Safe harbour
Safe harbours
The amendment of the transfer pricing rules introduced simplifications, known as safe harbours, covering transactions involving low value adding services and loans. The annexes to the CIT Act and the PIT Act contain an indicative catalogue of services that may qualify as low value adding services. That catalogue was drawn up on the basis of the work of the OECD and of the EU Joint Transfer Pricing Forum.
Where a taxpayer relies on a safe harbour and meets the conditions set out below, the tax authority refrains from determining the amount of its income or tax loss. This is also accompanied by an exemption from the obligation to include a benchmarking analysis or a compliance analysis in the transfer pricing documentation
The legal position in 2019
Usługi o niskiej wartości dodanej waiver of the determination of the taxpayer's income or loss as regards the amount of the mark-up on the cost of the services
In order to qualify as low value adding services, services must meet the following conditions:
1) they are listed in the catalogue in Annex 6
2) they are of a nature that supports the business activity of the recipient of the services
3) they do not constitute the main business of the group of related parties
4) the value of those services supplied by the service provider to unrelated parties does not exceed 2% of the value of those services supplied to related and unrelated parties
5) they are not resold by the recipient of the services, with the exception of the resale of services acquired in its own name but for the benefit of another related party (recharging)
A safe harbour for low value adding services may be relied on where all of the following conditions are met:
1) the mark-up on costs has been determined using the cost plus method or the transactional net margin method and amounts to:
a) no more than 5% of costs, where the services are acquired
b) no less than 5% of costs, where the services are supplied
2) the service provider is not an entity having its place of residence, seat or management in the territory of a country engaging in harmful tax competition
3) the recipient of the services holds a calculation containing the following information:
a) the type and amount of the costs included in the calculation
b) the manner in which the allocation keys were applied and the reasons for choosing them for all the related parties using the services
Loans: waiver of the determination of the taxpayer's income or loss as regards the interest rate on the loan
The safe harbours for financial transactions introduced with the amendment mean that the tax authority refrains from determining the taxpayer's income or loss as regards the level of remuneration for financial transactions (loans, credit facilities, bond issues), on the assumption that all the conditions set out in the act are met.
1) the interest rate on the loan as at the date on which the agreement is concluded is determined on the basis of:
the type of base interest rate and
the margin,
as published by the Minister of Finance in an announcement;
2) no fees other than interest connected with the granting or servicing of the loan are provided for, including commissions or premiums;
3) the loan has been granted for a period of no more than 5 years;
4) during the financial year the total level of the related party's liabilities or receivables in respect of the principal of loans with related parties, calculated separately for loans granted and loans taken out, amounts to no more than PLN 20,000,000 or the equivalent of that amount 1;
5) the lender is not an entity having its place of residence, seat or management in a territory or country engaging in harmful tax competition.
1 For the purpose of determining whether they exceed the limit of PLN 20,000,000, the amounts of loans granted in a currency other than the zloty are converted into zloty at the average rate announced by the National Bank of Poland for the last working day preceding the day on which the loan was granted or taken out, understood as the day on which the loan amount was paid out or placed at the borrower's disposal
For taxpayers, in turn, this means that they may dispense with preparing a benchmarking analysis or compliance description, provided that the interest rate on such a loan as at the date on which the agreement is concluded is calculated on the basis of the base interest rate and the margin set out in the announcement of the Minister of Finance.
In accordance with the Announcement of the Minister of Finance of 22 December 2020 on the publication of the type of base interest rate and the margin for transfer pricing purposes in personal income tax and corporate income tax, the following are set with effect from 1 January 2021:
1) the type of base interest rate for loans:
a) in zloty: WIBOR 3M,
b) in US dollars: LIBOR USD 3M,
c) in euro: EURIBOR 3M,
d) in Swiss francs: LIBOR CHF 3M,
e) in pounds sterling: three-month LIBOR GBP;
2) the margin:
a) for the borrower is at most 2.3 percentage points,
b) for the lender is at least 2.0 percentage points,
c) is the sum of the absolute value of the base interest rate and the value set out in point (a) or (b), where the value of the base interest rate referred to in point 1 is less than zero.
The legal position in 2018
One of the more important changes introduced by the amendment of the Regulation of the Minister of Finance of 10 September 2009 on the manner and procedure for determining the income of legal persons by way of estimation and on the manner and procedure for eliminating double taxation of legal persons in the case of an adjustment of the profits of related parties (Journal of Laws No. 160, item 1268) 1 was the addition of a provision governing matters connected with low value adding services. The purpose of that amendment was to reflect in the Polish transfer pricing rules the findings presented in the Communication of the European Commission of 25 January 2011 on the work of the EU Joint Transfer Pricing Forum as regards verifying whether the terms of such services are at arm's length.
Under the provision added as paragraph 22a, where a related party presents to the tax authorities or the fiscal control authorities a description of a transaction involving low value adding services, those authorities are required to examine the terms agreed by those parties for that type of transaction on the basis of the description submitted. In the course of that examination the authorities verify whether independent, rationally acting parties would have concluded such a transaction on the terms agreed by the related parties.
The remainder of that provision defines low value adding services as services of a routine nature which support the main business of the recipient of the services, which are generally or readily available and which do not generate significant added value either for the service provider or for the recipient. In addition, Annex 1 to the Regulation sets out an indicative catalogue of low value adding services covering, for example, IT services, services connected with human resources management, marketing services, legal services, accounting and administrative, technical and quality control services.
In order to rely on the arrangement proposed by the legislator, under which the description of low value adding services takes precedence, the taxpayer was able to submit an appropriate description to the relevant authorities, which should cover in particular:
- an indication of the type of service supplied, together with the reasons for classifying it as a low value service;
- confirmation that the service was performed, together with a detailed explanation of the rationale for acquiring the services and of the benefits obtained;
- a description of, and the reasons for, the manner in which the services were supplied;
- a list of the expenses incurred by the related parties in connection with the services supplied, together with their description and analysis;
- a list of shareholder costs;
- a description of the cost allocation key;
- a catalogue of on-call services, together with their description;
- an indication of the manner in which the remuneration due for the services supplied is calculated and of its amount, together with the reasons for the method applied and the manner of its application;
- the documentation that can be submitted.
It is worth noting that the Regulation also provided that, once the taxpayer had presented the description of the transaction to the tax authorities or the fiscal control authorities, those authorities retained the right to request further explanations and documents from the taxpayer.
In the further paragraphs of paragraph 22a the legislator also introduced a definition of shareholder costs. It indicated that the expenses connected with the low value adding services supplied include the costs directly and indirectly connected with the service supplied, excluding shareholder costs. Under paragraph 22a, shareholder costs are to be understood as expenses incurred by an entity holding shares in a second related party which bring benefits solely to the entity holding those shares.
For shareholder costs too the legislator provided an indicative catalogue, set out in Annex 2 to the Regulation, which lists, for example, the costs of activity connected with the shareholder's legal structure, the costs of that entity's reporting, the costs of raising funds to acquire shares, the costs of management and monitoring activities connected with managing and protecting the investment in shares, the costs of the entity's initial listing on a stock exchange and the costs connected with the investor relations of the entity holding shares in the second related party.
Naturally, the way in which the costs incurred by related parties in connection with the supply of low value adding services are shared should be analysed on the basis of the terms that unrelated parties would have agreed between themselves. The overriding principle for transactions between related parties involving low value adding services is therefore the arm's length principle.
The changes introduced should be regarded as favourable for the taxpayer, since a detailed description of the services prepared by the taxpayer and meeting the requirements set out above allows it to prepare properly for an audit in this area. Moreover, a precise description submitted by the taxpayer allowed the authorities to prepare better for the audit and to conduct it more efficiently.
It should be pointed out that the elements which, according to the legislator, the description of those services was to contain could pose an additional challenge for taxpayers and could make it difficult to prepare that description correctly. In addition, neither the Regulation nor the tax acts made it clear whether, in preparing a description of a transaction involving low value adding services, the taxpayer should have regard to value thresholds. The question when the obligation to prepare such a document arises may give rise to doubts, since it was not specified whether the trigger for preparing the description is exceeding the thresholds set out in Article 9a of the CIT Act and, respectively, Article 25a of the PIT Act, or the mere fact that a low value adding transaction has taken place.
It should also be noted that, comparing the provisions of the Regulation with the findings of the European Commission, the Polish legislator did not address the range of margins constituting the mark-up on the costs generated by low value adding services which the authorities should regard as being at arm's length. According to the Commission's Communication, the remarks on the margin state that where a margin is to be applied it will usually be low. The margins normally agreed fall within a range of 3 to 10% and most often hover around 5%. It should nonetheless be pointed out that such a statement depends on the facts and circumstances, which may justify a different margin.
1 Identical changes were introduced into the Regulation of the Minister of Finance of 10 September 2009 on the manner and procedure for determining the income of natural persons by way of estimation and on the manner and procedure for eliminating double taxation of natural persons in the case of an adjustment of the profits of related parties (Journal of Laws No. 160, item 1267).