Transfer pricing adjustment

Transfer pricing adjustments may follow from:

• Changes in the economic environment in the year in which the transaction is carried out, which may include, for example, exchange rate fluctuations.
• Deviations between a pricing algorithm based on historical data and the actual market data for the year in which the transaction is carried out.

Until 31 December 2018, in the absence of specific rules governing the recognition of transfer pricing adjustments, the general rules were applied, that is adjustments to revenue earned or costs incurred were made on a current basis in the settlement period, without any need to go back to the reporting period to which they related.

Since 1 January 2019, in order to make a transfer pricing adjustment all the conditions set out in Article 11e of the CIT Act and, correspondingly, Article 23q of the PIT Act must be met jointly.

In response to the doubts that arose with the new rules, on 11 March 2019 the Ministry of Finance published an explanation concerning the moment of recognising adjustments issued in 2019 for transactions or other events carried out in 2018.

In that explanation the Ministry of Finance indicated that the rules on transfer pricing adjustments in the wording in force from 1 January 2019 apply to controlled transactions carried out after 1 January 2019.

Accordingly, transfer pricing adjustments issued after 1 January 2019 but relating to transactions or other events carried out up to 31 December 2018 should be settled in the reporting period under the rules arising from the provisions in force until the end of 2018. 1

The legal position in 2018

Until the end of 2018 the act did not refer expressly to the possibility of making transfer pricing adjustments. The OECD Guidelines indicated that an adjustment mechanism could be used but did not regulate the mechanism for accepting it. The tax authorities in Poland therefore did not accept transfer pricing adjustments.

Practice in applying transfer pricing adjustments distinguished two cases:

• upward adjustments, which under the position of the Polish authorities constitute revenue of the company,
• downward adjustments, which under the position of the Polish authorities do not constitute a tax-deductible cost.

The case of a downward adjustment, where the position of the tax authorities did not allow the costs to be treated as tax-deductible, gave rise to considerable controversy. The Provincial Administrative Court in Poznań reasoned as follows: an expense incurred in order to bring the operating margin into line with the assumed level will not be an expense bearing a causal relationship to the revenue earned by the applicant. In incurring an expense connected with adjusting the operating margin downwards to the level envisaged earlier, the applicant is not acting in order to earn, preserve or secure revenue but merely to bring the margin into line with the level agreed earlier. An expense of this kind cannot be linked to any potential revenue. 1

In view of the differing treatment of transfer pricing adjustments in EU Member States, the JTPF proposed the following solutions:

1) related enterprises should calculate the profits arising from their mutual dealings symmetrically (using the same price), and

2) the tax administration should accept an adjustment initiated by the taxpayer where the following conditions are met:

• the price was set before the transaction was carried out in accordance with the arm's length principle, or reasonable efforts were made to that end,
• the taxpayer filed the adjustment before filing the tax return,
• there is an explanation of why the costs incurred and the revenue earned in connection with the transaction do not correspond to those planned,
• the adjustment is symmetrical, being recognised in the books of both parties to the transaction,
• the rules applied by the taxpayer remain unchanged over a longer period.

1 Judgment of the Provincial Administrative Court in Poznań of 25 October 2018, I SA/Po 508/18, LEX no. 2584835

Notes

1 Communication of the Transfer Pricing and Valuation Department of 11 March 2019; source: www.podatki.gov.pl.