Recharges and the obligation to prepare a benchmark study

by Joanna Bielecka

29 July 2019 

The Polish Corporate Income Tax Act (“CIT Act”) and the Polish Personal Income Tax Act (“PIT Act”) were amended on 1 January 2019.

The amendments introduced the term of “recharging” which means reselling services purchased in the company's own name but for another associated enterprise. The recharging enterprise is an intermediary in the purchase of a certain service and only performs an administrative function, which means that it does not generate any significant added value for itself. Therefore, the transaction may be made without a margin. However, it should be noted that the definition of recharging in the CIT Act and the PIT Act has been formulated for purposes of transfer pricing documentation and low value-added services only. So this definition is far from exhaustive because it covers exclusively transactions involving low value-added services and does not cover supplies of goods.

Low value-added services – classification criteria

Low value-added services are listed in appendix no. 6 to the CIT Act and appendix no. 4 to the PIT Act. Additionally, they must meet the following four conditions jointly:

1. they may be only auxiliary to the service recipient’s business activities;
2. in the case of a group of associated enterprises – they must not form the core business of that group;
3. the service recipient must not resell them any further, except as a recharge;
4. the total value of low value-added services provided to independent enterprises must not exceed 2% of the value of such services rendered to associated and independent enterprises.

Once these additional statutory conditions are met, taxpayers do not have to prepare a benchmark study for transactions involving low value-added services. This is the so-called safe harbour rule, meaning a simplified approach to the taxpayer's documentation obligations.

Mandatory benchmark study

At present, taxpayers who are obliged to draw up transfer pricing documentation for 2018 may choose whether to follow the laws in force until 31 December 2018 or the new legislative framework applicable since 1 January 2019. Neither the CIT Act nor the PIT Act in the wording applicable until 31 December 2018 defined recharging. Therefore, taxpayers were not sure whether the benchmark study was required for recharges at no margin. The Head of the National Tax Information Service held in his advance tax ruling of 2 March 2018 (file no. 0114-KDIP2-2.4010.15.2018.1.AZ) that the benchmark study had to be conducted (if certain conditions were met). The authority ruled that a price agreed between associated enterprises that is merely at the same level as the price between independent enterprises, did not confirm that the transaction between associated enterprises was arm's length. Consequently, a benchmark study should be conducted to see if the price for the transaction was set on terms that independent enterprises would have agreed under comparable circumstances. Whenever it is impossible to conduct a benchmark study, the taxpayer should prepare the so-called description of compliance. The description is required if the taxpayer is not able to gather sufficient data to conduct a benchmark study. It serves to show that the terms agreed between associated enterprises comply with terms which independent enterprises would have agreed.

Legal status from 1 January 2019

The amended CIT Act and PIT Act have not exempted recharging transactions from the obligation to conduct a benchmarking study. Neither are they exempt under the above-mentioned safe harbour regime. Moreover, the lawmakers have made the benchmark study a mandatory component of the local file. As a consequence, transfer pricing documentation for recharging transactions will have to include a benchmark study or, where this is impossible or inappropriate, a compliance analysis showing that terms and conditions of the controlled transaction comply with the terms and conditions which independent enterprises would have agreed.

Recommendations from Transfer Pricing Forum

On 12 March 2019, the Joint Transfer Pricing Forum (“JTPF”) issued recommendations on issues related to checking the arm’s length nature of recharging transactions (which generated income after 1 January 2019). The JTPF stated that the compliance could be checked using the so-called alternative verification method because enterprises could not always be compared in the case of such transactions. Moreover, the said alternative method might be appropriate if the transaction involved allocation keys to allocate the burden between the associated enterprises. If a taxpayer chooses the alternative method and conducts the compliance analysis the taxpayer will also have to justify why the transaction does not require a margin, invoke terms used by an independent enterprise, and justify the allocation keys for the settlements between the enterprises involved. The allocation keys should specifically show how added value is created in the transaction and the benefits expected by the respective parties involved. The JTPF recommends that the allocation keys should be used consistently and any deviations should be explained.

Therefore, the JTPF has proposed legislative changes that would exempt taxpayers from the transfer pricing documentation obligation if the recharges are to only one enterprise and without margin. Alternatively, the JTPF has proposed to reduce the number of mandatory components of the TP documentation if a recharge is settled using fixed allocation keys. They have also proposed introducing the said safe harbours.

Currently, transactions involving recharges require preparing a benchmark study or, if this is not possible – a description of compliance, both under the former legal regime (where they should be prepared only when certain statutory conditions are met) and under the new laws (mandatory in all cases). The JTPF's legislative recommendations are meant to simplify or abolish the above-mentioned obligations. Still, be mindful that they are only proposals and are not binding on the lawmakers. The lawmakers may consider these recommendations in designing and drafting legislative amendments and it is up to them whether to implement them or not.