Documentation obligation, transfer pricing

Tax documentation is an exceptionally important element of transfer pricing. It is a formal legal requirement imposed on taxpayers by the legislation of a given country. It consists in preparing a document describing, in line with applicable guidelines and tax regulations, the transaction or the set of transactions subject to that obligation.

The detailed guidelines and the rules in force for transfer pricing documentation differ from one country to another. This section discusses the regulations applicable in Poland, which draw largely on the experience of international organisations and of practitioners. It presents the OECD and PATA guidelines as well as the directives and communications of the European Union.

The documentation obligation was introduced into the Polish income tax acts with effect from 1 January 2001 (Article 9a and Article 11 of the Corporate Income Tax Act / Article 25 and Article 25a of the Personal Income Tax Act). The obligation covered transactions carried out between related parties and those with residents of countries engaging in harmful tax competition (so-called tax havens). Initially, tax law did not prescribe any form for transfer pricing documentation, but merely indicated the general elements it was to contain.

With the amendment that entered into force on 1 January 2017, the scope of the documentation obligations was considerably extended and made dependent on the size of the taxpayer's business. The legislator gave the documentation a defined three-tier reporting structure consisting of the local file, the master file and country-by-country reporting.

The legislator also introduced a time limit for preparing and updating the documentation, namely before the expiry of the deadline for filing the tax return. Taxpayers were additionally required to file a statement with the competent tax office confirming that the tax documentation had been prepared. The change in the rules follows from developments in European Union law aimed at finding a common approach across the Member States to the scope of documentation required between related parties.

A further amendment to the tax rules entered into force on 1 January 2019. Alongside changes to the mandatory elements of transfer pricing documentation, the method of verifying whether the documentation obligation arises was modified. In addition, the statement on the preparation of the local transfer pricing documentation was extended to include a confirmation that the terms agreed between the parties are at arm's length.

The rules governing transfer pricing have changed over the past several years. The rules in force until 31 December 2016 made the documentation obligation dependent on exceeding the limits set out in the acts (Article 9a of the CIT Act / Article 25a of the PIT Act).

Following the amendment of the income tax acts, from 1 January 2017 the documentation obligation was determined on the basis of two criteria, which had to be met cumulatively:

the criterion of the level of revenue or of tax-deductible costs,
the criterion of the materiality of the transaction (transaction thresholds dependent on the level of revenue or costs)

A further amendment to the transfer pricing rules entered into force on 1 January 2019. The documentation obligation is now determined on the basis of the limits set out in the PIT and CIT Acts.

The criteria are described separately for each legal regime.

The legal position in 2019

Local file

From 1 January 2019, the obligation to prepare a local transfer pricing file applies to entities which, in a given financial year:

carried out homogeneous controlled transactions with related parties or with entities having their seat in countries or territories engaging in harmful tax competition (tax havens),
exceeded the documentation thresholds.

The new mechanism for setting the documentation thresholds depends on the value of the homogeneous controlled transaction, expressed as a fixed amount.

A controlled transaction means an activity of an economic nature identified on the basis of the actual conduct of the parties, including the attribution of income to a foreign permanent establishment, the terms of which have been agreed or imposed as a result of the relationship between them.

The documentation thresholds are determined separately for:

each homogeneous controlled transaction,
the cost side and the revenue side.

When assessing whether a transaction is homogeneous, the following factors must be taken into account:

the economic uniformity of the controlled transaction,
the comparability criteria,
the transfer pricing methods,
other material circumstances of the controlled transaction.

The value of a homogeneous controlled transaction is determined irrespective of the number of accounting documents, of payments made or received and of the related parties with which the controlled transaction is concluded.

The value of a controlled transaction is determined on the basis of:

invoices received or issued for the financial year concerned,
contracts or other documents, where no invoice has been issued or in the case of a financial transaction,
payments received or made, where it is not possible to determine that value on the basis of points 1 and 2.

The obligation to prepare transfer pricing documentation arises once the documentation thresholds are exceeded; for the individual controlled transactions these are:

Where a transaction is denominated in a foreign currency, its value is converted into zloty at the average exchange rate of the National Bank of Poland applicable on the last working day preceding the day on which the economic operation was carried out or the contract concluded.

Transaction values are expressed net, that is, reduced by value added tax.

The following values are taken into account when determining the value of a controlled transaction:

Exemptions from the obligation to prepare a local file

The obligation to prepare a local file does not apply to controlled transactions:

concluded exclusively between related parties having their place of residence, seat or management in the territory of the Republic of Poland in a tax year in which each of the related parties meets all of the following conditions: it does not benefit from the personal exemptions (Article 6),
it does not benefit from the exemptions relating to special economic zones (Article 17(1)(34) and (34a)),
it has not incurred a tax loss.
covered by an advance pricing agreement, for the period to which that agreement relates
the value of which does not permanently constitute revenue or a tax-deductible cost in its entirety, with the exception of financial transactions, capital transactions and transactions relating to investments, fixed assets or intangible assets and legal rights
between companies forming a tax capital group
where the relationship results solely from a link with the State Treasury or with local government units or their associations
in which the price has been set under an open tender procedure on the basis of the Public Procurement Law of 29 January 2004 (Journal of Laws of 2018, items 1986 and 2215, and of 2019, item 53);
carried out between an agricultural producer group entered in the register referred to in Article 9(1) of the Act of 15 September 2000 on agricultural producer groups and their associations and on the amendment of other acts (Journal of Laws of 2018, item 1026) and its members, relating to disposal for consideration: to the agricultural producer group, of products or groups of products produced on the holdings of the members of that group,
by the agricultural producer group to its members, of goods used by the member to produce the products or groups of products referred to in point (a), and the supply of services connected with that production;
carried out between a provisionally recognised fruit and vegetable producer group or a recognised fruit and vegetable producer organisation operating on the basis of the Act of 19 December 2003 on the organisation of the fruit and vegetable markets and the hop market (Journal of Laws of 2018, items 1131 and 1633) and its members, relating to disposal for consideration: to such a group or organisation, of products or groups of products produced on the holdings of the members of that group or organisation,
by such a group or organisation to its members, of goods used by the member to produce the products or groups of products referred to in point (a), and the supply of services connected with that production;
consisting in the attribution of income to a foreign permanent establishment situated in the territory of the Republic of Poland by the taxpayers referred to in Article 3(2), where the provisions of the relevant international agreements to which the Republic of Poland is a party provide that such income may be taxed only in a state other than the Republic of Poland.

Deadlines for preparing the local transfer pricing file

Taxpayers are required to prepare the local transfer pricing file by the end of the ninth month following the close of the financial year for which the documentation is prepared.

Master file

From 1 January 2019, taxpayers are required to prepare a master file for transfer pricing purposes if they meet the following conditions:

they are subject to the obligation to prepare a local file, and
they belong to a group of related parties whose consolidated revenue in the year preceding the documented financial year exceeded the equivalent of PLN 200,000,000.

Group transfer pricing documentation (Master File) it may be prepared by another entity belonging to the group of related parties.

Where the master file has been prepared in English, the tax authority may require the taxpayer to submit the master file in Polish within 30 days of service of that request.

Deadlines for preparing the master file

Taxpayers are required to prepare the master file by the end of the twelfth month following the close of the financial year for which the documentation is prepared.

Country-by-country reporting

Domestic entities whose consolidated revenue within the meaning of the accounting rules, inside and outside the territory of the Republic of Poland, exceeded the equivalent of EUR 750,000,000 in the preceding tax year are required to submit to the tax office a report on the amount of income and tax paid and on the places of business, subsidiaries and foreign permanent establishments belonging to the group, in the tax year, within 12 months of the close of the tax year of the domestic entity for which the report is filed (country-by-country reporting). The report is filed using form CIT-CBC. An entity exceeding the above threshold of EUR 750 million is also required to prepare a local file and a master file.

Request by the authority for the taxpayer to submit documentation

In addition, the tax authority may require a taxpayer to prepare and submit tax documentation for transactions or other events whose value does not exceed the limits indicated above, where circumstances arise which indicate that their value is likely to have been understated in order to avoid the obligation to prepare tax documentation. The request should set out the circumstances pointing to the likelihood that the value of the transactions or other events has been understated.

Legal regime 2017-18

Whether the documentation obligation arises must be considered in terms of:

The obligation to prepare tax documentation (the documentation obligation) arises in accordance with the rules set out in Article 9a(1) of the Corporate Income Tax Act (/ Article 25a(1) of the Personal Income Tax Act).

The obligation applies to:

Taxpayers whose revenue or costs within the meaning of the accounting rules, determined on the basis of the books of account, exceed the equivalent of EUR 2,000,000 in the year preceding the tax year. For these taxpayers the obligation covers transactions that have a material effect on the amount of the taxpayer's income (or loss) or other events recognised in the books of account, the terms of which have been agreed or imposed between related parties.

Taxpayers

whose revenue or costs within the meaning of the accounting rules, determined on the basis of the books of account, did not exceed the equivalent of EUR 2 million in the year preceding the tax year are in principle not covered by the obligation to prepare tax documentation. Transactions or other events with entities from so-called tax havens are an exception.

Transactions or other events are regarded as having a material effect on the amount of the taxpayer's income (loss) where they are transactions or other events of one kind whose total value in the tax year exceeds the equivalent of EUR 50,000.

The table below shows the further relationships:

The table above shows that the larger the business (that is, the higher the revenue or costs), the higher the threshold above which a transaction becomes subject to the tax obligation.

Taxpayers who make payments, directly or indirectly, of amounts due under transactions or other events to an entity having its place of residence, seat or management in a territory or country engaging in harmful tax competition (tax havens), where the total amount (or its equivalent) under the contract, or the total amount of benefits due in the tax year that was actually paid in that year, exceeds the equivalent of EUR 20,000.00.
Taxpayers who conclude, with an entity having its place of residence, seat or management in a territory or country engaging in harmful tax competition, an agreement establishing a company that is not a legal person, a joint venture agreement or another agreement of a similar nature, where one of the parties to the agreement holds a value of contributions made by the partners, or a value of the joint venture, exceeding the equivalent of EUR 20,000.00.
Partners in a partnership: the documentation obligation relates to transactions concerning an agreement establishing a company that is not a legal person (and therefore also a partnership agreement) in which the total value of the contributions made by the partners exceeds the equivalent of EUR 50,000
a joint venture agreement or another agreement of a similar nature in which the value of the jointly implemented venture specified in the agreement, or, where the agreement does not specify that value, the value anticipated as at the date on which the agreement was concluded, exceeds the equivalent of EUR 50,000.
Taxpayers commencing business activity, from the month following the month in which their revenue or costs exceeded the above amount.
A taxpayer commencing business activity does not include a taxpayer formed: 1) as a result of a transformation, merger or division of taxpayers, or 2) as a result of the transformation of a company that is not a legal person, or 3) by natural persons who contributed to the capital of the newly formed entity a business previously conducted by them or assets of that business with a total value exceeding the zloty equivalent of at least EUR 10,000, the value of those assets being calculated by applying Article 14 accordingly.
Transactions carried out between an agricultural producer group entered in the register (or a provisionally recognised fruit and vegetable producer group or a recognised fruit and vegetable producer organisation operating on the basis of the Act of 19 December 2003 on the organisation of the fruit and vegetable markets, the hop market, the market in dried fodder and the markets in flax and hemp grown for fibre) and its members, unless they concern:
disposal for consideration, to the agricultural producer group, of products or groups of products produced on the holdings of the members of that group;
disposal for consideration, by the agricultural producer group to its members, of goods used by the member to produce the products or groups of products referred to in point 1, and the supply of services connected with that production.

The amounts expressed in euro are converted into Polish currency at the average exchange rate announced by the National Bank of Poland applicable on the last working day of the tax year preceding the tax year to which the tax documentation relates.

The documentation obligation also arises, irrespective of the revenue earned or the costs incurred, for the tax year following the tax year for which the taxpayers were required to prepare tax documentation.

Benchmarking analysis

For entities whose revenue or costs within the meaning of the accounting rules, determined on the basis of the books of account, exceeded the equivalent of EUR 10 million in the year preceding the tax year, or for entities holding interests in a company that is not a legal person whose revenue or costs within the meaning of the accounting rules, determined on the basis of the books of account, exceeded the equivalent of EUR 10 million in the year preceding the tax year, the documentation obligation covers, in addition to the description referred to above, the preparation of a benchmarking analysis (a benchmark study).

A benchmarking analysis is a description of the analysis of data on independent entities, or of data agreed with an independent entity, regarded as comparable to the terms agreed in the transactions or other events and used to calculate the settlements between the parties, together with the source of that data. The benchmarking analysis should contain comparable data on entities having their seat or management in the territory of the Republic of Poland, where such data is available to the taxpayer. Where such data is not available, the taxpayer attaches to the tax documentation a description of the conformity of the terms of the transactions and other events agreed with related parties with the terms that independent entities would agree between themselves.

Report on transactions and other events with related parties and with entities from tax havens (CIT/PIT-TP)

Entities with revenue or costs above EUR 10 million are required to attach to the tax return they file a report on transactions and other events with related parties and with entities from tax havens. This report allows the tax authorities to gather very detailed information about the taxpayer and about the types of transactions it concludes, their value and their materiality. It will therefore be an important tool for the tax authorities in identifying and selecting entities for tax audit and in selecting transactions to be examined with particular attention. The taxpayer files this report using form CIT-TP.

Group documentation (master file)

Where the revenue of a taxpayer (or of a company that is not a legal person in which the taxpayer earns income from its participation), or the costs within the meaning of the accounting rules, exceeded the equivalent of EUR 20 million, in the case of the taxpayer in the year preceding the tax year and in the case of a company that is not a legal person in the preceding financial year within the meaning of the accounting rules, the tax documentation it prepares should also contain information about the group of related parties of which the taxpayer forms part, in addition to the basic documentation.

Deadline for preparing the tax documentation and the statement by the management board

Under the Regulation of the Minister of Finance of 14 March 2018 on the extension of the time limits for performing certain obligations relating to tax documentation, the deadline for preparing the tax documentation, filing with the tax office the statement that the tax documentation has been prepared and attaching the simplified report to the tax return for the tax year is extended to the end of the ninth month after the end of the tax year

The legal position in 2016

The documentation obligation covers a transaction, or the sum of transactions, between related parties in which the total amount (or its equivalent) under the contract, or the total amount of benefits due in the tax year that was actually paid in that year, exceeds the equivalent of:

EUR 100,000 if the value of the transaction does not exceed 20% of the share capital* (for corporate income taxpayers only); or
EUR 30,000 in the case of the supply of services or the sale or making available of intangible assets and legal rights; or
EUR 50,000 in all other cases.

The obligation to prepare documentation also covers a transaction in connection with which the amount due under that transaction is paid, directly or indirectly, to an entity having its place of residence, seat or management in a territory or country engaging in harmful tax competition, where the total amount (or its equivalent) under the contract, or the total amount of benefits due in the tax year that was actually paid in that year, exceeds the equivalent of EUR 20,000.

In the case of an agreement establishing a company that is not a legal person, the obligation to prepare documentation covers agreements in which the total value of the contributions made by the partners exceeds the equivalent of EUR 50,000.

In the case of a joint venture agreement or another agreement of a similar nature, this limit relates to the value of the joint venture specified in that agreement or, where the agreement does not specify that value, to the value of the jointly implemented venture anticipated as at the date on which the agreement was concluded.

In the case of an agreement establishing a company that is not a legal person, where one of the parties to the agreement is an entity having its place of residence, seat or management in a territory or country engaging in harmful tax competition, the documentation obligation covers agreements in which the total value of the contributions made by the partners exceeds the equivalent of EUR 20,000.

In addition, the obligation to prepare documentation also covers transactions carried out by agricultural producer groups and fruit and vegetable producer groups. However, the groups referred to above will not have to prepare tax documentation for two types of transaction:

disposal for consideration, to the group, of products or groups of products produced on the holdings of the members of that group;
disposal for consideration, by the group to its members, of goods used by the member to produce products or groups of products, and the supply of services connected with that production.

For the remaining transactions concluded within the groups referred to above, the documentation obligation will arise if the relevant transaction limit is exceeded.

The amounts expressed in euro are converted into Polish currency at the average exchange rate announced by the National Bank of Poland applicable on the last day of the tax year preceding the tax year in which the transaction was concluded.

1) the amount declared but not actually paid into the share capital

2) the amount of share capital covered by receivables under loans (credits) and by interest on those loans (credits) [conversion of receivables into capital];

3) the amount of intangible assets and legal rights which are not subject to depreciation write-offs and which were contributed in kind to cover that share capital.

Notes

*The share capital is determined on the basis of the amount of the share or stock capital as entered in the National Court Register and of the relevant adjustments following from the tax rules (Article 16(7) of the Corporate Income Tax Act). The adjustments cover the following items: the amount declared but not actually paid into the share capital; the amount of share capital covered by receivables under loans (credits) and by interest on those loans (credits) [conversion of receivables into capital]; the amount of intangible assets and legal rights which are not subject to depreciation write-offs and which were contributed in kind to cover that share capital.

Frequently asked questions

How is the value of a transaction determined for the purposes of the thresholds?

The value is determined for a homogeneous controlled transaction, irrespective of the number of accounting documents and the number of counterparties, in net amounts. For a loan, a credit facility and a deposit, the principal amount is taken; for a surety and a guarantee, the guarantee amount.

Which domestic transactions are exempt from documentation?

The exemption covers transactions between related parties having their place of residence, seat or management in Poland, provided that none of them has incurred a tax loss and that none benefits from the exemptions set out in the act. Such transactions are still reported in the TPR information.

Which thresholds apply to transactions with tax havens?

For transactions with entities having their seat in countries engaging in harmful tax competition the thresholds are lower: PLN 2.5 million for financial transactions and PLN 500,000 for all other transactions.

When does the obligation to prepare a master file arise?

The master file is prepared by entities belonging to a group for which consolidated financial statements are drawn up, where the consolidated revenue of the group exceeded the thresholds set out in the act. The deadline for preparing it expires at the end of the twelfth month following the close of the tax year.