The beginning of the year is the time for related entities to check if the financial performance (profitability) reported in the preceding year has met the projections (assumptions made).
The results of this verification are final settlements between related entities (conducted usually at year-end or in the first quarter of the following period) in a form of transfer pricing adjustments (e.g. as a results of obtaining periodic financial data that helps adjust the prices to a level that unrelated parties would agree on ).
In order to perform the adjustment in a reasonably secure way, the taxpayer needs to ensure that the following documents and analysis support the adjustment:
- an agreement between related parties making adjustments that allows for such adjustments;
- a transfer pricing policy indicating the possibility to make such adjustments;
- benchmarking analysis determining transfer prices/profitability of unrelated parties (considered comparable to a given related party making transfer pricing adjustments) and being a benchmark for transfer pricing adjustments;
- calculation of the adjustment to be made by related parties that clearly specifies the adjustment amount and follows the transfer pricing policy adopted by the group,
- transfer pricing documentation for transaction with related entities for the year that the transfer pricing adjustment is conducted in.
The taxpayer also needs to take care of the appropriate recognition of tax consequences of the transfer pricing adjustments from CIT and VAT perspective. A tax ruling regarding the correct recognition of the tax consequences in CIT and VAT resulting from transfer pricing adjustments (if available) can constitute yet another argument supporting the taxpayer in a potential dispute with tax authorities.
Mitigating the risk of a dispute with tax authorities concerning adjustments made is important in the context of recent declarations of the Minister of Finance. On 1st December 2015 the Ministry of Finance published “Minister of Finance’s Action Plan for 2016”. One of the key objectives of the Minister of Finance for 2016 is prevention of income tax avoidance “with a particular focus on transfer pricing”.
The first steps to be taken by the Minister of Finance were presented on 18th December 2015 in a communication published at the website of the Ministry of Finance. As indicated in that communicate, “in the view of the common practice of making transfers on the last days of a calendar year to reduce income disclosed by Polish taxpayers” (for instance due to transfer pricing adjustments), such transactions will be controlled in the second quarter of 2016.
A tax inspection is necessary to identify any irregularities in intra-group transactions. The Ministry of Finance intends to intensify inspection activities in the coming year.
According to the public declarations, in order to improve effectiveness of tax inspections, the Ministry of Finance plans to allocate additional resources and to carry out structural changes (for instance gathering experts in transfer pricing inspections in selected tax offices – US -and tax control offices – UKS).
Solutions proposed by the Minister of Finance
In its communication dated 18th December 2015 the Minister of Finance encourages taxpayers to correct tax returns filed for years 2011-2015 by the end of Q1 2016 if the entity decides that intra-group transactions were not concluded at arm’s length. He also stresses that tax returns corrected at the initiative of the taxpayer may be conducted without specifying the reason for correction. If the taxpayer makes the correction, it has the right to apply a preferential rate applicable for calculating interest on tax arrears of 50% of the standard rate (if correction is made during 6 months since tax payment date). However, if the correction results from the inspection, interest will be calculated in the full amount.
In our opinion in the nearest future the number of tax inspections focusing on transfer pricing may increase, as well as, a change in the approach towards identifying areas of tax erosion may take place.
The communication published by the Minister of Finance clearly informs that related party transactions will be more closely inspected.