Transfer prices – what do you need to know about them?

From this article, you will learn:

• what are the basic reporting obligations regarding transfer prices;
• what are safe harbour transactions;
• what is the deadline for presenting transfer pricing documentation.

Due to the complexity of the regulations, entrepreneurs operating in Poland tend to have great difficulties with verification of their documentation obligation regarding transfer prices. And these taxpayers, who make transactions with related entities and have to describe in the local and master file all the elements that are required by acts and regulations, face an even bigger challenge.

So how to properly determine the documentation obligation and its scope according to the current legislation? Here are the answers to questions frequently asked to our tax advisors. For clarity, we focused on the payers of corporate income tax (although these regulations also apply to the individuals).

1. Where can I find an answer to the question, whether I have documentation obligation regarding transfer prices?

A determination of documentation obligation is generally dependent on the simultaneous occurrence of two factors:

• meeting the definition of related entities by the taxpayers;
• conducting a controlled transaction exceeding the defined documentation thresholds.

The legislator provided detailed information on what entities meet the definition of related entities and what transaction meets the criteria of controlled transaction in the glossaries to the chapters of the acts which regard transfer prices.

However, proper verification of documentation obligation sometimes is a challenge. This is why looking for an answer to the question about documentation obligation should not be based only on the regulations included in the acts or directives related to them. Additionally, crucial are the explanations of the Polish Ministry of Finance, posted on their website, the recommendations of the Transfer Pricing Forum and also the answers of the Minister of Finance provided within the general interpretation, interpellation or parliamentary question.

2. What are the basic reporting obligations regarding transfer prices?

The Polish law includes the following scope of reporting obligations:

Local documentation (local file)
- obligation of preparing occurs when a taxpayer exceeds the documentation thresholds.

Transfer pricing information (TPR)
- obligation of preparing occurs when a taxpayer exceeds the documentation thresholds.

Group documentation (master file)
- obligation of preparing occurs if the consolidated revenue of a group exceeds PLN 200 million.

Country-by-Country Reporting (CbC)
- obligation of preparing occurs if the consolidated revenue of a group exceeds EUR 750 million or exceeds PLN 3.25 billion*.
* The threshold indicated in PLN applies to the capital groups preparing a consolidated financial report in PLN; the threshold indicated in EUR applies to the capital groups preparing a consolidated financial report in a currency other than PLN.

3. What are the documentation thresholds for local documentation (local file) and transfer pricing information (TPR) in Poland?

The documentation thresholds correspond to the net value of a transaction and vary depending on the transaction type:

Goods transactions
- the documentation threshold is PLN 10 million.

Financial transactions
- the documentation threshold is PLN 10 million.

Services transactions
- the documentation threshold is PLN 2 million.

Other transactions
- the documentation threshold is PLN 2 million.

Transactions with a tax haven*
- the documentation threshold is PLN 2,5 million in the case of financial transactions;
- the documentation threshold is PLN 500 thousand in the case of transactions other than financial transactions.
*Attention! These thresholds apply to transactions conducted with both related and unrelated entities. 

Documentation thresholds are determined separately for every controlled transaction of a homogeneous nature and separately for the cost and revenue side.

4. How should the taxpayer determine if the transaction is of a homogenous nature?

While assessing the homogeneity of a transaction, an entity has to take into account, first of all:

• uniformity of a transaction in an economic context;
• comparability criteria;
• price verification methods.

The number of accounting documents, payments made or received and related entities, with which the transaction is conducted, does not affect the homogeneity of a transaction.
 

5. In Poland, which transactions are exempted from the documentation obligation?

The most popular exemptions apply to:

• domestic transactions (only after fulfilling additional conditions);
• transactions whose entire value does not constitute revenue or tax cost permanently (with exceptions);
• re-invoicing transactions (only after fulfilling additional conditions);
• safe harbour transactions (only after fulfilling additional conditions).

It should be noted that some of the transactions, despite the exemption from the obligation to prepare local documentation for them (local file), still have to be indicated in the information about transfer pricing (TPR-C/TPR-P).

6. What are safe harbour transactions?

Safe harbour transactions refer to low value-added services and to loan transactions, credit and bond issuing. After an entity fulfils the conditions specified in the provisions of acts on income taxes, a tax authority withdraws from the determination of taxpayer's income (loss) in terms of the given transactions. Then the parties are also not obliged to prepare transfer pricing documentation for them.

7. Should every documentation contain transfer pricing analysis?

Transfer pricing analysis (benchmark analysis or compliance analysis) is an obligatory element of every local documentation (local file).

Exceptions are controlled transactions conducted by micro and small entrepreneurs and transactions other than controlled transactions, which are covered by the documentation obligation, but they are concluded with entities from the so-called tax havens.

A benchmark or compliance analysis should be updated at least once every 3 years, unless there occurs a change in economic environment which significantly affects the prepared analysis. (an example of such change can be war in Ukraine, inflation, pandemic).

8. Which countries are referred to as tax havens?

Tax havens are the countries and territories which apply harmful tax competition in terms of both personal and corporate income tax.

Tax administration authorities claim that in the tax systems of such countries and dependent territories tax conditions are favourable for non-residents, which is conducive to the transfer of profits by Polish taxpayers to these countries (territories).

In Poland, tax havens are the countries (territories) listed by the Minister of Finance in the regulations on specifying countries and territories applying harmful tax competition.

9. By when should reporting obligations for 2022 be fulfilled?

The dates for the fulfilment of reporting obligations vary depending on the scope of the documents required:

Local documentation (local file) with transfer pricing analysis
- preparing by October 31, 2023 (for the entities of which the tax year corresponds to the calendar year).

TPR-C/TPR-P (including the statement about the preparation of local file)
- preparing by November 30, 2023 (for the entities of which the tax year corresponds to the calendar year).

Group documentation (master file)    
- preparing by December 31, 2023 (for the entities of which the tax year corresponds to the calendar year).

CBC-P notification   
- submission by March 31, 2023 (for the capital groups of which a consolidated financial report is prepared for the year corresponding to the calendar year).

CBC-R information    
- submission by December 31, 2023 (for the capital groups of which a consolidated financial report is prepared for the year corresponding to the calendar year).

2023 will probably be the first in several years when the statutory dates for fulfilling documentation obligations will not be extended due to the state of epidemic threat.

10. Does the local documentation (local file) have to be prepared in Polish?

In Polish law there are not any precise regulations indicating the language which the taxpayer should use while preparing local file. However, having regard to the provisions of the Constitution of the Republic of Poland (and the act on the Polish Language), it is easy to come to the right conclusion that local documentation (local file) should be prepared in Polish.

11. Can I use the group documentation (master file) made in English and prepared by another entity from the group?

A Polish entity that belongs to a group of related entities with consolidated revenues exceeding PLN 200 million and whose financial statements are consolidated using the full or proportional method, is obliged to attach group documentation (master file) to local documentation (local file). Master file, however, can be prepared by another entity from the group. However, it is important that it contains all the elements specified in the provisions of Polish acts on income taxes.

In the case of group documentation (master file) prepared in English, the tax authority can demand the presentation of its translation (which should be submitted within 30 days from the date of delivering an official request).

12. Does transfer pricing documentation have to be signed?

No, under the present legislation in Poland, the taxpayer does not have an obligation to sign transfer pricing documentation.

13. Can transfer pricing documentation be prepared without the support of a tax advisor?

Preparation of reliable tax documentation, fulfilling all the requirements of Polish law is, unfortunately, complicated. So, it is worth entrusting the tasks regarding transfer pricing documentation to the specialists who have many years of experience in this matter.

By using the services of professional advisors, we are sure that in case of a potential tax inspection, the documentation provided will not be recognized by the tax authorities as unreliable and we will not be exposed to any penalties.

14. What is „unreliable tax documentation”?

Unreliable transfer pricing documentation is one that presents relations between related entities in a way that differs from the reality or does not include all the elements specified in the provisions. Presenting unreliable tax documentation does not protect the taxpayer from the criminal fiscal liability and penalties in the form of an additional tax obligation.

15. What to do when the tax authority initiates an inspection?

The tax authority which initiates an income tax inspection, is authorized to demand the presentation of transfer pricing documentation from the taxpayer. Then, within 14 days (from the date of delivering an official request), the taxpayer should present the documentation personally or send it by post to the address of the appropriate tax office (the date of postmark matters).

The taxpayer should also bear in mind that the tax authority can demand additional explanations and documents in relations to the presented documentation, for example, a sworn translation of specific contracts, on the basis of which a transaction was concluded (it may happen if the taxpayer presented them to the authorities in a foreign language) or a translation of group documentation (master file).

16. What is the deadline for presenting transfer pricing documentation?

The taxpayer is obliged to present the documentation on the tax authorities’ demand and has to do this within 14 days from the date of delivering a request by the agencies authorized.

17. Can the time limit of 14 days for presenting documentation be extended in any way?

No, the limit for presenting transfer pricing documentation is always 14 days from the date of delivering to the taxpayer a request by the agencies authorized. Polish law does not provide the possibility of its extension.

18. What penalty does the company face for the lack of transfer pricing documentation?

The taxpayer who does not present transfer pricing documentation on the tax authorities’ demand within the time limit determined by law, that is within 14 days, exposes themselves to penalties in the form of additional tax obligation and criminal fiscal liability.

19. How much is the additional tax obligation?

Additional tax obligation, in general, is 10% of the wrongly reported sum or overstated tax loss and wholly or partly unreported taxable income. Furthermore, the legislator provided the possibility of:

• doubling the rate – when the basis for the determination of additional tax obligation exceeds PLN 15 million (regarding the excess over this amount) or the taxpayer did not present tax documentation;
• tripling the rate – when the basis for the determination of additional tax obligation exceeds PLN 15 million (regarding the excess over this amount), and the taxpayer did not present tax documentation.

In practice, this idea of penalties means that the taxpayer, no matter the financial result achieved, will be forced to pay the tax arising from the additional tax obligation. It should also be noted that these penalties can be applied not only to the transactions under the documentation obligation, but to all the transactions, in respect to which there is an obligation to apply the arm's length principle.

20. What can be the consequences when transfer pricing documentation does not fulfil the statutory requirements?

Properly prepared transfer pricing documentation should contain all the elements required by the acts on income taxes. Otherwise, it can be recognized by the authorities as incomplete and defective, which will expose the taxpayer to penalties in the form of an additional tax obligation and criminal fiscal liability; so, the same consequences as in the case of a complete lack of documentation.

21. When can the Polish tax authority set additional tax obligation?

The Polish tax authority can set additional tax obligation in the case when the agreed conditions in controlled transactions between related entities, differ from those which would be applied among independent entities, that is, when a transfer price is not a market price.

22. How to determine a market price?

The market price is one that, under comparable economic conditions, for a corresponding transaction, would be determined among unrelated entities.

RSM Poland comprehensively supports related entities in the field of transfer pricing documentation. Should you have a question, please contact us

We are aware of how complex Polish provisions can be for internationally active entrepreneurs. This is why our company offers a wide range of support:

• developing a transfer pricing policy;
• help with fulfilling the reporting duties;
• preparation of local documentation (local files), benchmark analyses, compliance analyses and also group documentation (master files).

If you want to avoid problems with tax administration authorities, contact our expert and find out how we can help your company.