Transfer pricing adjustment non-VATable

by Aleksandra Galczak

6 March 2020

The Head of the National Tax Information Service confirmed in the advance tax ruling (dated 3 January 2020, file no. 0111-KDIB3-1.4012.754.2019.1.KO) that neither downward, nor upward adjustment was subject to VAT.

The ruling concerned the transfer pricing adjustment referred to in Article 11e of the Corporate Income Tax Act (the “CIT Act”) of 15 February 1992 and applied to the adjustment of the profit(loss) measured at the operating profit margin for 2019, to be made at the beginning of 2020. The application for the ruling stated that the unit prices of goods sold in 2019 would not be adjusted.

The taxable person indicated that it was the operating profit that would be adjusted, and not the profit on the sale of goods, so the adjustment would cover all operating expenses. The adjustment would be documented with notes – a credit note for upward adjustment or a debit note for downward adjustment. The notes would not be invoices in the meaning of the Value Added Tax Act of 11 March 2004 (the “VAT Act”).

Pursuant to Article 5(1)(1) VAT Act, VAT is chargeable on, among other things:

• payable supply of goods and payable supply of services in Poland;
• export of goods;
• import of goods to Poland;
• intra-Community acquisition of goods (ICA) for a consideration in Poland;
• intra-Community supply of goods.

Pursuant to Article 7(1) of the VAT Act, the supply of goods is understood as the transfer of the right to dispose of the goods as owner, whereas according to Article 8(1) of the VAT Act, the supply of services means any supply to a natural person, legal person or an organisational entity not having a legal personality which is not a supply of goods within the meaning of Article 7 of the VAT Act, including also:

• assignment of rights to intangible assets regardless of the form in which such s transaction has been carried out;
• obligations to refrain from an act or to tolerate an act or situation;
• performance of services under an order made by a public authority or an entity acting in the name of such public authority, or in pursuance of the law.

Fee for goods and services

Supplies of goods and services are generally VATable when they are effected against payment (in accordance with Article 5(1)(1) VAT Act). For a supply of goods or a service to be considered paid there must be a legal relationship between the service provider and the recipient, and a fee should be paid for the service performed. However, the VAT Act does not specify the form of the compensation. When determining whether a transaction is VATable, it is important to determine whether services have been performed and whether a fee for the performance of the service is payable. However, the following conditions must be met:

• as a result of the fulfilment of a commitment to perform a service, the other party (purchaser) is the service beneficiary;
• the service must be accompanied by the buyer's performance (consideration).

The amount received or paid to adjust the agreed profitability does not concern individual invoices, invoice items or the original prices (so it does not directly affect the prices of goods). The payment received or made as profitability adjustment will not adjust accounts of sales of goods and services to an associated enterprise. Adjustment of mutual accounts which consists in a (downward or upward) adjustment of expected profitability is not a reciprocal transaction. In no way does the adjustment of profitability to an agreed profitability level oblige the other entity to any performance. Therefore, it is not a service fee in the meaning of the VAT Act and is non-VATable under Article 5(1)(1) read together with Article 8(1) of the VAT Act. Neither is profitability adjustment a fee for a supply of goods in the meaning of Article 7(1) of the VAT Act – we are not dealing with a transaction on goods.

A similar approach was taken by the Head of the National Tax Information Service in the advance tax ruling of 10 September 2019 (file no. 0115-KDIT1-2.4012.409.2019.1.AW), in which he confirmed the applicant's opinion.

Correct adjustment

Transfer pricing adjustment must be well thought out and planned in detail, it should follow from, among other things, the applied transfer pricing policy, concluded contracts and must meet the conditions set forth in transfer pricing regulations, in particular Article 11e of the CIT Act. If an adjustment is wrongly documented, e.g. if invoices are issued instead of notes, or if the assumptions as to the method of calculation the adjustment amount are wrong, the adjustment may be considered a VATable transaction.

Rödl & Partner advisers will be happy to review in detail your dealings with associated enterprises to evaluate the correctness of the adopted transfer pricing policy and internal rules for adjustments to transactions between associated enterprises. As part of tax advisory services they are also ready to support you in adapting the transfer pricing policy related to contracts to new laws.