Poland: New regulations on transfer pricing adjustments

published on April 1, 2019

Transfer pricing adjustments are commonly applied in accounting between members of multinational corporations. As there were no clear provisions and guidelines in this respect, tax authorities many times challenged the tax deductibility of expenses incurred to bring the transaction terms in line with the market. By virtue of the amending statute of 23 October 2018, the legislator directly regulated this issue in the tax legislation.

Clear-cut adjustment rule

On 1 January 2019, the lawmakers introduced a rule which clearly stipulates that transfer pricing adjustments represent either revenues or tax-deductible costs and are to be recognised in the year to which they refer. However, a taxpayer may recognise a transfer pricing adjustment as either revenue or tax-deductible cost only after meeting certain legal conditions. According to the Ministry of Finance, this solution should prevent the misuse of transfer pricing adjustments by taxpayers and thus appropriately secure the Treasury's interests.

Example

In 2019, A sp. z o.o. distributes furniture purchased from C GmbH, a furniture manufacturer and A sp. z o.o.'s associated enterprise within ABC corporate group. A sp. z o.o. is a limited-risk distributor and C GmbH is fully responsible for establishing the transfer pricing policy. Taking into account the functions performed, assets used and risks taken, the parties agreed that A sp. z o.o. would receive a resale margin of 3.5 percent on the distribution of goods, which was in line with the arm's length principle. During the year, C GmbH decided to grant discounts to its key customers served by A sp. z o.o. This resulted in a reduction in the resale margin for A sp. z o.o. to 1.3 percent. Because the decision on additional discounts was made exclusively by C GmbH, was an outcome of C GmbH's manufacturing errors and because C GmbH did not want to lose customers, it was resolved at the end of the year to increase the resale margin for A sp. z o.o. to the arm's length level of 3.5 percent. Both entities adjusted the margin after the year-end, by virtue of a written agreement. The adjustment was made in February of the following year (2020), that is, before the deadline set for filing the annual CIT return. According to Article 11e of the CIT Act, the adjustment will represent A sp. z o.o.'s revenue for the year to which the adjustment refers and should be declared in the annual tax return for 2019.

According to Article 11e(1) of the CIT Act, transfer pricing adjustments affecting revenues or tax-deductible costs are allowed if the following conditions are met jointly:

controlled transaction were effected at arm's length;
there was a change in the significant circumstances affecting the transaction terms or the actual costs or revenues providing the basis for transfer pricing are known and the transfer prices must be adjusted in order bring the agreed terms in line with the market;
the taxpayer adjusts the transfer prices by the deadline set for filing the tax return for the year in which the relevant transaction was effected;
also the taxpayer's associated enterprise makes the same transfer pricing adjustment by the deadline set for filing the tax return by the taxpayer, and confirms this in a relevant statement;
the taxpayer's associated enterprise which is to make the transfer pricing adjustment has its place of residence, registered office or management board in Poland or in a country which signed a double taxation avoidance agreement with Poland and has a legal basis for the exchange of tax information with the taxpayer;
the adjustment is confirmed in the tax return for the year to which the adjustment refers.

Regular verification of the agreed terms

When analysing the transaction terms, you may be unsure how to prove that there was a change in the significant circumstances affecting the transaction terms and substantiating the adjustment. In its justification of the new regulations, the Ministry of Finance expressly notes that the prices agreed between associated enterprises should be at arm's length already during the year – to the best of the parties' knowledge and experience. Thus, the taxpayer must regularly verify the arm's length nature of the agreed transaction terms and, if needed, modify their pricing as necessary during the year. But even if we look only at the example circumstances listed in the justification of the implemented regulations, such as changes in the market prices of commodities, currency and interest rate fluctuations, supply and demand variations caused by independent factors, we may find it impossible in practice to continuously modify the agreed terms and the adopted transfer pricing rules. In the justification of the amendment, the Ministry of Finance states that tax authorities will still be entitled to challenge the transfer pricing adjustment if there are ground to suppose that the taxpayer purposefully applied prices significantly deviating from the arm's length level during a year and failed to adjust those prices during a year when the market conditions significantly changed.

Implications for taxpayers

From the taxpayer perspective, this change seems positive because the lawmakers have directly stipulated that transfer price adjustments may be either revenues or tax-deductible costs. On the other hand, however, the various conditions that taxpayers must meet in order to apply the adjustment may pose further administrative burdens hindering the recognition of adjustments for tax purposes. Moreover, in its justification of the statute the Ministry of Finance makes a reservation that even if all conditions are met, tax authorities may nevertheless check if there were sufficient grounds for the adjustment.