Tax authorities’ recent activity and plans for 2016
Tax Alert 5/2016
12 February 2016
The settlements of the Polish taxpayers with their related parties have recently become an important area of interest of the tax authorities and they are subject to a detailed scrutiny.
This trend was confirmed in the communication of the Ministry of Finance dated 5th February 2016; in which the Ministry of Finance pointed out the following activities planned to be performed in the first half‑year of 2016:
- in the first quarter of 2016 the Ministry of Finance will focus on expanding its own personnel resources and developing knowledge in the field of transfer pricing,
- in the second quarter of 2016 tax inspections will be carried out focusing on those entities that, despite significant revenue growth, in recent years have not paid corporate income tax at all.
In this communication the Ministry of Finance indicated also recent experience of completed proceedings in the field of transfer pricing and tax optimization.
The following irregularities of particular settlements between related parties were addressed (quotation):
- “in transaction concerning the sale of shares possessed by a limited liability company through the chain of related entities, which aim was to minimise taxable income by an artificial increase of the book value of these shares to the amount of price obtained from the sales of such shares to an independent entity – the value of understatement of corporate income tax liability for one fiscal year amounted to nearly 500 million PLN;
- regarding one-off agreement concluded with the majority shareholder which concerned future cash flows; the actual purpose of the agreement was to ensure a foreign parent company participation in the profits generated from the sale of other company’s shares, as well as, creation of tax loss for the controlled entity – the value of the disputed tax loss, as a result of tax control, amounted to nearly 300 million PLN;
- considering non-arm’s length amount of license fee, which, under an agreement, the licensee (controlled entity) was obliged to transfer to the licensor (foreign shareholder) – the result of decrease of the license fee of only 1 p.p. was adjustment of declared tax deductible costs for four fiscal years amounting to nearly 25 million PLN;
- in the area of improper key of cost sharing / allocation of profits to the Polish entity, as a result of incorrect assignment of functions performed and risks incurred by the headquarter and the Polish branch – as a result of establishing, in course of tax control, a new profits allocation key between headquarter and local branch based on functions actually performed in the transaction, a tax liability increased by nearly 2 million PLN;
- with respect to granting of loans or guarantees between related parties on terms more favourable than those which would be agreed on the market (i.e. without remuneration due to the lender and repayment period of decades) – the value of additional tax liability to be paid amounted to more than 7 million PLN.”
In the light of the above, we recommend the following:
- supplementing promptly transfer pricing documentation,
- preparing benchmarking studies, in particular for major transactions conducted with related parties and
- in the case of entities whose activities were recently subject to business restructuring we recommend (i) preparing a defense file regarding business reasons supporting the changes made in course of restructuring from the perspective of restructured entity, (ii) preparing an analysis concerning options realistically available and (iii) evidencing the substance of the new post-restructuring settlements, according to actual parties’ engagement.
The communication of the Ministry of Finance dated 5th February 2016 is available on the website of the Ministry of Finance.