Difficulties in Interpretation and Tax Disputes: Transfer Pricing Regulations on Tax Grounds

Under the tax provisions, related parties are required to comply with a number of obligations to ensure that they set ‘arm’s length’ prices in transactions between them, i.e. prices that would be acceptable  in a comparable transaction between unrelated parties. 

When determining the market value of intangible goods or services in transactions between related parties, the tax authorities and tax inspection authorities prioritise whether independent, rational parties would have entered into such a transaction on the terms and conditions that the related parties have agreed.

The transfer pricing documentation aims to describe the transaction in detail, presents how the price was determined and indicates the factors that the parties took into account when determining the price. The main purpose of this documentation is to convince the tax authorities that the actual relationships between the entities did not influence the price determination process or the final price. This is an important element in the context of avoiding disputes with the tax authorities.

Local Transfer Pricing Documentation Regulations – documentation thresholds

A Local File is required for a controlled transaction of a homogeneous nature, where the value exceeds the following thresholds in a given tax year:

• PLN 10,000,000 – for financial transactions;
• PLN 10,000,000 – for commodity transactions;
• PLN 2,000,000 – for services and other transactions.

Additionally, for transactions with a tax haven resident or a foreign permanent establishment located in a tax haven, the thresholds above which a Local File is required are:

• PLN 2,500,000 – for financial transactions; and
• PLN 500,000 – for other transactions.

Related parties required to prepare a Local File or Master File  must submit this documentation within 14 days of receiving a request from the tax authorities. The new legislation introduces clarity and precision in the documentation requirements, aimed at increasing the transparency and efficiency of the tax audit process.

New Guidelines of the Tax Authorities: Tightened Control Measures and Consequences for Taxpayers

The tax authorities recently introduced new procedures to monitor transactions more effectively and to increase transparency in tax documentation. Under the latest regulations, the tax authorities have gained the power to require taxpayers to prepare and submit tax documentation even where the value of a transaction does not exceed the thresholds requiring the preparation of documentation.

In situations where there are reasonable doubts as to the reliability of the submitted transaction values, the tax authorities may request the submission of tax documentation.

It is worth noting that taxpayers in the micro-enterprise category (with fewer than 10 employees and a turnover or total assets less than EUR 2 million) are exempt from such requests, but other companies are obliged to prepare and provide tax documentation within 30 days of receiving such a request.

A novelty is the introduction of a penalty if the tax authority decides that transfer pricing income was understated. In such situations, the tax authority determines additional tax liability amounting to 10% of the sum of the undeclared or overstated tax loss and the unreported income. This may be doubled if the basis for determining the additional liability exceeds PLN 15,000,000.

Importantly: a failure to present the tax documentation to the tax authority may result in the sanction being trebled, meaning a rate of as much as 30% on the overestimated income. Nonetheless, it is possible to avoid this sanction by completing the documentation in full within an additional period indicated by the tax authority, no longer than 14 days. Therefore, it is worth being cautious and taking care of the completeness of the tax documentation to avoid possible consequences.