Executive summary

On 16 July 2018, Poland's Government Legislation Center published, for public consultation, a draft amendment to the Act on corporate income tax (CIT) and personal income tax (PIT) with respect to transfer pricing rules.

The published draft proposes significant changes to the new provisions on transfer pricing (TP) documentation introduced in 2017. The proposed changes seek to reduce the administrative burden imposed on taxpayers by increasing documentation thresholds and introducing "safe harbors." However, at the same time, the draft law grants broader powers to tax authorities in the area of assessing the merits of transactions between related parties and validating the applied TP policy, which may make TP audits in Poland more difficult.

Detailed discussion

Key proposed changes in TP documentation

The draft law proposes the following key changes to the TP law:

• Introducing new, increased documentation thresholds as follows:
  • PLN10 million (approx. US$2.7 million) for the following types of transactions: purchase/sale of property, plant and equipment, fixed assets, debt financing (financing value), sureties and guarantees (guarantee sum)
  • PLN2 million (approx. US$0.55 million) for the following types of transactions: sale/purchase and use of intangible assets (WNIP), services, use/making available for use of fixed assets, assignment of income to a foreign plant, other transactions (e.g., production)
• Redefining the obligation to prepare Master File documentation so that taxpayers will be obliged to prepare a Master File only if all of the following conditions are met:
  • The entity is required to prepare local documentation
  • The entity belongs to the group of related entities for which consolidated financial statements are prepared
  • Consolidated revenues of the Group exceeded PLN200 million (approx. US$50.4 million) in the previous financial year

The proposed law provides for the possibility of preparing the Master File documentation in English.

• Setting forth new deadlines for the preparation of documentation:
  • Local File: 9 months from the end of the tax year
  • Master File: 12 months from the end of the tax year
• The proposed law replaces the CIT/PIT TP form with a new TP-R electronic document

Introduction of safe harbor rules

The new regulation proposes the introduction of safe (recognized by the tax authorities as market) margin rates for low value-added services at the minimum level of 5% for the provision of services and a maximum of 5% for the purchase of services.

Although the application of these rates exempts the taxpayer from the benchmarking requirement for those transactions, the use of the safe harbor would only be possible if the taxpayer had a broad calculation presenting information on the type and amount of costs included in the calculation, as well as the use of allocation keys for all entities using a given low value-added service.

A similar solution is proposed for certain loans. If the interest rate on the loan is determined on the basis of the base interest rate increased with margin as determined in the decree to be published by the Ministry of Finance, after fulfilling certain requirements on the period and value of the loan, taxpayers would be able to benefit from the safe harbor rules.

Changes in the tax authorities competencies in the area of TP

Importantly, the proposal would give tax authorities' the right to re-characterize a transaction.

In addition, the catalog of TP methods that can be used by tax authorities for the purpose of establishing the arm's-length nature of a transaction was extended, giving them the right to use valuation techniques.

Change of limits for non-deductibility of several types of costs

The proposal also introduces significant changes in the scope of recently introduced rules on non-deductibility of several types of costs as follows:

• Article 15 e: the limit on the deductibility of services and intra-group licenses will be increased from 5% to 10% of tax EBITDA (adjusted earnings before interest, taxes, depreciation and amortization) above safe harbor PLN3 million (approx. US$0.82 million).
• Article 15 c: the limit on the deductibility of debt financing costs is reduced to 20%.
• Article 15 ca: waving the right to validate the market creditworthiness of taxpayers on the grounds of art. 15ca. It still can be verified on the basis of general rules.

It is assumed that the new law will be effective as from 1 January 2019.

The proposed law seems to be in line with the current tax authorities' policy to reduce the administrative burden for taxpayers, while increasing the tax auditing competencies and rights of the tax authorities indicating that the priority for taxpayers should be put on sound, arm's-length TP policies, which may be subject to tax audit.

Given the proposed rules, extending the authority of the Polish tax administration, Polish taxpayers should review the TP policies, prior to the anticipated finalization of the rules.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

EY Doradztwo Podatkowe Krupa sp. k. (previously Ernst & Young Doradztwo Podatkowe sp. z o.o.)

• Andrzej Broda, International Tax Services
  andrzej.broda@pl.ey.com
• Aneta Blazejewska–Gaczynska, Transfer Pricing
  aneta.blazejewska-gaczynska@pl.ey.com

Ernst & Young LLP, Polish Tax Desk, European Business Group, New York

• Sylwia Migdal
  sylwia.migdal1@ey.com
• Joanna Pachnik
  joanna.pachnik1@ey.com
• Paula Przybielska
  paula.przybielska1@ey.com

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ATTACHMENT

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