Poland: The revolution in transfer pricing continues

Magdalena Frytek, Junior partner, Advocate/Legal Counsel
Cracow, 18.10.2021

The end of the year is in a hurry, and with it the need to examine obligations regarding transfer pricing documentation for 2020. Taxpayers should be used to the fact that for several years this study looks different almost every year. After the great revolution of 2017 (drastic tightening of regulations) and the theoretical easing of them in 2019, the years 2020 and 2021 look quite innocent. After all, since 2021, only inconspicuous changes have been introduced - changes by assumption only "specifying the existing interpretative doubts". Are you sure?


Small changes...


The changes introduced from January 2021 to the provisions on transfer pricing documentation were implemented in the name of the fight against the so-called Tax havens. For this purpose, in particular, Art. 11o of the Corporate Income Tax Act (CIT) and the corresponding Art. 23za of the Personal Income Tax Act (PIT). The current wording of the provisions in question (obligations regarding transfer pricing documentation in relation to transactions made "directly or indirectly, payment of receivables to an entity resident, registered office or management board in the territory or in a country applying harmful tax competition” was considered to give rise to too many interpretation doubts. Instead, the documentation obligations currently cover transactions with entities: from the Tax Paradise, with the UBO from the Tax Paradise and with the alleged UBO from the Tax Paradise - if their annual value exceeds PLN 100,000 (in the first case) and PLN 500,000 (in the other two cases) or their equivalent expressed in a foreign currency.


Big trouble...


How to test the value of "Paradise transactions" in the case of transactions with UBO from the Tax Paradise and with the alleged UBO from the Tax Paradise? Should UBO be tested in relation to a transaction or a contractor? Which transaction / contractor has the UBO from the Tax Paradise? When should it be presumed that the UBO of the transaction / counterparty comes from a tax haven? How can you show that the presumption is not true? Tax laws do not answer these and other questions. The draft tax explanations in this area also do not answer most of the key questions. The tax clarifications themselves (from March 2021) have not yet taken the form of final guidelines, despite the deadline for submitting opinions, conclusions and comments on their content for April 20, 2021, i.e. over half a year ago. A taxpayer or a company that is not a legal person are obliged to exercise due diligence.


 … Not only for the largest taxpayers


Will the changes introduced to the regulations on transfer pricing documentation apply only to the largest taxpayers and only  to transactions that are significant in terms of amounts? Well, not at all. The wording of the current regulations indicates that even one-off transactions of negligible importance for the functioning of the taxpayer may be covered by the transfer pricing obligations. This is due to the established principles of transaction testing for the purposes of analyzing obligations in this respect. Namely, as in the case of testing transactions with related entities - the transaction materiality threshold here applies to a homogeneous aggregate transaction, i.e. a transaction examined from the perspective of its nature / subject, and regardless of the number of contractors and the number of accounting documents related to this transaction.

For example - a taxpayer, who purchases goods of a given type from many contractors, and then sells these goods to third parties, will be obliged to add up the value of one type of transaction with all his contractors, i.e. the value of one type of purchases in total (on the cost side) and the value of sales of one type in total (on the revenue side). Exceeding the value of PLN 500,000 per year in relation to any transaction will result in the obligation to identify "paradise transactions" in relation to all contractors and all transactions covered by this homogeneous transaction, and in extreme cases - even the obligation to prepare transfer pricing documentation for such transactions will be obliged to sum up the value of transactions of one type with all its counterparties, i.e. the value of purchases of one type in total (on the cost side) and the value of sales of one type in total (on the revenue side). 


A cannon shot at a sparrow


The idea of ​​fighting against tax havens - in principle, we can say: "right". But is it really the scope of the obligations, i.e. identification by taxpayers of "heavenly transactions" or even merely "the risk of heavenly transactions" (one could even say: replacing the relevant authorities in this matter), and what is more, the obligation of Polish taxpayers to demonstrate marketability (??) their transactions with counterparties who not only have ties to the "paradise element", but who may even be suspected of the existence of such connections, is a measure adequate to the assumed goal? Can it be done in practice at all? It seems that the number of activities required from taxpayers and aimed at serving the Polish tax authorities in identifying the "risk of paradise transactions".


Get ready!


In connection with the above, it is recommended to prepare for the above-mentioned circumstance, i.e. the development of such practices and procedures which, on the one hand, will provide the taxpayer with the opportunity to demonstrate at least a minimum of "due diligence" referred to in Art. 11o CIT and art. 23 for PIT, and on the other hand - the application of which will not paralyse the activity actually conducted by him. The end of the year is near - it's almost the last bell.

Magdalena Frytek

Magdalena Frytek

Junior partner, Advocate/Legal Counsel

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