Administrative and fiscal procedure
1. Verification activities
Verification activities are undertaken by the tax authority of its own motion. In this respect the tax authority may undertake verification activities aimed at:
1. checking the timeliness of:
- the filing of returns,
- the payment of declared taxes, including taxes collected by withholding agents and by collecting agents,
2. establishing the formal correctness of the documents referred to in point 1, 3. establishing the facts to the extent necessary to confirm their consistency with the documents submitted.
4. verifying the expenditure incurred and the taxed or untaxed income earned by taxpayers, to the extent necessary to disclose the tax base in respect of income not covered by disclosed sources or derived from undisclosed sources.
5. verifying the data and documents submitted by taxpayers registering for tax purposes.
6. verifying the data and documents submitted by entities making the simplified registration notification referred to in Article 16b(1) of the Excise Duty Act of 6 December 2008 (Journal of Laws of 2019, items 864, 1123, 1495, 1501, 1520 and 1556).
It should be borne in mind that Tax documentation for transfer pricing is informative in nature and is therefore a description of the facts concerning the performance of transactions between related parties. In our view, point 3 above entitles the tax authority to request the taxpayer, under Article 11s(1) of the CIT Act (Article 23ze(1) of the PIT Act), to produce the transfer pricing documentation within 7 days. The tax authority may also ask the taxpayer to produce all the evidence supporting the entries made in that documentation. In particular, it may require certified and translated copies of foreign-language documents relating to the performance of the transaction covered by the documentation.
It should be noted that verification activities often take the form of a cross-check, that is, a review of accounting entries carried out in connection with an audit of another taxpayer. Inquiries conducted in this way may, in certain circumstances, result in a request to produce the transfer pricing documentation.
2. Tax audit
A tax audit is undertaken by the tax authorities of their own motion. Its purpose is to check whether the taxpayers audited (or withholding agents or collecting agents) are complying with the obligations arising from tax law.
The commencement of audit proceedings entitles the tax authority to request the taxpayer, under Article 11s(1) of the CIT Act (Article 23ze(1) of the PIT Act), to produce the transfer pricing documentation within 7 days. The tax authority may also ask the taxpayer to translate into Polish documentation drawn up in a foreign language. Where the taxpayer does not comply with the request, the authority may commission that translation at the taxpayer's expense.
It should be noted that an audit report is drawn up on the audit activities, which should contain, among other things:
- identification of the audited party,
- identification of the auditing officers,
- a statement of the subject matter and scope of the audit,
- a statement of the place and time at which the audit was conducted,
- a description of the findings of fact,
- the documentation relating to the evidence taken,
- a legal assessment of the matter under audit,
- a notice of the right to submit objections or explanations and of the right to file an amended return,
- a notice of the audited party's obligation to notify the tax authority of any change of address made within 6 months of the date on which the tax audit was closed, where irregularities were found in the course of the audit, and of the consequences of failing to comply with that obligation.
In its description of the findings, the report states the facts concerning the performance of transactions between related parties. If the facts established by the tax authority differ from those presented by the taxpayer in its tax documentation and confirmed by other evidence, there is a high likelihood that tax proceedings will be commenced to determine income (or loss) in the amount the authority considers correct.
3. Tax proceedings at first instance
Tax proceedings give concrete form to the audit, where the authority, drawing conclusions from the irregularities previously identified, conducts proceedings with a view to issuing a decision setting the tax liability at the correct amount and thereby rejecting the amount of tax declared by the taxpayer. In transfer pricing matters, tax proceedings are commenced by the tax authority of its own motion, which serves the party with an order commencing the proceedings.
The tax authority conducts transfer pricing proceedings on the basis of the CIT Act and the applicable transfer pricing regulations of the Minister of Finance. Under those rules the authority examines whether the taxpayer's income was earned on the basis of the market value of the subject matter of the transaction and whether it was properly recorded and attributed to the parties to the transaction.
Where the taxpayer produces its transfer pricing documentation together with a determination of the market value of the subject matter of the transaction based on the comparable uncontrolled price method, the resale price method, the reasonable margin (cost plus) method, the transactional net margin method or the profit split method, and where the reliability and objectivity of the data presented do not give rise to justified doubts, the tax authority determines the market value of the transaction using the method previously adopted by the taxpayer, unless the use of another method is clearly more appropriate. It should be stressed that one of the overriding principles of tax proceedings is the principle of written form. This means that all matters are dealt with in writing. The tax authority is obliged to draw up a concise record of every step in the proceedings that is material to the decision, unless that step has been recorded in writing in another way. Records are drawn up in particular of hearings, inspections and expert opinions produced with the participation of an officer of the tax authority.
A matter requiring the taking of evidence should be dealt with without undue delay, but no later than within one month and, in a particularly complex matter, no later than within 2 months. Alongside the time limits set out in the tax rules, the time limits laid down in the Entrepreneurs' Law must also be taken into account. That act provides that the total duration of audits of an entrepreneur in a calendar year may not exceed:
- micro-enterprises: 12 working days,
- small enterprises: 18 working days,
- medium-sized enterprises: 24 working days,
- other entrepreneurs: 48 working days.
The final element of the tax proceedings is the issue of a decision determining the tax arrears (or reducing the loss) which, under Polish tax law, is due from the date on which that decision is served. The tax authority may therefore issue either a decision assessing the amount of the tax liability or a decision discontinuing the proceedings. A decision issued by the first instance authority may be appealed to the second instance tax authority.
The consequence of this is the obligation to pay the tax assessed, irrespective of whether an appeal has been lodged with the second instance authority or whether that decision is later set aside. If payment is not made, the taxpayer must reckon with enforcement costs, which are pursued alongside the tax arrears.
4. Tax proceedings at second instance
Tax proceedings at second instance, the appeal proceedings, are commenced by the taxpayer who has received an unfavourable decision in the first instance proceedings. An appeal against a decision of the first instance authority is lodged through that authority within 14 days of service of the contested decision. It should also be borne in mind that lodging an appeal with the second instance authority within the proper time limit does not suspend the enforcement of the first instance decision.
The first instance authority that issued the contested decision has 14 days to issue a decision setting aside the decision previously issued (the self-review procedure) or to refer the matter to the appeal authority. An appeal against a decision should set out the grounds of objection to the decision, state the substance and scope of the relief sought and indicate the evidence supporting it.
Failure to meet the requirements laid down in the Tax Ordinance as to the content of an appeal or the time limit for lodging it results in the second instance authority issuing an order closing the appeal proceedings. Such an order is final for the second instance proceedings, but a complaint against it may be brought before the Provincial Administrative Court.
Where the taxpayer has met the formal requirements, the second instance authority reconsiders the matter. The same procedural rules apply in proceedings before the second instance authority as in matters before the first instance.
In the course of the proceedings the second instance authority may take additional, supplementary evidence, or may set aside the contested decision and refer the matter back to the first instance authority for reconsideration.
Our experience is that in complex matters the second instance frequently extends the period for issuing its decision, since it is not required to deal with the matter within a set time limit.
In the proceedings before both the first and the second instance the taxpayer may submit any evidence in support of its assertions, but the authority's principal evidentiary steps should be dealt with in the proceedings before the first instance.
In the course of tax proceedings at second instance the tax authority may issue the following decisions:
- a decision upholding the decision of the first instance authority,
- a decision setting aside the decision of the first instance authority in whole or in part and determining the substance of the matter to that extent,
- a decision setting aside the decision of the first instance authority in whole or in part and discontinuing the proceedings in the matter,
- a decision discontinuing the appeal proceedings,
- a decision setting aside the decision of the first instance authority in its entirety and thereby referring the matter back to that authority for reconsideration.
Against a decision issued by the second instance authority the taxpayer may bring a complaint before the Provincial Administrative Court within 30 days of service of that decision.
Since 1 June 2017 a complaint about the authority's inaction or about the excessive length of the proceedings may be brought at any time, provided that a reminder concerning the conduct of the authority dealing with the matter has first been lodged.
5. Court proceedings before the Provincial Administrative Court
Receipt of a decision of the second instance authority with which the taxpayer disagrees entitles it to bring a complaint before the Provincial Administrative Court within 30 days of service of the decision.
The judgment of the Provincial Administrative Court determines whether the decisions of the first and second instance authorities were issued lawfully, both in procedural terms, in particular as regards the taking of evidence, and as regards the correct application of the law. The court therefore does not take evidence itself but merely examines whether the authorities conducted those proceedings correctly, and verifies whether the provisions underlying the assessment of the tax arrears were interpreted and applied correctly.
The judgment of the Provincial Administrative Court may set aside the decisions of the tax authorities or dismiss the complaint on the ground that they do not infringe the law in force. Where the judgment is unfavourable, the taxpayer may bring a complaint before the Supreme Administrative Court in Warsaw.
6. Court proceedings before the Supreme Administrative Court
Where the judgment of the Provincial Administrative Court is unfavourable, the taxpayer may bring a complaint before the Supreme Administrative Court, which must be drawn up by a professional representative. The judgment of the Supreme Administrative Court is the final ruling given by a court in Poland.
Where the judgment of the Supreme Administrative Court is unfavourable, there is a limited possibility of challenging it before the Court of Justice of the European Union, if it can be shown that provisions of Polish law conflict with European provisions that have been incorporated into the Polish legal order.