An Update on Year-End Transfer Pricing Adjustments in Poland
Poland’s been busy. In 2019, the Ministry of Finance reorganized the transfer pricing regulations adopting the OECD’s BEPS works, along with some adjusted country-specific returns (TRANSFER PRICINGR-C for corporate income taxpayers and TRANSFER PRICINGR-P for personal income taxpayers). The regulations also established—or tried to—a new price-setting approach for transfer pricing, which obliges taxpayers to comply with the arm’s-length principle at the time of the controlled transaction. Unfortunately, the wording surrounding the expectation wasn’t entirely clear and so the Ministry of Finance is currently drafting the tax explanatory note on transfer pricing adjustments to clarify it.
Generally, to make transfer pricing adjustments, the taxpayer must meet all five conditions:
- The controlled transaction must comply with the arm’s-length principle.
- There has been a change in significant circumstances affecting the conditions set during the tax year or the actual costs or revenues for the basis for the price calculation are known and ensuring their compliance with market conditions requires a transfer pricing adjustment.
- At the time of making the transfer pricing adjustment the taxpayer must have a written statement from the related party confirming that the related party made the same transfer pricing adjustments in the same amount.
- The associated company must be based in Poland or in a country that shares a double-tax treaty or exchange-of-information agreement with Poland.
- Taxpayers should confirm the transfer pricing adjustment in the annual tax return for the tax year where the transfer pricing adjustment applies.
Due to COVID-19 there has been made a law amendment applicable for the COVID period. Namely, the taxpayer is not obliged to have a written statement from the counterparty on the transfer pricing adjustment made during or for the tax year when the COVID pandemic is present in Poland.
Of course, the big question is how do these year-end adjustments affect Poland’s taxable base? If the adjustments increase it, then MNEs only need to meet the first two conditions. If the adjustments stand to decrease Poland’s tax base, then all five conditions must be met.
How do you know if a related-party transaction adheres to the arm’s-length principle? A benchmarking analysis, of course, and Poland’s tax explanatory note suggests that a study should be included ex ante when the original transfer price is determined.
Adjustments for Limited-risk Distributors
One question the explanatory note raises is how transfer prices can be adjusted in the absence of a transaction. The draft note says that profitability adjustments are acceptable between limited-risk distributors and parent companies even if the adjustment doesn’t pertain to a specific transaction. In an attempt to avoid adjustments through insufficient intercompany agreements, the Ministry of Finance says a note explaining the correction is satisfying enough to adjust the entity’s profitability. The question this raises, of course, is how that complies with the arm’s-length standard as two independent companies would not be allowed to do the same.
Polish taxpayers have been saddled with more compliance burdens in the last few years. Without meeting those five conditions, this draft of tax explanatory note strips them of the ability to impact their own tax liabilities, including self-imposed adjustments on understated taxes in Poland, and makes them more prone to double taxation. Whether or not the provisions in the tax explanatory note will be officially adopted remains to be seen, but if it does find its way into Poland’s transfer pricing regulations, the Ministry of Finance will have a bit more explaining to do.