The Polish Ministry of Finance, on 16 July, presented for public consultations new draft tax regulations that would introduce sweeping changes to Poland’s transfer pricing rules.
The main purpose of the new regulations is to enhance the efficiency of tax audits and the transparency of related party transactions. The regulations would also limit reporting requirements with respect to typical low-value-adding transactions and loans.
Key changes include a new approach to the arm’s length principle as well as a broadening of the scope of what are considered associated companies to include companies that share a personal relationship.
The regulations also allow use of new transfer pricing valuation techniques when the five OECD methods can’t be used.
Additionally, the guidance introduces safe harbours for a recommended 5% mark-up for low-value adding services and for loans meeting specific requirements. The tax regulations would also modify the existing regulations on transfer pricing year-end adjustments, adding a number of specific conditions and providing rules for determining when an adjustment should be reported.
Tax authority recharterisation power
The new proposal’s adjusted arm’s length approach permits the tax authorities, directly in domestic regulations, to recharacterize or not recognize transactions between associated companies.
Tax authorities may recharacterize or even disregard related party transactions if they conclude that unrelated entities would not enter into the transaction declared by the taxpayer or would conclude a different transaction or activity.
A guide on income tax assessment after non-recognition or recharacterisation is not publicly available yet.
The new provision does not include any particular safeguards for tax authorities’ power to use this tool. As the references for the issuing decree do not provide safeguards, this possibility may not even be considered. The final wording of the decree is not available yet.
Additionally, a new section on the arm’s length standard introduces the direct obligation for taxpayers to set transfer prices based on the conditions that would be made between independent enterprises. These conditions are not yet defined.
Poland transfer pricing documentation
There are also changes to Poland’s transfer pricing documentation requirements that would further increase the transparency of related party transactions and facilitate the selection of taxpayers for tax audits by the tax authorities.
New materiality thresholds for transactions were proposed, namely, PLN 10 million (approx. EUR 2.5 million, USD 2.7 million) per transaction for tangible and financial assets, and PLN 2 million (approx. EUR 0.5 million, USD 546,000) for other transactions. The materiality threshold for the master file is set at PLN 200 million (approx. EUR 47 million, USD 54.5 million) of consolidated revenue.
Taxpayers submitting the country-by-country report (those achieving consolidated revenues exceeding EUR 750 million and meeting other specific requirements) will also be obliged to submit the master file to the head of the National Revenue Administration. The deadline for preparing and submitting the master file will be 12 months after the end of the tax year.
According to the new regulations, the master file may be prepared in English. Translation into Polish will only be required at the explicit request of the tax authorities.
The new regulations are to be binding from 1 January 2019; however, taxpayers will have the option to apply the regulations on transfer pricing documentation voluntarily for tax years beginning after December 31, 2017.