The original bill of 27 April 2015 was modified to account for some of the comments raised in the public consultation. The ultimate objective of the new regulations is to incorporate in our legislation the EU regulations on common system of taxation of associated enterprises and to introduce common requirements for the transfer pricing documentation. The new regulations aim at adapting the legislation to the OECD transfer pricing recommendations adopted in September 2014. They also account for the concluding remarks of the President of the Supreme Audit Office in his Communication of 20 April 2015 concerning the findings of the audit of supervision exercised by the tax authorities and tax inspection authorities over foreign-capital companies' payables to the state budget.
Below we are presenting the key changes in the transfer pricing area.
Capital Relations Redefined
At present, enterprises are considered associated in the meaning of transfer pricing regulations amon other things if one enterprise holds, directly or indirectly, at least 5% of share capital in another enterprise. That 5% share is going to be increased to 25%.
New principles of transfer pricing documentation
Documented will have to be in a given tax year taxpayer's:
- transactions with associated enterprises and
- other dealings which are disclosed in the books of account of the year materially affecting the taxpayer's income (loss).
They will include transactions and dealings of one type exceeding more than EUR 50 thousand in a tax year.
Lawmakers want the documentation obligation to be triggered by:
- a certain level of revenues and expenses in the meaning of the accounting regulations, generated in a previous tax year and determined on the basis of the books of account,
- overdraft thresholds of value of transactions / other dealings of one type, which are fix depending on the level of revenues.
With respect to the taxpayers whose revenues in the previous tax year exceeded the PLN equivalent of:
- EUR 2 million, but no more than EUR 20 million – transactions and dealings materially affecting the taxpayer's income (loss) will mean transactions and dealings of one type totalling more than the equivalent of EUR 50 thousand plus EUR 5 thousand per every EUR 1 million of revenue in excess of EUR 2 million;
- EUR 20 million, but no more than EUR 100 million – transactions and dealings materially affecting the taxpayer's income (loss) will mean transactions and dealings of one type totalling more than the equivalent of EUR 140 thousand plus EUR 45 thousand per every EUR 10 million of revenue in excess of EUR 20 million;
- EUR 100 million – transactions and dealings materially affecting the taxpayer's income (loss) will mean transactions and dealings of one type totalling more than the equivalent of EUR 500 thousand in a tax year.
Enterprises whose revenues or expenses in the meaning of the accounting regulations calculated on the basis of the books of account do not exceed EUR 2 million in a previous tax year will be exempt from the transfer pricing documentation obligation.
In the case of a partnership, the revenue and expense thresholds will be set for the partnership.
Taxpayers who earn revenue from participation in a partnership will be entitled to designate a partner established in Poland to compile the transfer pricing documentation of transactions and other dealings disclosed in the books of account. Nevertheless, designating such a partner will not exempt the other partners from the obligation to deliver the transfer pricing documentation on demand.
The tax authorities or the tax inspection authorities will be allowed to request the taxpayer to compile the transfer pricing documentation of transactions and/or dealings totalling less than the above limits if the circumstances suggest that the values were understated to evade the documentation obligation. The taxpayer will have to deliver such documentation within 30 days of the request.
If an enterprise is obliged to have the transfer pricing documentation in the given tax year, it will have to prepare it the following year too, regardless of its revenues and expenses in the meaning of the accounting regulations in the given year for which the documentation was prepared.
Taxpayers who only start their operations and carry out transactions and other dealings which materially affect their income (loss) already in the first tax year will have to prepare the documentation starting from the month following the month in which their revenues or expenses exceed the equivalent of EUR 2 million. Taxpayers created in the following ways will not be considered new taxpayers:
- transformation, merger or split; or
- transformation of a partnership; or
- by natural persons who have contributed to the capital of the newly-established entity their old enterprise or assets of their enterprise worth in total more than PLN equivalent of EUR 10 thousand.
The bill introduces a three-level concept of the transfer pricing documentation which would consist of:
- local documentation (local file) – in which the local associated enterprise presents details of transactions or other dealings disclosed in the books of account with the other group components, including:
- details of the type and subject matter of those transactions or dealings;
- financial figures, including cash flows in the transactions or dealings;
- details of the associated enterprises involved in the transactions or dealings;
- description of the transactions or dealings, including the functions performed by the taxpayer and the associated enterprises, the assets they use, including off-balance sheet assets, human resources and the risks assumed;
- description of the method and manner of calculation of the taxpayer's income (loss) plus the justification of the choice, including the algorithm for calculation of the payments for the transactions or dealing, plus the method of calculating the payments affecting the taxpayer's income (loss);
- group documentation (master file) – containing information about the group, including without limitation:
- details of the associated enterprise which prepares description of the associated group including the date it files the annual tax return;
- organisational structure of the associated group;
- description of the transfer pricing rules of the group (transaction pricing policy);
- description of the group's business profile;
- description of the intangible assets owned, produced, developed and used in the group's business activity;
- description of the financial arrangement among the group members, including especially the consolidated financial statements of the associated enterprises within the group;
- description of any agreements concerning income taxes made between the group components and the tax authorities in other countries, especially unilateral advance pricing agreements;
- country-by-country reporting – a CbC report will provide aggregate information about income and the tax paid as well as business locations of the associated enterprises and foreign plants which belong to the group in a tax year.
Taxpayers with revenues or expenses between EUR 2 million and 10 million will have to prepare a local file only.
Taxpayers with more than EUR 10 million in revenues or expenses, will have to prepare also a benchmarking study and file a summary report on transactions and dealings with associated enterprises along with a tax return.
Taxpayers with revenues or expenses exceeding EUR 20 million will have to prepare additionally a master file.
Those taxpayers who earn consolidated revenues of more than EUR 750 million will have to prepare, in addition to a local file and master file, a CbC report.
Deadlines for transfer pricing documentation
Lawmakers want the transfer pricing documentation to be prepared no later than by the tax return filing deadline. A member of the management board of a local enterprise will have to sign a statement saying that the documentation is complete and has been prepared within the statutory deadline, and enclose the statements with the tax return.
Any follow-up transfer pricing documentation of transactions and dealings materially affecting the taxpayer's income (loss) will have to be periodically reviewed and updated in the subsequent years, at least once per calendar year before the deadline for filing tax returns. The benchmarking study will have to be updated at least once every 3 years, unless the business circumstances change so much affecting such an analysis that is will be justified to review the benchmarking analysis in the year of change.
Taxpayers will still be obliged to present the complete transfer pricing documentation within 7 days of the request from the tax authorities.
The bill has been delivered for review to the Council of Ministers' Standing Committee and the changes are expected to go live on 1 January 2017. However, the CbC report will have to be drawn for the first time in the tax year starting after 31 December 2015 if the taxpayer's consolidated revenues in the meaning of the accounting regulations exceed EUR 750 million in that tax year. Therefore, we recommend reviewing the consequences of the new regulations as soon as possible. We are ready to help you if you are interested in this subject.
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tel.: +48 22 244 00 55