Transfer Pricing Documentation — We Will Handle It for You

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Expansion Tax Relief  ·   Expansion Tax Relief for Online Shops  ·   Estonian CIT  ·   R&D Tax Relief / IP Box  ·   Family Foundations

KRS Law Firm prepares transfer pricing documentation. Our team’s experience helps minimise the risk of punitive tax rates and fines in the event of an audit. We offer solutions tailored to each case, taking account of the industry’s specific characteristics.

The obligation to prepare tax documentation follows directly from the income tax legislation. Related parties must prepare electronic local transfer pricing documentation for each tax year to demonstrate that their transfer prices reflect terms that independent parties would have agreed.

Local Transfer Pricing Documentation is prepared for a homogeneous controlled transaction whose value exceeds the following documentation thresholds in the tax year:

1)  PLN 10,000,000 — for transactions involving goods;
2)  PLN 10,000,000 — for financial transactions;
3)  PLN 2,000,000 — for service transactions;
4)  PLN 2,000,000 — for transactions other than those specified in points 1–3.

Different transaction value limits apply to transactions with entities in jurisdictions practising harmful tax competition. For controlled transactions with a party resident, registered or managed in a territory or country practising harmful tax competition, or with a foreign permanent establishment located there, the documentation threshold is:

1) PLN 2,500,000 — for financial transactions;
2) PLN 500,000 — for transactions other than financial transactions

It should be noted that the value of a controlled transactioncorresponds to:

1) the principal amount — for a loan, credit facility or deposit;
2) the nominal value — for a bond issue;
3) the guaranteed amount — for a surety or guarantee;
4) the value of allocated revenue or costs — when attributing income or loss to a foreign permanent establishment;
4a) the total value of contributions to a partnership without legal personality — for that partnership agreement;
5) the value appropriate to the particular controlled transaction — for other transactions.

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A key issue in determining the documentation obligation is defining  Related parties are defined in the income tax legislation. Under these provisions, related parties include:

a) entities where one exercises significant influence over at least one other entity; or

b) entities over which significant influence is exercised by:

• The same other entity or
• The spouse, relative or relative by marriage up to the second degree of an individual exercising significant influence over at least one entity, or

c) a partnership without legal personality and its partner; or

d) a limited partnership or limited joint-stock partnership and its general partner; or

e) a general partnership and its partner; or

f) a taxpayer and its foreign permanent establishment or, for a tax capital group, a member company and its foreign permanent establishment.

Prepare for an Audit

Transfer pricing is currently a priority area for tax authority audits. Protect your business today.

Protection from Penalties

Did you know that failing to prepare transfer pricing documentation can result in a punitive 50% tax rate and a fine of up to PLN 1,700,000?

Leave It to Specialists

KRS Law Firm’s experienced team of experts will help you reduce the risks associated with a transfer pricing audit. Contact us to discuss your needs.

The tax legislation imposing the documentation requirement does not prescribe a specific template. It does, however, identify the core elements that transfer pricing documentation must contain.

The documentation first describes the relationships between the parties.

It must then describe the transaction and the functions performed by each participant, identifying which party performs the more significant functions. This section should also cover the assets used and risks assumed, including how those risks are allocated between the parties.
The next section should contain a transfer pricing analysis, namely: 

a) an analysis of data on independent parties or transactions with or between independent parties considered comparable to the terms of the controlled transaction, known as a “benchmarking analysis”; or

b) an analysis demonstrating that the terms of the controlled transaction are consistent with those that independent parties would agree, known as a “compliance analysis”, where a benchmarking analysis is inappropriate for the verification method or cannot be prepared despite due diligence.

The analysis must identify all costs associated with the transaction and the form and timing of payment. These include both costs directly related to payment for the transaction and additional expenses incurred in connection with it. The types of expense depend on the transaction. Such costs are often excluded from the price but affect the transaction’s profitability and therefore its arm’s-length character.

A key element is identifying the selected method, the profit calculation and the transaction price. Calculation methods are set out in implementing regulations under the income tax legislation. A common approach is the comparable uncontrolled price method, which compares the price of goods and services in comparable transactions between independent parties. Comparability should take account in particular of product or service quality, the contractual allocation of rights and obligations, the volume of dealings and liability for non-performance or improper performance.
The final element is financial information, requiring an analysis of the financial statements and a description of the financial position of the entity preparing the documentation.

The penaltiesfor failing to prepare mandatory transfer pricing documentation fall into two categories: tax penalties and fiscal criminal penalties.

1. Tax Penalties — the Punitive 50% Rate.

The primary penalty is a 50% tax rate under Article 19(4) of the Corporate Income Tax Act and Article 30d of the Personal Income Tax Act. Under those provisions, failure to provide required tax documentation results in a punitive 50% rate applied to the difference between the income assessed by the tax authority and that declared by the taxpayer. Applying this rate does not exclude liability under the Fiscal Criminal Code for those responsible for a company’s financial and business affairs, sole traders or partners in partnerships.

2. Fiscal Criminal Penalties — Fines.

In addition to the tax penalties described above, failure to submit documentation for a related-party transaction constitutes a fiscal offence under Article 80 §1 of the Fiscal Criminal Code. The provision states that anyone who fails to submit required tax information to the competent authority on time is liable to a fine of up to 120 daily rates, where tax proceedings result in an additional tax liability. Under the Fiscal Criminal Code, the daily rate may not be lower than one-thirtieth of the minimum monthly wage at the time of the first-instance judgment or exceed four hundred times that amount.

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