The growing number of transfer pricing audits coupled with an increased value of taxpayers’ income upward adjustments make the issue of double taxation much more commonplace. The methods allowing the elimination or limitation of double taxation include the procedures provided for in the Act dated 16 October 2019 on Dispute Resolutions Regarding Double Taxation and Conclusion of Advance Pricing Agreements (DRM from Dispute Resolution Mechanisms).
A new procedure for international dispute resolution
The DRM procedure has been defined by the legislator as the procedure for resolution of disputes regarding double taxation between the member states of the European Union. The procedure was introduced to the Polish legal system as a result of implementing the Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms in the European Union. The DRM procedure is applied in disputable issues concerning the income or property obtained in the tax year beginning after 31 December 2017, which currently significantly limits the number of disputes to which it may be applied.
The DRM procedure introduces the effective time and institutional frameworks as well as the rules concerning a request for the institution and performance of the Mutual Agreement Procedure (MAP). If the need be, the procedure provides for the appointment of an advisory commission or a commission for pre-judicial dispute settlement consisting of independent arbitrators. The DRM procedure ensures uniform guarantees in the scope of settling disputable issues, new means of appeal, and interactions with domestic proceedings.
What is important, the submission of the request under the DRM procedure precludes the possibility of submitting the requests in other manners and results in the withdrawal of the requests submitted earlier based on other procedures.
Other procedures for international dispute resolution
In addition to the DRM procedure mentioned hereinabove, there are two other grounds for submitting the request for institution of the MAP procedure.
- The convention on the elimination of double taxation in connection with the adjustments of profits of associated enterprises, also referred to as the Arbitration Convention, which – similarly to the DRM procedure – makes it possible to resolve disputes concerning double taxation between the member states of the European Union.
- Agreements on the avoidance of double taxation concluded by Poland.
It should be noted that the Arbitration Convention includes the mechanisms which obligate the States participating in the MAP procedure to eliminate double taxation. The agreements on the avoidance of double taxation concluded by Poland do not provide for such a beneficial solution. The filing of the appeal provided for in the regulations effective in a given country in a case covered by the request for mutual agreement does not prevent the settlement of the case under the MAP procedure. However, the final and binding judgement issued by the court will be binding upon the Minister of Finance of the interested state in the scope of assessment of a given case.
The MAP is a deformalised procedure which is not subject to any administrative fee. The duration of the procedure depends on the manner of its institution, cooperation with foreign tax authorities, receipt of information from tax authorities, and provision of additional information necessary to carry out the procedure. The request for MAP should be filed within three years of the day of the first notification to a domestic related entity or an entity related thereto about the activities of tax authorities which will or may result in double taxation. The request for MAP is considered as filed before the deadline if the request that does not include any formal deficiencies has been filed before the expiry of the three-year time limit.
An important benefit arising from the MAP procedure in comparison with the traditional way of appeal, that is the appeal against an administrative decision or filing the appeal with the administrative court, is the possibility of eliminating the economic double taxation for the transactions challenged by tax authorities. There is no possibility of further appeal against the final agreement made by and between the relevant tax authorities of the States. It should be remembered that the request for the resolution of disputes regarding double taxation should specify one of the three settlement procedures for the disputes regarding double taxation to which it relates.
The grounds for making a unilateral adjustment are provided for in the Arbitration Convention, agreements on avoidance of double taxation and the DRM Act. A unilateral adjustment may be made by the Polish Minister of Finance in order to eliminate double taxation of income of related entities when:
- the terms and conditions defined by the tax administration of another state are in compliance with the terms and conditions that would be agreed by independent entities;
- a domestic related entity and a foreign related entity give their consent that the tax administration of another state includes the income of the domestic related entity in the income of the foreign related entity and taxes the said income in an appropriate manner.
The request for making a unilateral adjustment may not refer to a tax liability which has become statute-barred in compliance with the provisions of the Tax Ordinance, or when the case has been earlier resolved in one of the MAP procedures, or when the request has been filed under one of such procedures. The Arbitration Convention, agreements on avoidance of double taxation and the DRM Act do not provide for the deadline for filing the request for making a unilateral adjustment.
Amendments to other procedures introduced in the DRM Act
The DRM Act regulates not only the dispute resolution procedures described hereinabove but also issues concerning advance pricing agreements (APAs), and it also introduces a new mechanism of cooperation with tax authorities in the form of an agreement on cooperation in relation to taxes included in the scope of competence of the National Revenue Administration. Let us hope that the regulations in question will actually enable the taxpayers to solve the double taxation disputes in a more efficient way.
Paweł Kapłan, Tax Assistant Manager in Transfer Pricing Team at KPMG in Poland