When is it not necessary to have transfer pricing documentation?

From this article, you will learn:

• Which transactions are not subject to the documentation obligation?
• What exemptions from the obligation to have transfer pricing documentation are provided for in the regulations?
• Whether the exemption from the documentation obligation also exempts you from the obligation to submit a TPR-C?

The end of the year and the first weeks of the new year is a good time to start a preliminary analysis of transfer pricing obligations for the current period. It is worth remembering that not all transactions with related entities require the preparation of transfer pricing documentation, even if documentation thresholds are exceeded. In recent years, the legislator has slightly relaxed the transfer pricing regulations by introducing several exemptions from this obligation. In today's article we will briefly discuss the most important of them.

For which controlled transactions do you not need to prepare documentation at all?

There are certain types of transactions between related entities that do not require preparation of documentation because they are not of an economic nature. Many taxpayers wondered what this actually means.

The Ministry of Finance came to the rescue and explained in its general interpretation of 29 December 2021 that, for example, dividend payments or subsidies regulated in Art. 177-179 of the Commercial Companies Code do not have an economic nature.

The subsequent transactions discussed below are subject to the reporting obligation, but may be exempt from this obligation if certain conditions are met.

Domestic transactions are exempt from the obligation to prepare transfer pricing documentation

Let's start with a solution that will most likely apply to the largest group of Polish entrepreneurs. Those who are based in Poland and make transactions with domestic related entities are exempt from the documentation obligation. It is worth remembering that the exemption is only possible after each party meets additional conditions, such as:

• no subjective CIT exemption under Art. 6 of the Act on Corporate Income Tax (for budgetary units, local government units or family foundations),
• no tax loss in the year in which transactions with the domestic related entity were carried out,
• no CIT exemption provided for the Special Economic Zone and the Polish Investment Zone.

In order for transactions to be exempt from the obligation to prepare transfer pricing documentation, the taxpayer should meet all of the conditions listed above.

It should be emphasized here that the exemption may apply to any domestic transaction, regardless of its value, if the guidelines mentioned above are met. It is therefore prudent to first analyze transactions with a high probability of obtaining national exemption. The next ones we will discuss, provided for in the Act on Corporate Income Tax, refer to precisely defined types of transactions and in their case the nature of the entities does not matter.

Low value added services are exempt from transfer pricing reporting

Another discussed type of exemption from the obligation to prepare transfer pricing documentation concerns the so-called services with low added value. It is worth noting here that this is a closed set of services listed in Annex 6 to the Act on Corporate Income Tax. Therefore, services may be exempt if they are included in the indicated catalogue. They should also meet several additional conditions:

• must be of a nature supporting the business activity of the service recipient,
• cannot constitute the main subject of activity of a group of related entities,
• their value to unrelated entities may not exceed 2% of the value of these services to all entities, related and unrelated,
• they cannot be resold, although a few exceptions to the rule are allowed in this case.

The method of calculating the transfer price for low-value-added services must be based on the cost-plus method or the net transaction margin method. At the same time, the mark-up on costs cannot be higher than 5% in the case of purchasing services or less than 5% in the case of providing services. Moreover, these services cannot be provided by entities from tax havens.

The last, but probably the most important, condition is that the service recipient must have a calculation of the established transfer price including the type and amount of costs of providing these services, the allocation keys used and a description of the transaction, including an analysis of functions, assets and risks. As can be seen, taking advantage of the exemption in question requires the taxpayer to meet restrictive criteria, as well as to collect a large amount of data, which he will have to submit to the tax authorities in the event of a possible audit.

Exemption for selected financial transactions

Transactions between related entities, such as loans, credits or bond issues, may be exempt from the obligation to prepare transfer pricing documentation for them. However, the following conditions must be met:

1. The interest rate on such a loan must be determined in accordance with the announcement of the Ministry of Finance, which specifies the type of base interest rate and the amount of the margin. This notice is normally published at the end of the year for the following calendar year.
2. Apart from interest, there may be no other fees or commissions.
3. The loan cannot be granted for a period longer than 5 years.
4. The total level of liabilities or receivables of the taxpayer arising from loans with related entities cannot exceed PLN 20 million. It should be emphasised that this limit applies to all loans with related entities.
5. The loan cannot be granted by an entity based in a tax haven.
    

Therefore, it is worth making sure that the provisions of the contract take into account the above requirements already at the stage of planning the terms of cooperation. This will save time and expenses related to the preparation of transfer pricing documentation and reduce the risk of a possible non-market price.

Exemption for re-invoice transactions

Another type of transaction exempt from the obligation to report prices (of course, under certain conditions) are re-invoices. These are transactions involving the settlement between related entities of expenses initially incurred for an unrelated entity. Such transactions:

• cannot be settled with an added margin or profit surcharge and, at the same time, no added value can be created in such a transaction.
• A re-invoice transaction cannot be linked to another controlled transaction.
• Settlement between related entities must occur immediately after payment is made to the unrelated entity.
• The related entity cannot come from a tax haven.
• In the case of settlements using allocation keys, the taxpayer must prepare a calculation including information on the amount and type of costs, a description of the transaction and justification for the selection of allocation keys.

Although the conditions for applying the re-invoice exemption are relatively simple, taxpayers wishing to use it should bear in mind the need to secure appropriate documents confirming the fulfilment of the above criteria.

Why is it worth using the support of an advisor when analysing transactions covered by transfer pricing obligations?

As you can see, taxpayers have quite a few options at their disposal that allow them to take advantage of the exemption from the obligation to prepare transfer pricing documentation. However, as always, the devil is in the details. At the same time, the legislator specifies numerous and sometimes quite restrictive conditions that a taxpayer must meet in order to benefit from a given exemption. Therefore, already at the transaction planning stage it is worth considering whether any of the exemptions can be applied. A well-thought-out transfer pricing policy will reduce the time and expenses related to the subsequent preparation of documentation.

At the same time, it should be remembered that the use of any of these solutions does not mean that there is no need to submit TPR-C information, where taxpayers should also report exempt transactions with related entities.