In accordance with the provisions of Polish law and OECD guidelines, the choice of the transfer valuation method should lead to finding the most appropriate method for a specific, verified case.

Pursuant to Art. 11d section 3 of the Corporate Income Tax Act, when selecting the most appropriate method in the given circumstances, account shall be taken in particular of:

– conditions that have been established or imposed between related parties,

– the availability of information necessary for the correct application of the method, and

– specific criteria for its application.

In practice, the selection should take into account, among others:

– strengths and weaknesses of the method,

– appropriateness of the method under consideration in the context of the nature of the transaction in question, as determined by functional analysis,

– data availability on the taxpayer’s side,

– availability of reliable data (in particular uncontrolled comparative data) needed to apply the method; for example, is there gross margin data for applying the resale price method?

– the degree of comparability between the controlled and uncontrolled transactions, including the reliability of comparative adjustments made in order to eliminate material differences between them,

– Contribution of the parties to the transaction: whether the parties make a valuable contribution to the transaction being controlled or provide unique intangible assets,

– type of activity – is it, for example, highly integrated,

– whether the good being resold has been processed,

– time difference between the purchase and resale of the good.

The above directory is exemplary and open.

Statutory and guideline methods

In accordance with Polish tax law and the OECD Guidelines on Transfer Pricing for Multinational Enterprises and Tax Administrations, there are five methods of transaction price verification.

These methods are further divided into traditional methods and transaction profit methods:  

Traditional methods

  • comparable uncontrolled price method
  • resale price method
  • the “cost plus” method (previously called the “reasonable margin” method)

Transactional profit methods

  • net transaction margin method
  • profit sharing method which is determined by
    • residual analysis
    • share analysis

Transfer pricing methods indicated by the legislator do not have an assigned hierarchy. The choice of the method depends on its adaptation to the specific actual state of affairs. In situations where the indicated methods cannot be applied, non-tax methods can be used.

When using tax methods, special attention should be paid to the provisions of Chapter 3 of the Regulation of the Minister of Finance of December 21, 2018 on transfer pricing in the field of corporate income tax. This chapter is devoted to a detailed description of the application of transfer pricing verification methods.

A very important aspect of determining prices / margins in transactions between related parties is setting them in relation to the external market. This means that a given related entity, when determining the terms of concluding a transaction with another related entity, should refer to the terms of similar transactions carried out with an independent entity (the so-called internal comparison), or to similar transactions concluded by independent entities (the so-called external comparison).

It should be noted that comparable transactions are those in which none of the possible differences between the analyzed transactions or between the entities concluding these transactions could significantly affect the price of the subject of such transaction on the free market or it is possible to make rationally accurate corrections eliminating significant the effects of such differences.

When conducting a comparative analysis of entities performing transactions on a given market, the course of transactions should be taken into account, including the functions performed by given entities in comparable transactions, taking into account the analysis of the assets they engage, including also tangible and intangible goods not classified as assets, human capital and the risks incurred. 

It should be noted that the above-mentioned tax methods are based on transactions that are comparable internally or externally. For entities audited by tax or fiscal authorities, the possibility of internal comparison is more important from the point of view of minimizing the tax risk of comparable transactions. Such a risk occurs whenever transactions are compared between unrelated entities on different markets, in different factual circumstances and with a different operating strategy.

Transfer pricing method selection procedure

  • participation analysis
Source: P. Wiśniewski, W. Komer, Transfer prices. Analysis of normative regulations, examples of practical solutions