The tax law regulations effective since 2019 introduce a broader scope of the statement on transfer pricing documentation. The statement on preparation of the Local File, apart from the confirmation that the Local File has been prepared, should include the statement of application of arm’s length prices in related party transactions.
The statement on transfer pricing documentation is nothing new.
The obligation to file the statement on transfer pricing documentation was originally introduced in 2017. At that time, the taxpayers obliged to prepare the Local File submitted a statement on transfer pricing documentation in which they confirmed the fact of having the required tax documentation. The statement on transfer pricing documentation effective in the previous legal situation was limited to stating the fact of the timely preparation of tax documentation.
The regulations on transfer pricing effective since 2019 significantly expand the scope of the statement on transfer pricing documentation filed by taxpayers.
In the statements filed for 2019 and the following years, the taxpayers – in addition to confirmation of preparing the transfer pricing documentation for transactions subject to documentation obligation – will be additionally obliged to confirm that such transactions were effected pursuant to arm’s length terms and conditions, that are the terms and conditions that would be agreed by and between independent entities.
Broader scope of the statement – greater liability?
In compliance with the regulations effective since 2019, the statement on transfer pricing documentation is filed with competent tax offices only by electronic means, with the deadline being the end of the 9th month after the end of the financial year.
Pursuant to Article 11m of the CIT Act, the statement on transfer pricing documentation is signed by a manager of the undertaking, as interpreted in the Accounting Act, with specifying their function. When several people fulfil the criteria for a manager of the undertaking, or their designation is not possible, the statement is to be submitted and signed by each person authorised to represent a given undertaking. The regulations effective since 2019 do not provide for the possibility of filing the statement on transfer pricing documentation by an attorney.
The new scope of the statement obligates the persons obliged to submit it to verify not only the fact of having relevant transfer pricing documentation but also to check whether the terms and conditions of the transactions effected with related entities actually do not differ from arm’s length terms and conditions.
From the perspective of taxpayers and managers of the undertaking, that is in the case of legal persons being the members of the management board of a company, the preparation of transfer pricing documentation and reliable benchmarking analyses results not only from the statutory obligation but is also the indication of exercising due diligence, which – in the case of potential tax audit – may protect the persons signing the statement against being held personally liable.
The amendment of the transfer pricing regulations under the PIT Act and the CIT Act also entailed the amendment to the provisions of the Fiscal Penal Code through adding Article 56c providing for the liability arising from the violation of the regulations concerning the submission of statements on transfer pricing documentation. Pursuant to Article 56c of the Fiscal Penal Code, the failure to file the statement on transfer pricing documentation, or the filing of the statement after the deadline, or the certifying of false information shall expose the liable persons to the threat of being imposed sanctions on personal grounds – in compliance with the cited provision, the listed actions constitute a prohibited act subject to the penalty that may be assessed up to 720 daily rates.
Free of charge transactions and the statement on transfer pricing documentation
The effective regulations stipulate the key issues related to the scope and the content of the statement on transfer pricing documentation. Nevertheless, the conclusion of certain transactions raises many doubts in practice in the context of the analysed statement and confirmation of the arm’s length nature of effected transactions.
Recently, the taxpayers had doubts about the possibility of filing the statement on transfer pricing documentation including the confirmation of observing the arm’s length prices in transactions in which the performance has been partially or entirely free of charge.
The related entities which conclude controlled transactions may, in fact, encounter the situation in which – in compliance with the contractual provisions – they receive the performance for which their business partner does not expect any payment, the so–called free of charge performance. In compliance with the provisions of the CIT Act, it is recommended that the taxpayers recognise the revenue arising from the so–called free of charge performance and take it into account in their tax settlement. The absence of remuneration may arise from the adopted group policy in the scope of transfer pricing, reciprocity of performances, etc.
Furthermore, what is important is that the tax regulations applicable in the country of the registered office of a business partner with whom the taxpayer concludes the transactions may provide for the conclusion of the transactions in which the undertaking gives or receives the performance without remuneration. The OECD Guidelines allow the absence of the possibility of calculating the remuneration in the case of certain transactions if it is not contrary to the national regulations of the related entities concluding a given type of transaction.
Nevertheless, in the scope of filing the statements in the case of concluding free of charge transactions, the Head of the National Revenue Information issued two individual interpretations negative for taxpayers (0111-KDIB1-2.4010.495.2019.1.AW and No. 0111-KDIB1-1.4010.544.2019.1.BK dated 28 February 2020).
In both cited interpretations, the tax authority stated that the revenue from free of charge performances is not a transfer price determined on the basis of the terms and conditions that would be agreed by and between the independent entities. Therefore, and in spite of recognising the additional taxable revenue arising from free of charge performance by the taxpayer (that is – to give an example – giving of free of charge guarantee by a related entity), the taxpayer will not be entitled to file the statement on transfer pricing documentation.
While the Voivodeship Administrative Court in Wrocław, in the judgement dated 22 July 2020, files No. I SA/Wr 269/20, did not agree with the stance of the tax authority expressed in the interpretation No. 0111-KDIB1-1.4010.544.2019.1.BK, and thus overruled the individual interpretation appealed against by the taxpayer.
In the statement of reasons given orally, the Voivodeship Administrative Court emphasised the essence of the objective of the introduced regulations. In the case of receiving the free of charge performance and recognising the taxable revenue arising therefrom, the taxpayer undertakes to pay the tax on that account, and thus increases the revenues to the state budget (incurs additional costs paid to the state which the taxpayer would not have incurred in the case of free of charge performance). Thus, the taxpayer should not suffer the negative consequences of the activities which are not aimed at tax avoidance or profit transfer. The Voivodeship Administrative Court emphasised that in the analysed case, it was not possible to approve the stance of the tax authority that had rejected the possibility of filing the statement by the authorised persons, and also indicated that such a statement would refer to a transaction which was not concluded in market realities because that case dealt with the free of charge performance (the giving of free of charge guarantee for a credit by the majority shareholder).
We hope that the cited decision of the Voivodeship Administrative Court will permanently change the existing interpretation trends which were unfavourable particularly for the taxpayers who conclude the transactions consisting in the receipt of free of charge performances and recognise the additional revenue arising therefrom, given the lack of possibility of filing the statement, which would result in the personal fiscal penal liability for the managers of the undertakings of such taxpayers.
Hanna Rawska, Manager in Transfer Pricing Team at KPMG in Poland
Ewa Major, Senior Consultant in Transfer Pricing Team at KPMG in Poland