One-type transactions related to transfer pricing - a new approach of the Minister of Finance

Service-Tax

On January 24, 2018, the Minister of Finance issued a general ruling with reference number DCT.8201.1.2018 for the uniform application of the provisions on the obligation to prepare tax documentation referred to in Art. 9a of the Act of February 15, 1992 on corporate income tax (hereinafter: "updop"). In the above-mentioned the letter explains important, from the taxpayers' point of view, issues related to the obligation to prepare transfer pricing documentation.

This Interpretation addresses four areas, namely:

  1. establishing one type of transaction,
  2. the method of determining the documentation thresholds for transactions of one type / other events of one type,
  3. the method of determining the documentation thresholds for transactions concluded with various related entities,
  4. obligation to prepare tax documentation.

Let us remind you that pursuant to Art. 9a paragraph. 1d in connection with Art. 9a paragraph. 1, transactions or other events having a significant impact on the amount of the taxpayer's income (loss) are transactions of one type 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, they exceeded the equivalent of:

  1. 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;
  2. 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;
  3. 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.

The indefinite phrase "transactions or other events of one kind" contained in this provision caused taxpayers many interpretation problems. Depending on whether individual transactions were recognized or not, the taxpayer was or is not obliged to prepare transfer pricing documentation.

Two important conclusions should first be drawn from the explanations of the Minister of Finance concerning the method of establishing transactions of one type. The first is related to the fact that it is the taxpayer's responsibility to correctly qualify. The second indicates that it is inadmissible to artificially divide transactions in order to avoid the obligation to prepare transfer pricing documentation.

What are transactions of one type

As we read in the justification of the above-mentioned letters, 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, then the individual cash flows should be aggregated to one type of transaction (or one type of event). It is unacceptable for transactions of one type (or one type of event) to be artificially divided into several smaller quasi-transactions in order to avoid the obligation to prepare tax documentation.

At the same time, it was indicated that transactions of one type and other events of one type should be assessed each time individually, taking into account the specificity 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 updop is the value of only a specific, individual transaction, somewhat abstracted from the entirety (type) of relations 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.

One-type transactions / one-type other events - the method of determining documentation thresholds

As indicated in this Interpretation in the phrase "transactions or other events of one kind" used in the above provisions, the statement "of 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 updop obliging 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 updop, should be applied to each type of transaction or each type of event separately. 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.

Method of determining documentation thresholds for transactions concluded with various related entities

In order to determine the obligation to prepare tax documentation, the taxpayer is obliged to refer to the transaction thresholds specified in the above-mentioned art. 9a paragraph. 1d updop 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 updop. In other words, the fact of concluding a similar transaction of one type with various related parties does not mean that we are dealing not with one, but with many transactions of the same type.

The above approach results in the fact that a transaction of a lower value with a given related entity will be subject to the documentation obligation due to the fact that transactions of one type with another entity in the group are carried out for a value exceeding the statutory thresholds. Such an understanding of the discussed regulations will entail certain consequences related to the obligation to prepare transfer documentation, even if the sales value calculated for individual entities separately does not exceed the statutory thresholds.

Obligation to prepare tax documentation

The Minister of Finance also dispelled taxpayers' doubts as to whether the documentation obligation resulting from the above-mentioned provisions in the case of "other events" referred to in Art. 9a paragraph. 1 point 1 lit. b updop, also applies to transactions with unrelated (independent) entities. It was indicated that such an obligation does not arise. In order for it to arise, both the transactions and other events referred to in the above-mentioned provisions should be implemented with related entities.

This is due both to the wording of the above-mentioned regulations, and the purpose of these regulations, which are addressed to taxpayers making transactions or other events with related entities. The exceptions are transactions or other events with entities having their place of residence, seat or management board in the territory of a country applying harmful tax competition, which has been regulated in a separate editorial unit, i.e. Art. 9a paragraph. 1 point 2 and 3 updop. Moreover, the systemic interpretation also leads to similar conclusions, e.g. Art. 27 sec. 5 updop refers directly to "transactions with related entities or other events taking place between related entities".

Important: The explanations of the Minister of Finance in the above-mentioned scope apply accordingly to taxpayers of personal income tax.