Transfer pricing documentation thresholds - for whom?

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The transfer pricing documentation thresholds refer to the revenues obtained and costs incurred by a non-resident taxpayer with a foreign establishment in Poland. How to determine them and who is obliged to prepare tax documentation? The answer to these and other questions is in the article.

How to set the documentation thresholds for transfer pricing? - related party transactions

Amended transfer pricing regulations have been in force since 2017. The new regulations are more complicated and detailed. For the first time in 2018, many taxpayers had to prepare transfer pricing documentation. However, those who have been preparing it so far, implementing it for 2017, will be surprised by the scope it currently covers.

Who is obliged to prepare tax documentation?

Pursuant to Art. 9a paragraph. 1 of the Act of February 15, 1992 on corporate income tax (i.e. Journal of Laws of 2017, item 2343, as amended), hereinafter referred to as the CIT Act, taxpayers:

  1. whose revenues or costs, within the meaning of the accounting regulations, determined on the basis of the kept accounting books, exceeded the equivalent of EUR 2,000,000 in the year preceding the tax year:
    a. making transactions with related entities in the tax year within the meaning of art. 11 sec. 1 and 4, having a significant impact on the amount of their income (loss), or
    b. recognizing in the tax year in the books of accounts other events, the conditions of which have been agreed (or imposed) with related entities within the meaning of Art. 11 sec. 1 and 4, having a significant impact on the amount of their income (losses)
    or
  2. making, 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, resulting from a transaction or other event included in the accounting books, if the total amount (or its equivalent) resulting from the contract or the total amount of benefits payable in the tax year actually paid in the tax year exceeds the equivalent of EUR 20,000, or
  3. containing with an entity residing, with its registered office or management board in the territory or in a country applying harmful tax competition:
    a.a articles of association which is not a legal person, if the total value of contributions made by partners exceeds the equivalent of EUR 20,000 or
    b. a joint venture agreement or another agreement of a similar nature, in which the value of the joint venture specified in the contract, and in the absence of this value specified in the contract, expected on the date of conclusion of the contract, exceeds the equivalent of EUR 20,000,

- are required to prepare tax documentation of these transactions or other events, hereinafter referred to as "tax documentation".

Pursuant to Art. 9a paragraph. 1a of the CIT Act, the taxpayers referred to in para. 1 point 1, are required to prepare tax documentation also for the tax year following the tax year for which they were required to prepare tax documentation, regardless of the amount achieved, in the tax year for which they were required to prepare tax documentation, revenues or costs incurred , within the meaning of the accounting regulations.

Transactions or other events having a significant impact on the amount of the taxpayer's income (loss)

Pursuant to Art. 9a paragraph. 1d of the CIT Act, for transactions or other events having a significant impact on the amount of the taxpayer's income (loss) referred to in paragraph 1, point 1, transactions or other events of one type, the total value of which in the tax year exceeds the equivalent of EUR 50,000, except that in the case of taxpayers whose revenues, within the meaning of accounting regulations, in the year preceding the tax year exceeded the equivalent of:

  • EUR 2,000,000, but not more than the equivalent of EUR 20,000,000 - such transactions or other events are transactions or other events of one type, the value of which in the tax year exceeds the amount equivalent to EUR 50,000 plus EUR 5,000 for each 1 EUR 000,000 in income above EUR 2,000,000;
  • EUR 20,000,000, but not more than the equivalent of EUR 100,000,000 - such transactions or other events are transactions or other events of one type, the value of which in the tax year exceeds the amount equivalent to EUR 140,000 plus EUR 45,000 for each EUR 10,000,000 of revenue above EUR 20,000,000;
  • EUR 100,000,000 - such transactions or other events are transactions or other events of one kind, the value of which in the tax year exceeds the amount equivalent to the amount of EUR 500,000.

Pursuant to Art. 9a paragraph. 1e of the CIT Act, for transactions or other events having a significant impact on the amount of the taxpayer's income (loss) referred to in paragraph 1, paragraph 1, shall also be included in the tax year:

  • a company agreement which is not a legal person, in which the total value of contributions by partners exceeds the equivalent of EUR 50,000 or
  • a joint venture agreement or another agreement of a similar nature, in which the value of the joint venture specified in the contract, and in the absence of this value specified in the contract, expected on the date of conclusion of the contract, exceeds the equivalent of EUR 50,000.

Pursuant to Art. 9a paragraph. 4a of the CIT Act, the tax authority may request the taxpayer to prepare and submit tax documentation for transactions or other events the value of which does not exceed the limits specified in paragraph 1 d or 1e, in the event of circumstances indicating the likelihood of underestimating their value in order to avoid the obligation to draw up tax documentation. The request should indicate the circumstances proving the probability of underestimating the value of the transaction or other events. The taxpayer is obliged to prepare and submit tax documentation within 30 days from the date of delivery of such a request.

In the light of the above provisions, it is clear that in order for the requirement to prepare transfer pricing documentation to arise, the following conditions must be met. First, we must be dealing with a transaction or other event of one kind. Second condition - the transaction or other event must take place between related parties. The third condition - a transaction or other event of one type must have a significant impact on the amount of the taxpayer's income (loss), i.e. exceed the minimum limit indicated in art. 9a paragraph. 1d of the CIT Act, for which the total value of transactions or other events of one type exceeds EUR 50,000.

The above provisions raised many doubts among taxpayers. They had a problem with defining documentation thresholds for transactions of one type. The entrepreneurs did not know, and the legislator did not explain what is meant by a single transaction of one type. The above doubts of taxpayers led the Minister of Finance to issue a general interpretation of January 24, 2018, number DCT.8201.1.2018.

General interpretation of the Minister of Finance setting the thresholds for documentation of transfer prices - what does it contain?

This Interpretation explains the following:

  • the method of determining the documentation thresholds for transactions of one type / other events of one type,
  • the method of determining the documentation thresholds for transactions concluded with various related entities,
  • obligation to prepare tax documentation,
  • a method of determining one type of transaction.

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One Kind of Transaction and Events

The interpretation states that "one kind" applies to both "other events" and "transactions". This means that if the taxpayer carries out with the entity or related entities transactions of one type, the total value of which exceeds the threshold indicated in art. 9a paragraph. 1d of the CIT Act, obliging them to prepare tax documentation (determined individually depending on the amount of revenues obtained by the taxpayer in the previous tax year within the meaning of accounting regulations) and at the same time other transactions of one type, the value of which does not exceed the above-mentioned the threshold, the taxpayer is obliged to prepare documentation only for those transactions of one type that exceed the statutory threshold.

Thus, the documentation threshold relating to the value of transactions or other events referred to in Art. 9a paragraph. 1d of the CIT Act, should be applied separately to each type of transaction or to each type of other event. Consequently, if the value of a given type of transaction (other events) does not exceed this threshold, the taxpayer will not be required to prepare tax documentation for this type of transaction (other events).In other words, the taxpayer is not required to add up the values ​​of different types of transactions or different types of other events in order to determine the obligation to prepare tax documentation.

To sum up, in accordance with the provision of tax acts, determining the significance of a transaction or other event for the purposes of the obligation to prepare tax documentation should be carried out in relation to transactions of one type or other events of one type.

Transfer pricing documentation thresholds for transactions with various related entities - findings

In order to determine the obligation to prepare tax documentation, the taxpayer is required to refer to the transaction thresholds specified in Art. 9a paragraph. 1d of the CIT Act, up to the value being the sum of the value of transactions of one type or another event of one type concluded with individual related entities, and not to the value of one type of transaction with one specific related entity.

Therefore, if the taxpayer concluded a transaction of one type with several related entities, then in order to determine whether it is subject to the documentation obligation, the taxpayer is required to refer the total value of such transaction of one type carried out with all related entities to the documentation threshold referred to in art. 9a paragraph. 1d of the CIT Act. Considering the above, concluding a similar transaction of one type with various related entities does not mean that we are dealing not with one, but with many transactions of one type.

The above results from the wording of Art. 9a paragraph. 1d of the CIT Act, which does not specify anywhere that the documentation threshold should be calculated separately for each related entity. This provision also applies to the concept of transactions of one kind or other events of one kind. Certainly, a transaction of one type carried out on similar terms with various related entities does not cease to be one transaction of a given type.

Pursuant to Art. 9a paragraph. 1 point 1 of the CIT Act, taxpayers whose revenues or costs, within the meaning of the accounting regulations, determined on the basis of the books kept, exceeded the equivalent of EUR 2,000,000 in the year preceding the tax year:

  • making transactions with related entities in the tax year within the meaning of art. 11 sec. 1 and 4, having a significant impact on the amount of their income (loss), or
  • recognizing in the tax year in the books of accounts other events, the terms of which have been agreed (or imposed) with related entities within the meaning of art. 11 sec. 1 and 4, having a significant impact on the amount of their income (loss).

Establishing a single type of transaction

Taxpayers often have trouble determining whether they are dealing with a single type of transaction. The Minister of Finance emphasized that it is the taxpayer's duty to correctly identify one type of transaction or one type of other event. If the main parameters of the transaction, significant from the point of view of transfer pricing (such as, for example, important functions, assets, risks, as well as the method of price calculation, significant payment terms, etc.) are similar, the individual cash flows should be aggregated to one the type of transaction (or one type of event). It is unacceptable to artificially divide transactions of one type (or event of one type) into several smaller quasi-transactions in order to avoid the obligation to prepare tax documentation referred to in Art. 9a of the CIT Act.

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Thus, transactions of one type and other events of one type should be assessed each time individually, taking into account the specific nature of the activity of a given taxpayer. The assumption that the limit value constituting the premise for the obligation to prepare the tax documentation referred to in Art. 9a of the CIT Act, is the value of only a specific, individual transaction, somewhat abstracted from the overall (type) relationship between related entities, could lead to the circumvention of the obligation in question and, as a consequence, the lack of tax transparency of relations between related entities.

In the opinion of the Minister of Finance, the subject of this interpretation is not to define transactions of one type or other events of one type. The division of the entire relationship of a given taxpayer with related entities into individual transactions of one type or other events of one type requires an individualized approach based on a specific factual state reflected in source documents during tax proceedings, tax audits or verification activities.

Moreover, it was noted in the interpretation that regardless of the fact that transactions of one type or one type of event are subject to the documentation obligation, they should be - in connection with Art. 11 of the CIT Act - established in accordance with the arm's length principle.

The issue of the above interpretation by the Minister of Finance should be assessed very positively. This explained to taxpayers how the tax authorities interpret transfer pricing regulations.

The above article describes the need to prepare documentation by taxpayers of corporate income tax, but in this respect the regulations in the act on personal income tax are the same.