Over 60% of global trade is generated by multinational enterprises that include both world’s leading corporations, which have become household names, and smaller companies that own one or several affiliated enterprises in but a few countries. The resulting globalization of business operations has drawn the attention of tax authorities to the issues of transfer pricing; transfer pricing arises in the context of price relations between entities that belong to the same group of companies.
In accordance with the Guidelines issued by OECD’s Committee on Fiscal Affairs, transfer prices are prices at which an enterprise provides goods and intangibles or renders services to related enterprises. Consequently, the term applies exclusively to transactions concluded within a single group of companies. The Polish tax law does not use the concept of transfer price, which has been replaced by the concept of transaction price (cena transakcyjna). Pursuant to Article 3(10) of the Tax Ordinance, transaction price means a price of a transaction entered into between related entities (podmioty powiązane) within the meaning of the provisions of the tax law on personal income tax, corporate income tax, and tax on goods and services (VAT). This includes all types of transactions under which tangible goods and intangibles are transferred or provided for use, loans extended, and services rendered. Tax authorities are particularly interested in intercompany loan and guarantee (surety) transactions and in cash pooling transactions.
Tax authorities are entitled to adjust the transaction price adopted by entities that belong to the same group of companies under conditions set forth in Article 11 of the Act on Corporate Income Tax. If as a result of connections between companies described thereunder, conditions that differ from those that independent entities would apply have been adopted or imposed and because of that an entity does not report income or reports lower income that should be expected if it were not for the above connections (and consequently pays lower tax), then the income of the relevant entity and tax payable are established without taking into account the conditions resulting from those connections. Simply put, tax authorities may interfere in a situation when the prices of specific transactions concluded between related entities (engaging in a non-agricultural business activity) do not correspond with the prices that would be applied in similar transactions and under similar circumstances in a free market by independent entities. Importantly, the above right of tax authorities (or tax inspection authorities) applies also to transactions between related domestic entities, the international aspect not being necessary.
The ability to evaluate adequately the conditions of a transaction depends primarily on learning the reasons why they are structured the way they are. Taxpayers entering into transaction with related entities are obligated to maintain the relevant documentation in that regard, in compliance with the guidelines set forth under Article 9a(1) of the Act on Corporate Income Tax, providing that the aggregate value (or its equivalent) arising under an agreement or the aggregate amount actually paid during the tax year for goods or services falling due during the tax year is in excess of EUR 100,000, EUR 30,000, or EUR 50,000, respectively, depending on the type of entity and category of transaction. At the request of tax authorities or tax inspection authorities taxpayers are required to submit the above documentation within a period of seven days of the date of request service. Otherwise, if the documentation is not submitted, the authority may conclude that the transaction resulted in shifting income and charge the taxpayer with a restrictive tax rate of 50%, calculated on the difference between the income reported by the taxpayer and established by the authority (Article 19(4) of the Act on Corporate Income Tax).
However, it is worthwhile for taxpayers to document the conditions of transactions adopted by them even if they are not covered by the statutory obligation. Inspection authorities are obligated to accept and take into account the data submitted by the taxpayer if its reliability and objectivity raise no doubts. Consequently, it would be harder to accuse entities that have the relevant analyses at their disposal of the prices applied in their transactions not being arm’s length and as a result impose additional tax on them.