Changes in Polish transfer pricing regulations in 2019

1. Consolidation of the thresholds for the mandatory transaction documentation

The bill simplifies the rules for computing the thresholds above which certain transfer pricing documentation becomes obligatory, with the value of the transaction in question being the sole criterion (irrespective of the taxpayer's revenue). The thresholds for the specific types of transaction are:

1. PLN 10M for transactions involving goods or financial transactions,
2. PLN 2M for transactions relating to services and any other type of transactions.

The threshold that applies to transactions with subjects that reside, are established (registered address) or have a management board in a tax haven has been set at PLN 100k.

2. Extension of the requirement of benchmark analyses

A benchmark analysis must be included in the local file. After the law is enacted, the benchmarking obligation will apply to all subjects that are obliged to compile a local file due to exceeding the threshold, irrespective of their revenue. Previously, benchmark analyses were mandatory for entities with revenue or expenses exceeding a the threshold of EUR 10M.

3. Exemptions from the documentation obligation

The most far-reaching change that will take effect on January 1, 2019 affects related entities established in Poland, not benefiting from any tax exemptions and not reporting a tax loss. Those businesses will be exempt from the obligation to document their transaction in a local file to the extent of transactions with other profitable entities.

Local documentation will not need to be compiled by members of a tax capital group (tax unity) with respect to transactions between them.

4. Official definition of the markup on low value adding services and the interest on loans ('safe harbour')

By providing an official definition of a market markup rate on low value adding services as well as a definition of market interest on loans, the lawmaker is giving a clear benchmark for determining whether the transaction is arm’s length. This will simplify the documentation and benchmarking because now it will suffice to prove that the markup on services or interest meets the legal requirement.

Low value adding services

Under the Bill, an auditor's assessment of profit (loss) on a transaction involving low value adding services will no longer be mandatory. This applies in particular to accounting, audit, finance, HR, IT, legal and tax services; the exhaustive list has been attached as Schedule 1 to Sejm paper 2860. When the markup on those services amounts to 5% of the total expense of the service provider, the auditor will recognise the transaction as arm’s length.

Benefiting from this simplification is conditional. Only those service recipients who hold documentation specifying the type and amount of expenses incurred and including justification of the service cost allocation to the specific recipients will qualify for it. Furthermore, service providers from tax havens are excluded.

Loans

With regard toloan transactions, the tax authorities will not assess profits (losses) when the loan meets the following conditions:

1. the interest rate has been defined using the base interest rate and a margin specified in the Finance Minister’s decree (no such decree has been published as yet);
2. apart from the interest, no fees are charged for the loan provision;
3. the loan agreement term is no longer than 5 years;
4. the audited subject's liabilities relating to loan agreements have not exceeded PLN 20M in the tax year; and
5. the lender's registered office or its board of directors are not located in a tax haven.

5. Extension of the deadline for compiling documentation

Instead of 3, the Bill provides for 9 months after the end of the tax year to provide the statement of availability of the local transfer pricing documentation and  the information concerning transfer prices. For proving Group transfer pricing documentation, the term has been extended to 12 months since the end of the tax year.

6. More methods for determining transfer prices

Under the current law, the tax authorities can choose from among five valuation methods for determining the market value of transactions specified in the Law. The Bill allows the tax authorities to use other transfer pricing valuation methods, selected according to the nature of the transaction.

7. Other changes

• Transaction valuation method

According to the new regulations, the audited transaction value does not include VAT. This is because VAT is not taken into account to determine income tax. Furthermore, the Bill specifies the value of certain transactions.

• Scope of the master file documentation

The current regulations on group reporting on transfer prices have been amended. Under the Bill, the master file will be compiled only by members of a tax capital group (tax unity) which:

1. files consolidated financial statements,
2. reported in the prior year consolidated revenue of at least PLN 200M or foreign currency equivalent.

Additionally, the group reporting obligation may be satisfied with the master file of another member of the tax capital group (tax unity). The master file can be submitted in English, if that is convenient for the multinational.

• Reporting duties

The simplified CIT/TP and PIT/TP forms can now be submitted as a TP-R form transferred electronically.

• Consistent concepts and definitions

Current transfer pricings regulations will be deleted and the new provisions will fit into a single chapter 1a in the CIT Law. In order to limit potential interpretation disputes, the Bill includes key definitions of legal terms, including the definition of a "transakcja kontrolowana" (monitored transaction).