even if the entity has suffered a tax loss (this applies to the years in which the COVID-19 epidemic was in Poland and where the revenues for that year were at least 50% lower than in the previous year).
  • No obligation to collect a related counterparty statement on booking a transfer pricing adjustment.
  • The possibility of a declaration on the preparation of local transfer pricing documentation for transfer pricing and the arm's length nature of the documented transactions being signed only by authorised representatives (and not the entire board of directors according to the general rule).

Procedural deadlines were suspended between March and May 2020. However, after this temporary suspension, they began running again. In practice, audits have not been stalled and continue. No significant impact of the pandemic on ongoing tax audits has been noted in Poland. However, the number of new audits initiated in 2020 was lower than in previous years.

Baker McKenzie

Rondo ONZ 1
00-124 Warsaw
Poland

+48 22 445 31 00

+48 22 445 3200

warsaw@bakermckenzie.com www.bakermckenzie.com
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Law and Practice in Poland

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Baker McKenzie is represented in 46 countries and has a leading global transfer pricing practice, providing clients with world-class service in all facets of transfer pricing. Supported by more than 240 advisers, lawyers and economists, the firm's transfer pricing team advises global companies on transfer pricing matters including design/planning, financial modelling, implementation, documentation, audit defence and litigation. It has extensive experience in competent authority procedures and has successfully accompanied and advised clients in numerous sizeable and high-profile advance pricing agreements and mutual agreement procedures. Baker McKenzie's economists specialise in transfer pricing and work in close co-operation with transfer pricing lawyers, providing economic modelling that takes into account specific transfer pricing requirements. Its transfer pricing experts have a unique awareness of international transfer pricing policy. As a law firm, Baker McKenzie's advice is legally privileged subject to local laws and regulations; its lawyers can litigate against tax authorities if disputes arise.