Transfer pricing methods
Under Polish law and the OECD Guidelines, the choice of a transfer pricing method should lead to the method most appropriate for the particular case under review.
Under Article 11d(3) of the Corporate Income Tax Act, in choosing the method most appropriate in the given circumstances, account is taken in particular of:
the conditions agreed or imposed between the related parties,
the availability of the information needed to apply the method correctly, and
the specific criteria for applying it.
Criteria for choosing a transfer pricing method
In practice the choice should take into account, among other things:
the strengths and weaknesses of the given method,
the suitability of the method considered in the light of the nature of the transaction as established by the functional analysis,
the availability of data on the taxpayer's side,
the availability of reliable data (in particular uncontrolled comparable data) needed to apply the given method, for example whether gross margin data are available for applying the resale price method,
the degree of comparability between the controlled and the uncontrolled transaction, including the reliability of the comparability adjustments made to eliminate material differences between them,
the contribution of the parties to the transaction: whether they make a valuable contribution to the controlled transaction or contribute unique intangible assets,
the type of activity, for example whether it is highly integrated,
whether the goods resold have been processed,
the time difference between the purchase and the resale of the goods.
The above list is illustrative and open.
Types of transfer pricing method: statutory methods and methods from the Guidelines
Under Polish tax law and the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, five methods of verifying a transaction price are distinguished.
These methods are further divided into traditional methods and transactional profit methods:
Traditional methods
- the comparable uncontrolled price method
- the resale price method
- the cost plus method (formerly known as the reasonable margin method)
Transactional profit methods
- the transactional net margin method
- the profit split method, applied by means of residual analysis
- contribution analysis
The transfer pricing methods indicated by the legislator are not ranked in any hierarchy. The choice of method depends on how well it fits the particular facts. Where the methods indicated cannot be applied, non-statutory methods may be used.
The procedure for choosing a transfer pricing method
When using the statutory methods, particular attention should be paid to Chapter 3 of the Regulation of the Minister of Finance of 21 December 2018 on transfer pricing for corporate income tax purposes. That chapter is devoted to a detailed description of how the transfer pricing methods are applied.
A very important aspect of setting prices and margins in transactions between related parties is determining them by reference to the external market. This means that, when setting the terms of a transaction with another related party, a related party should refer to the terms of similar transactions carried out with an independent party (internal comparison) or to similar transactions concluded by independent parties (external comparison).
It should be noted that transactions may be regarded as comparable where none of the possible differences between the transactions under review, or between the parties concluding them, could materially affect the open market price of the subject of such a transaction, or where reasonably accurate adjustments can be made to eliminate the material effects of such differences.
The benchmarking study in setting transfer prices
When carrying out a comparability analysis of parties transacting on a given market, account must be taken of the course of the transaction, including the functions the parties perform in comparable transactions, taking into account an analysis of the assets they engage, which also covers tangible and intangible goods not recognised as assets, human capital and the risks assumed.
It should be noted that the statutory methods indicated above are based on comparable transactions, whether internal or external. For parties under examination by the tax or fiscal authorities, the possibility of an internal comparison is more important from the point of view of minimising the tax risk of comparable transactions. That risk is always present where transactions between unrelated parties on different markets, in different factual circumstances and with different operating strategies are compared.
- contribution analysis