Significant changes have been made to Polish transfer pricing regulations in recent years. New legislation, adopted in 2017, introduced a three-tiered approach to transfer pricing documentation consisting of: (1) local file, (2) master file, and (3) country-by-country reporting. Poland was one of the first countries to introduce the changes recommended by the OECD in BEPS (Action 13).
Furthermore, beginning in 2018, a limitation on intra-group services (such as advisory, market research, marketing, management and supervision, data processing, insurance, guarantees, etc.) and licences between related parties that could be treated as tax-deductible was introduced in Poland. New regulations allow taxpayers to deduct up to 5% EBITDA above an annual threshold of PLN 3 million. However, the Polish Ministry of Finance plans to raise the limit up to 10% of EBITDA in 2019. More expenses on intra-group services might be recognized as tax-deductible costs only if confirmed by the Advance Pricing Agreement negotiated with the Polish authorities.
New Draft Rules on Transfer Pricing
In August 2018, and before taxpayers even had time to get used to the new regulations, the Polish Ministry of Finance published draft rules representing revolutionary changes in the area of transfer pricing. The main goal of the draft rules is to ease the compliance burden for taxpayers and ensure greater consistency of local transfer pricing documentation regulations with OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. However, some of the proposed regulations, such as one allowing the tax authorities to re-characterize or not recognize transactions between related parties, may pose some risk for taxpayers.
Moreover, the new bill does not change some elements which have been problematic for taxpayers. For example, benchmarking studies are still required to contain Polish comparables (however, this requirement is expected to be changed by decrees attached to the new bill). In addition, there are no plans to extend the seven-day deadline for taxpayers to submit tax documentation after receiving the tax authorities’ request.
Tax Authorities’ Approach to Transfer Pricing
Tax authorities have, it seems, become particularly interested in transfer pricing in recent years during their discussions with taxpayers. At the same time, they have become more open to dialogue with taxpayers and to pursuing positive initiatives in respect of transfer pricing regulations. For instance, they have created the Transfer Pricing Forum – a discussion platform between the tax administration and business.
In terms of tax audits, Polish tax authorities have increased the effectiveness of their efforts by doing more preparatory analysis in advance, using statistical tools (like the Quick Analytics TP and Orbis databases, CIT-TP declaration, and SAF-T), and implementing data mining processes before initiating formal audits. These analyses may be triggered by, for instance, a decrease in profits or low profitability, deviations from the profitability level in the industry, or low income in relation to the capital employed.
According to statistics, in 2017 the Ministry of Finance initiated over 150 audits and proceedings in the field of transfer pricing and aggressive tax optimization, involving the understatement of tax liabilities amounting to PLN 635 million and a PLN 1.3 billion tax loss reduction. Transactions of special concern for the Polish tax authorities include: (i) intangible services and licences; (ii) loans and guarantees; (iii) business restructuring; and (iv) profit allocation to permanent establishment.
To sum up, transfer pricing is becoming an increasingly important area of tax law in Poland. This trend is clearly highlighted by the fact that despite a major amendment to the transfer pricing rules in 2017, the Ministry of Finance is already preparing more significant changes for 2019.
By Andrzej Posniak, Partner, and Bartlomiej Wajda, Counsel, CMS
This Article was originally published in Issue 5.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
