Update of the article: Participating in public consultations pays off! Eighteen months after the entry into force of the regulations, the Ministry of Finance repealed the provisions relating to transactions in indirect tax havens. Importantly, the obligations have also been canceled for 2021. However, it should be remembered that transactions carried out directly with tax havens are still subject to declaration and documentation.
Several important Polish transfer pricing (TP) provisions entered into force in 2021 and taxpayers are now feeling the impact. The provisions require the constitution of a local file and the filing of a TP-R form for transactions carried out indirectly with entities based in tax havens.
Previously, the obligations only applied to taxpayers who made purchase transactions directly with entities located in tax havens.
The new obligation applies not only to transactions with related entities, but also to third parties.
In the case of indirect transactions, two conditions for a transaction to be documented have been defined:
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A transaction value greater than PLN 500,000 (approximately $106,000) net; and
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The true owner of the receivables is an entity based in a tax haven.
Taxpayers are confronted for the first time in 2022 with the new obligations concerning indirect transactions.
Polish taxpayers must identify all suppliers with whom the value of the transaction exceeds 500,000 PLN net (including third parties) and try to confirm who is the real owner of the payment made to them.
In its explanations, the Ministry of Finance specifies how to verify the suppliers (the explanations are not final at the time of writing). The taxpayer must:
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Verify suppliers in terms of information they have in internal procedures (e.g. withholding procedure, KYC procedure, AML procedure and mandatory disclosure rules procedure); and
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If the above information is not available, try to obtain an appropriate statement from the supplier naming the true owner of the receivables.
If the true owner of the supplier’s receivables cannot be identified in these sources, it should be verified in publicly available external sources.
This is a large order that requires considerable administrative effort. At the same time, the purpose of these provisions remains unclear.
If the beneficial owner of the receivables is an entity based in a tax haven, the taxpayer must prepare the TP documentation and report the transaction in the TP-R form. In such a case, the comparative study is not necessarily part of the local file.
In the statement on the preparation of TP documentation that is filed with the tax authorities, the taxpayer must also confirm that the prices established in the transaction are at arm’s length. The local file must also be accompanied by an additional document: an economic justification for the operation; in particular, a description of the expected economic benefits, including tax benefits.
Failure to comply with documentation obligations triggers the risk of sanctions. The operation can be estimated by the tax administration, which can apply the institution of an additional charge. However, since the transactions are made with third parties, the risk is low.
Another important risk is that the tax authorities recognize as false the declaration filed on the preparation of the TP documentation. If so, the taxpayer faces a penalty of up to 720 daily rates, which equates to approximately 6 million euros ($6.1 million) in 2022.
The Ministry of Finance has compiled clarifications on guidelines for meeting the additional obligations. It also announced its intention to simplify regulations and raise documentation thresholds.
However, the regulations still raise doubts about the burden of the obligation on taxpayers, which is out of proportion to the effect on tax authorities.
The deadline to fulfill these obligations for 2021 is the end of December 2022 for taxpayers whose calendar year coincides with the tax year. Experience shows that verification is a difficult task, given the understandable lack of responses and willingness to provide information from suppliers. It is therefore worth acting as soon as possible.
The Deputy Minister of Finance announced changes to corporate income tax. They seek to introduce simplifications and solutions adapted to the current economic situation.
For example, the Ministry of Finance proposes simplified rules for documentation of transactions with tax havens and increased documentation thresholds applicable in such cases (100,000 PLN for direct transactions and 500,000 PLN for indirect transactions currently).
The bill will double the thresholds for direct transactions; i.e. 200,000 PLN. In the case of indirect operations, they will be modified according to the type of operation.
On the one hand, this is good news for taxpayers. On the other hand, it is a big surprise after several months of efforts to meet the requirements of the regulator, such as obtaining declarations from suppliers and the documentation of transactions with entities from tax havens.
The act is a draft and should be published within a month.
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