Selected Transfer Pricing issues/Advance pricing agreements (APA) in Polish practice (2006 – 2011)Tomasz MichalikMoscow, 3 February 2012

Transfer pricing documentation in Poland

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Transfer pricing documentation

Transfer pricing documentation should include:

•information on functions performed, assets involved and risks taken by the parties to the transaction

•description of the expected costs related to the transaction

•form(s) and terms of payment

•method of price and profit calculation

•business strategy if it influences the transaction value

•other factors that affect the transaction value

•description of benefits from the transaction (in case of services or intangible assets)

Transfer pricing documentation should be submitted within 7 calendar days upon request of the tax authorities.

In practice transfer pricing documentation should be available in advance before the tax authorities submit such request.

Transfer pricing documentation in Poland

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Thresholds

Transfer pricing documentation should be prepared for the transactions in which the total amount which results from the contract or total amount actually paid in a tax year exceeds :

•100.000 EUR – if the value of the transaction does not exceed 20% of the share capital

•30.000 EUR – for services, sale or license of intangibles

•50.000EUR – in the remaining cases

Transfer pricing documentation should be prepared Polish.

Transfer pricing audit in Poland

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Tax audit procedure

Market value of the transaction between related parties should be determined based on the publicly available data.

Tax authroities may only use:

• comparable uncontroled price method (CUP)

• resale price method

• cost plus method

• profit split method

• transactional net margin method (TNMM)

CUP method has priority over all other methods.

Transactional profit methods (profit split and TNMM) may be only used if none of the traditional methods (CUP, resale price or cost plus) may be applied.

TP audit procedure in Poland

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Penalties

Income assessed from the transactions between related parties is taxed with the standard tax rate of 19% (plus penalty interest) if transfer pricing documentation is available upon request.

50% penalty tax rate (plus penalty interest) is applied if the taxpayer fails to submit transfer pricing documentation within the statutory deadline (7 days).

Currently (Feb 2012) penalty interest amounts to 14%.

Specific penalties may apply to individuals responsible for preparing the transfer pricing documentation. Such individuals may be held liable for either not submitting the documentation or presenting inaccurate or false data.

APA in Poland

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APA available in Poland

1.Unilateral

• domestic (for the transactions between domestic entities), or

• foreign (for the transactions between domestic and foreign entity concluded with the Polish competent authority only).

2.Bilateral (for the transactions with foreign related entity, subject to approval of foreign tax authority competent for the foreign entity).

3.Multilateral (for the transactions with foreign related entities of more than one country, subject to approval of foreign tax authorities competent for foreign entities).

APA may be concluded for the permanent establishment.

APA process

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Preliminary inquiry

Discussion with the Ministry of Finance on:

•concerns with respect to the advisability of the APA

•information required to process the APA application (that should be included in the application)

•likely date for APA

•expected results of the process (agreed conditions) and duration of APA

Review of the draft APA application by the Ministry of Finance prior to its submission.

No administrative fee for the preliminary inquiry and for the meetings with the Ministry of Finance at this stage of APA process.

APA process

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APA application

Application to the Ministry of Finance must include:

•industry and market analysis

•organizational and capital structure

•company analysis

•transaction(s) subject to APA

•functional analysis (including predicted costs and business strategies)

•description of accounting principles

•proposed method for transfer pricing

•proposed scope and duration of APA

•other information (agreements and market studies)

APA process

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Meeting(s) of consensus

Meetings with Ministry of Finance:

 

•discussion with Ministry of Finance on the arm's length conditions of the transaction(s)

•presentations of supplementary information (additional documents and market studies)

Average number of consensus meetings is 4.

Maximum consensus meetings number in one case was 11.

Minimum consensus meetings in one case was only 1.

APA process

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APA decision

APA decision includes:

 

•parties to the transaction(s) subject to APA

•description and amount(s) of the transaction(s)

•period of APA

•transfer pricing method

•description of rules to use the method

•other conditions of APA

APA is concluded for up to five years.

APA may be extended for further five year period (provided the critical assumptions of the method used are not changed and the taxpayer applies for the extension of the agreement at least 6 months before it expires).

Costs of APA in Poland

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Unilateral APA for the transaction(s) between domestic entities only

1% of the transaction amount not less than 5.000 PLN (about 1.100 EUR) and not more than 50.000PLN

Unilateral APA for the transaction(s) between domestic and foreign entities

1% of the transaction amount not less than 20.000 PLN (about 4.400 EUR) and not more than 100.000 PLN

Bilateral and multilateral APA1% of the transaction amount not less than 50.000 PLN (about 11.000 EUR) and not more than 200.000 PLN

APA procedure time limits

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Unilateral APA for the transaction(s) between domestic entities only

6 months

Unilateral APA for the transaction(s) between domestic and foreign entities

6 months

Bilateral APA 12 months

Multilaterial APA 18 months

Time limits are of instruction nature for the Ministry of Finance and may be extended.

Average time for APA procedure in Poland is 19 months. The shortest APA procedure was 6 months long*

* As of October 2011.

Common problems in the APA process

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APA application

• Incomplete accounting policy

• Not sufficient information on organizational and capital structure and on the parties to the transaction characteristics

• Missing consent of the parties to the transaction to submit all documents and information related with the transaction to the Ministry of Finance in Poland

• No critical assumptions in the APA application

• Incorrect functional analysis of the transaction

• Search of comparable entities only in the commercial databases and with certain comparability criteria put aside

• inappropriate choice of a transfer pricing method (e.g. transactional profit methods in simple transactions

Further APA process

• Not sufficient involvement of the parties to the transaction in the APA process

• Necessity to appoint external expert witnesses due to insufficient information from the parties to the transaction

• Not sufficiently reliable comparability analyses and projections for the future

APA statistics in Poland*

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2006 2007 2008 2009 2010 2011 Total

Preliminary inquires 27 14 12 11 10 6* 80

APA applications 12 3 5 3 4 4 31

• unilateral 12 2 5 3 3 1 26

• bilateral - 1 - - - 3 4

• multilateral - - - - 1 - 1

APA decisions 1 2 6 2 7 4 22

• unilateral 1 2 6 2 7 2 20

• bilateral - - - - - 2 2

• multilateral - - - - - - -

* Data included in the table above as of 15 November 2011 and number of preliminary enquires as of end of March 2011.