Transfer prices in 2021 – a new problem for board members
Tax provisions regarding transfer prices were significantly amended in 2017 and 2019. Against the background of other major updates introduced in recent years, the changes that entered into force on 1 January 2021 can seem less important. However, they can significantly complicate the functioning of companies and make it more difficult for board members to fulfil their duties.
What was the situation like until now?
Preparing documentation on transfer prices was associated mainly with transactions with related parties. However, for many years there was a provision pursuant to which this obligation also applied to transaction with entities (including non-related ones) from so-called ‘tax havens’. Its scope was limited to transactions as part of which a Polish taxpayer makes a payment to an entity from a ‘tax haven’ (in an amount exceeding PLN 100k). It also applied to situations in which a Polish tax payer concluded with such an entity articles of association of a tax-transparent entity or a joint venture agreement (in an amount exceeding PLN 100k). The application of this provision did not pose any great difficulty – each taxpayer could simply identify the situations in which the obligation provided for in the provision existed. It was enough to have information about the headquarters (location of the board) of the counterparty and the annual value of the transactions.
As of 1 January 2021, the legislator broadened the scope of the provision in question. Currently, taxpayers are required to also document transactions as part of which an entity from a ‘tax haven’ does not act directly as the counterparty, but as the ‘beneficial owner’. In such situations, the value threshold requiring documentation to be prepared is PLN 500k.
Verifying the ‘beneficial owner’ in transactions concluded with an unrelated entity is often impossible. To simplify the application of the newly-introduced provision, the legislator introduced a presumption that the ‘beneficial owner’ is an entity from a ‘tax haven’ if the other party to the transaction makes ‘settlements’ with such entity during the tax year. Using a wide concept of ‘settlements’ means that the introduced presumption is a simplification only for the tax office. Reading this provision literally, the ‘beneficial owner’ will be an entity from a ‘tax haven’ if our counterparty had any settlements with such entity, e.g. if it bought computer software that has nothing to do with our transaction. The introduced presumption results in a complete distortion of the concept of a ‘beneficial owner’ used, among others, in provisions on withholding tax.
What does this mean in practice?
Something that taxpayers can do to fulfil the new documentation obligation is to gather statements from counterparties. In practice, after the tax year ends, the taxpayer should prepare a list of counterparties with which it carried out transactions with a total value exceeding PLN 500k, and then ask them for information on whether they carried out any ‘settlements’ with entities from ‘tax havens’.
At this stage, two significant problems will arise. First, the counterparties have no obligation to provide such information. However, if they do, we will easily get trapped into an obligation to provide documentation. This will be the case, among others, if the counterparties inform us that they have carried insignificant transactions with entities from ‘tax havens’ that have nothing to do with our transaction.
Response from board members
For several years, there has been a provision that provides for the obligation to submit a statement confirming that local transfer pricing documentation has been prepared. Since 2019, the act specifies directly that such a statement must be signed by the company’s board members. Signing this statement for 2021 – given the abovementioned broadening of documentation obligations – may prove very problematic. If we do not verify that the transactions we concluded did not involve ‘beneficial owners’ from ‘tax havens’, the board member will not have complete information needed to sign the statement. A failure to submit a statement or the submission of a false statement is subject to a fine that may even exceed PLN 26 million.
To protect against liability, for large entities, it is worth considering the implementation of an appropriate procedure to correctly identify transactions with entities from tax havens. Of course, in many cases the procedure may prove ineffective – counterparties may refuse to provide us with information about the ‘beneficial owners’ of the transactions. Its consistent application may, however, be considered in the future as proof of due diligence indicating that any potential violation of provisions on transfer prices was unintentional.
Piotr Prokocki, Attorney-At-Law & Tax Adviser Vistra Poland
Last Updated on February 16, 2021 by Karolina Ampulska