Local transfer pricing documentation (Local File)

Elements of transfer pricing documentation

Under the rules in force since 1 January 2019, transfer pricing documentation is prepared at two levels:

• Local transfer pricing documentation,
• Group transfer pricing documentation (Master File).

Elements of local transfer pricing documentation (local file)

Description of the related party:

• a description of the management structure and an organisational chart of the related party
• a description of the core activity of the related party

Description of the transaction, including an analysis of functions, risks and assets:

• the subject matter and type of the controlled transaction
• information about the related parties taking part in the controlled transaction
• a functional analysis of the related parties taking part in the controlled transaction, taking into account material changes compared with the previous financial year
• the method of calculating the remuneration, together with the assumptions adopted
• the value of the controlled transaction, broken down by counterparty
• payments received or made in connection with the controlled transaction, including any set-off of mutual claims
• agreements, intra-group arrangements or other documents concerning the controlled transaction
• arrangements or tax rulings concerning the controlled transaction, including advance pricing arrangements, concluded with or issued by the tax administrations of states other than the Republic of Poland

Transfer pricing analysis:

• an indication of the method applied to verify the transfer price, together with a brief justification of the choice
• an indication of the party or transaction examined in the transfer pricing analysis, where this follows from the method indicated as applied to verify the transfer prices
• a description of the benchmarking study, or
• a description of the compliance analysis
• a comparison of the transfer price with the result of the analyses (the benchmarking study or compliance analysis), together with a justification of any deviations

Since 1 January 2019 the transfer pricing analysis has been a mandatory element of the local transfer pricing documentation.

There are two available forms for preparing the transfer pricing analysis:

A benchmarking study: an analysis of data of unrelated parties, or of transactions concluded with unrelated parties or between unrelated parties, regarded as comparable to the conditions established in the controlled transactions.

Where preparing a benchmarking study is not appropriate in the light of the transfer pricing method applied, or is not possible while exercising due care, the taxpayer prepares a compliance analysis.

A compliance analysis: an analysis demonstrating that the conditions on which the controlled transaction was concluded correspond to the conditions that unrelated parties would have agreed.

Financial information

• the approved financial statements for the financial year, prepared under the accounting regulations,
• a description making it possible to reconcile the financial data on the controlled transaction with items in the financial statements or with other information contained in them.

The detailed scope of the elements of local transfer pricing documentation is laid down in the Regulation of the Minister of Finance of 21 December 2018 on transfer pricing documentation for corporate income tax and personal income tax purposes.

The legal position in 2017

ELEMENTS OF TAX DOCUMENTATION

Local documentation (local file)

• Under Article 9a(2b) of the CIT Act, the basic documentation covers a description of the transactions or other events, including cash pooling agreements and cost contribution arrangements, carried out between the taxpayer (or a company that is not a legal person) and its related parties, containing: an indication of the type and subject matter of those transactions or other events,
• financial data, including the cash flows relating to those transactions or recognising those events,
• data identifying the related parties carrying out those transactions or recognising those events,
• a description of the course of those transactions or other events, including the functions performed by the taxpayer (or a company that is not a legal person) and its related parties, the on- and off-balance-sheet assets and the human capital they engage, and the risks they assume,
• an indication of the method and manner of calculating the taxpayer's income (loss), together with a justification of their choice, including the algorithm for calculating the settlements relating to those transactions or other events and the manner of calculating the value of the settlements affecting the income (loss) of the taxpayer (or of the other partners in a company that is not a legal person)
• An analysis of comparable data (taxpayers whose revenue or costs exceeded the equivalent of EUR 10,000,000, or who hold an interest in a partnership whose revenue or costs exceeded that threshold).
• A description of the financial data of the taxpayer (or of a company that is not a legal person) making it possible to compare the settlements (that is the settlements between the parties relating to the transactions or other events) with the data in the approved financial statements, where the obligation to prepare them follows from the accounting regulations applicable to the taxpayer or the company.
• Information about the taxpayer (or about a company that is not a legal person), comprising a description of: the organisational and management structure,
• the subject matter and scope of the activity carried on,
• the business strategy pursued, including any transfers between related parties, in the tax year or in the year preceding the tax year, of economically significant functions, assets or risks that affect the taxpayer's income (loss),
• the competitive environment.
• Documents, in particular: agreements and arrangements concluded between related parties or other documents concerning the transactions or other events, the articles of association of a company that is not a legal person, a joint venture agreement or an agreement of a similar nature documenting the rules on granting the partners (parties to the agreement) rights to share in profits and to participate in losses
• income tax arrangements concluded with the tax administrations of states other than the Republic of Poland concerning the transactions or other events, in particular advance pricing arrangements

The legal position in 2016

Tax documentation should be described on the basis of the following range of information:

• The definition of the functions that the parties to the transaction will perform, taking into account the assets used and the risks assumed,
• The determination of all anticipated costs connected with the transaction and of the form and date of payment,
• The method and manner of calculating profits and the determination of the price of the subject of the transaction,
• The definition of the business strategy and of other actions taken within it, where the strategy adopted by the party affected the value of the transaction,
• An indication of other factors, where the parties to the transaction took those other factors into account in determining the value of its subject matter and, in the case of the articles of association of a company that is not a legal person, a joint venture agreement or an agreement of a similar nature, in particular the rules adopted in the agreement on the partners' (parties') rights to share in profits and to participate in losses,
• The determination of the benefits expected by the party required to prepare the documentation in connection with receiving the performance, in the case of agreements concerning performance (including services) of an intangible nature.

The above list is set out in Article 9a(1) of the Corporate Income Tax Act (Journal of Laws no. 21, item 86) and in Article 25a(1) of the Personal Income Tax Act (Journal of Laws no. 80, item 350) and represents the minimum range of information that tax documentation must contain. In order to discharge the documentation obligation as well as possible, the taxpayer should also include in the documentation any other information that may bear on the transaction described. For example, documentation concerning services should be expanded to include a detailed description of the services received and confirmation that the fees paid relate to the services rendered.