The New Polish Order - changes in transfer pricing

On 26 May, the Ministry of Finance presented a draft of the first tax act of the New Polish Order, which includes, among others, amendments to transfer pricing regulations. The presented solutions are aimed at simplifying regulations and facilitating taxpayers' fulfilment of transfer pricing documentation obligations.

The draft has been referred to public consultation, which will end on 30 August 2021.

Below we present the changes proposed by the Ministry of Finance, to be faced by taxpayers in the coming year.

Key changes in transfer pricing - the Polish New Order:

• Transfer pricing adjustment - it has been proposed:
  • the option to make a downward transfer pricing adjustment also in a situation in which the taxpayer has received accounting evidence from a related party that confirms an adjustment of transfer prices in a certain amount made by the related party,
  • the abolition of the obligation to report the transfer pricing adjustment in the annual return, thus abolishing one of the formal conditions for an effective adjustment,

• Changes to the definition of related entities - the concept of a company without legal personality is replaced by the concept of a company that is not a legal person. Moreover, by replacing "partners" in the plural by "shareholder" in the singular, it has been clarified that the relationship is between the non-corporate company and each of its partners separately,

• Safe harbour mechanism - it has been proposed to clarify the moment at which a loan (credit, bond) agreement should comply with the financial safe harbour conditions in terms of interest rates by stipulating that they should be met each time a loan agreement is amended,

• Extension of deadlines:
  • extending the deadlines for preparing local transfer pricing documentation until the end of the tenth month after the end of the entity's tax year,
  • extending from 7 to 14 days the deadline for a taxpayer to submit local transfer pricing documentation at the request of the tax authority,
  • extending the deadline for submission of transfer pricing information until the end of the eleventh month after the end of the tax year of the entity (related entity and other than related entity in respect of transactions other than controlled for transactions with so-called tax havens),

• Transaction value:
  • the manner of determining the value of a controlled transaction in the case of a deposit contract, an insurance or reinsurance contract, as well as transactions involving the conclusion of a contract of a company which is not a legal person has been clarified: for a deposit the transaction value refers to the value of the capital, for insurance or reinsurance contracts to the sum insured, and for companies which are not legal persons to the total value of the contributions made to the company which is not a legal person,
  • the concept of the value of a controlled transaction has been linked to the neutrality of VAT,

• Exemptions from documentation and information requirements:
  • exemptions from the obligation to prepare local transfer pricing documentation are provided - the proposed provisions of the PIT and CIT Acts also cover, under the same conditions, related transactions between foreign permanent establishments located in Poland, whose parent companies are related entities, as well as between a non-resident permanent establishment located in Poland and a related entity with tax residency in Poland,
  • exemption from the obligation to prepare local transfer pricing documentation for controlled transactions covered by a tax treaty and an investment treaty,
  • exemptions from the obligation to prepare local transfer pricing documentation for controlled transactions covered by the safe harbour mechanism for loans, credits, bonds and transactions concerning settlements in the scope of so-called pure reinvoicing,
  • the local transfer pricing documentation may not include a benchmarking analysis or a compliance analysis for:

    - controlled transactions satisfying the safe harbour exemption criteria for controlled transactions representing low-value services (current regulation),

    - controlled transactions concluded by related entities which are micro or small entrepreneurs within the meaning of the Enterprise Law,

    - transactions other than controlled transactions concluded with so-called tax havens (direct transactions) or in which the beneficial owner of the counterparty is resident in the so-called tax havens (indirect transactions), subject to documentation requirements,

  • for an entity obliged to prepare transfer pricing information, exemption from the obligation to prepare and submit information on agreements concluded with non-residents within the meaning of the foreign exchange law (ORD-U form). The obligation to prepare and submit information on agreements concluded with non-residents (ORD-U) results from the Tax Ordinance, and the proposed provision assumes that the exemption from the obligation to prepare and submit the ORD-U will not apply to taxpayers and companies which are not legal persons, performing a transaction other than a controlled transaction with an entity from so-called tax havens. The exemption will apply to ORD-U information submitted after 31 December 2021,

• The transfer pricing documentation statement will be removed as a separate document and moved, with its revised content, to the transfer pricing information,
• Powers of the tax authority:

  the amendment provides that a tax authority will be authorised to require a taxpayer (other than a micro-entrepreneur) to prepare and submit local transfer pricing documentation within 30 days with regard to specified controlled transactions for which the taxpayer was exempt from the documentation obligation due to the use of the financial safe harbour mechanism. At the same time, the tax authority will be obliged to specify the circumstances indicating the probability of an understatement of the value of the controlled transaction or non-fulfilment of the conditions referred to in the provision,

• TPR-P and TPR-C transfer pricing information:
  • TPR-P and TPR-C transfer pricing information will be filed on the basis of local transfer pricing documentation,
  • there will be a second element added to the existing TPR-P and TPR-C form regarding the marketability of transfer pricing. Taxpayers will not have to submit two different documents regarding the same subject matter via different electronic channels,

• Change regarding the authority to which the transfer pricing information is submitted - according to the new provision, the information will be submitted to the head of the tax office responsible for income tax matters,

• Method of submitting transfer pricing information for companies which are not legal persons - the proposed regulations directly indicate that transfer pricing information is to be submitted by means of electronic communication, in accordance with the provisions of the Tax Ordinance. At the same time, there is a proposed change in the scope of signing the transfer pricing information, which is to be signed by
  • a natural person if the related entity is a natural person,
  • a person authorized by a foreign entrepreneur to represent him in a branch if the related entity is a foreign entrepreneur possessing a branch operating in the territory of the Republic of Poland,
  • the head of an entity within the meaning of Article 3.1.6 of the Accounting Act,
  • by one or more persons authorised to represent the company, observing the rules of representation in the event that the company is managed by a multi-member body,

• Limited partnerships - to introduce a relationship, irrespective of the size of the shares, between the limited partnership and its general partners (liable without limitation),

• Clarification of the definition - transfer prices are considered to be determined on terms and conditions that would be agreed between unrelated parties if the taxpayer, for tax purposes, when receiving free of charge or partly paid goods or rights, or other benefits in kind, reported income in accordance with the arm's length principle,

• Abolition of the obligation to designate a shareholder of a company other than a legal person who is obliged to submit transfer pricing information for the company. Local transfer pricing documentation will be prepared by a company which is not a legal person (for an entity obliged to prepare it),

• Introduction of the condition that all revenue and tax deductible costs resulting from a controlled transaction must be settled for tax purposes in Poland. This means that for controlled transactions between foreign permanent establishments located in Poland, the entire revenue and tax deductible costs of these transactions will be allocated to one or the other permanent establishment, respectively. However, for controlled transactions between a foreign permanent establishment located in Poland and a Polish entity related to the permanent establishment's parent company, all of the revenue or costs arising from the transaction are to be allocated to the permanent establishment,

• New statutory definition of a tax agreement and an investment agreement within the meaning of the Tax Ordinance - a tax agreement and an investment agreement will be, apart from a price agreement, a premise that will exclude the determination by a tax authority of a tax liability (amount of loss) to the extent to which the income (loss) shown by the taxpayer was determined in accordance with a given agreement.

The changes in transfer pricing presented above should be viewed positively, as they will not only reduce the existing difficulties in meeting some of the documentation obligations, but will also significantly reduce their number.