Cooperative compliance agreement instead of APA?

by Krzysztof Smach

4 August 2020 

The Polish Tax Act was amended with effect from 1 July 2020 to include provisions enabling taxpayers to sign a cooperative compliance agreement.

Under a cooperative compliance agreement, the taxpayer and tax authorities resolve voluntarily to jointly monitor the correctness of tax accounts. As part of the cooperative compliance agreement the taxpayer and tax authorities may also conclude a tax compliance agreement regarding transfer pricing. Is this new agreement a good alternative to the Advanced Pricing Agreement (APA)?

Similarities between APA and a tax compliance agreement

An APA and a tax compliance agreement signed as part of the cooperative compliance agreement have the same functions. Both solutions allow taxpayers to obtain assurance as to the arm’s length nature of transactions (including cost allocation agreements) with associated enterprises. Both the APA and the tax compliance agreement are concluded with (or issued by) the Head of the National Revenue Administration (NRA) at the taxpayer's request. Also, the application for a tax compliance agreement regarding transfer pricing consists of the same elements as the application for APA. Those elements are as follows:

• description of the taxpayer's business activity;
• subject matter and type of transaction;
• functional analysis;
• transfer pricing method along with the reasons for choosing that method;
• benchmarking study (or description of compliance);
• description of the method used to calculate the transfer price, along with the calculation assumptions, including financial forecasts;
• critical assumptions for the selection of the transfer pricing method;
• the proposed lifetime of the agreement;
• type of the agreement (unilateral/bilateral).

There are also similarities in the types and the lifetime of the agreement and the circumstances in which the taxpayer cannot apply for one. A tax compliance agreement with tax authorities may be unilateral (between the taxpayer and the Head of NTA), bilateral (between the taxpayer, the Head of NTA and one foreign tax authority) or multilateral (between the taxpayer, the Head of NTA and multiple foreign tax authorities). The agreement is valid for maximum 5 years (renewable) and can cover the period since the beginning of the tax year in which the taxpayer files the application. However, no agreement can by concluded in respect of transactions completed before the application date and transactions subject to tax proceedings, tax inspections or customs and tax inspections or proceedings before administrative courts for any of the last two tax years preceding the tax year in which the application was filed.

Differences between APA and tax compliance agreement

The most important differences between those agreements result from the fact that the tax compliance agreement is concluded as part of the cooperative compliance agreement. Tax compliance agreements regarding transfer pricing can be signed only by large taxpayers whose revenues exceeded EUR 50 million in the year preceding the application for cooperative compliance agreement and who have obtained a pre-audit opinion. In addition, the Head of NTA may limit the number of entities with which to sign the cooperative compliance agreement, taking into account their social and economic impact. Due to the above requirements, the tax compliance agreement is not a real alternative to the APA.

Inspection and reporting obligations

A tax compliance agreement is concluded under the cooperative compliance agreement so taxpayers who have signed it must fulfil additional reporting obligations as part of which they must:

• report to the Head of NTA, without request, any important tax issues which could reasonably lead to a dispute between the taxpayer and tax authorities;
• report to the Head of NTA immediately, without request, any significant issues that could result in the taxpayer’s tax advantage, according to the materiality thresholds set in the cooperative compliance agreement.

The tax compliance agreement regarding transfer pricing is also governed as appropriate by the provisions on the obligation to report the performance of the APA.

Transfer pricing documentation obligation

A tax compliance agreement signed as part of the cooperative compliance agreement does not release the taxpayer from the obligation to prepare transfer pricing documentation. The APA provides for such release by virtue of Article 11n(2) CIT Act, which says that no local transfer pricing documentation needs to be prepared for controlled transactions governed by an Advance Pricing Agreement in the period covered by it. As the scope and content of the application for APA and the application for tax compliance agreement regarding transfer pricing are identical, it is hard to understand why those two agreements differ in terms of documentation obligations.

Costs

The fees for the application for tax compliance agreement amount to 50% of the fees for the application for APA. The fees are collected after signing the agreement. The fee for the application for APA is 0.5% of the value of the controlled transaction covered by the APA, whereas:

1. in respect of:

• an APA applicable exclusively to domestic associated entities – is no less than PLN 2500 and no more than PLN 25,000;
• an APA applicable to a foreign associated entity – is no less than PLN 10,000 and no more than PLN 50,000;

2. bilateral or a multilateral APA – is no less than PLN 25,000 and no more than PLN 100,000.

Consequences of signing a tax compliance agreement

Just like with APA, the basic purpose of the tax compliance agreement regarding transfer pricing is to limit the risk that tax authorities will challenge the arm’s length nature of transfer prices and the taxpayer will not be exempt from the cost limit stipulated in Article 15e CIT Act. In both cases, if the taxpayer applies the transfer pricing method and calculation set in the agreement, he can be sure that tax authorities will not challenge the prices agreed between the taxpayer and associated entities and will not assess tax (or reduce the loss) because of this.

The tax compliance agreement regarding transfer pricing can also exempt the taxpayer from the restriction on the tax-deductibility of expenses incurred for intangible services or intangible assets. This is possible if the agreement regulates the correct calculation of fees for such services and other payments during the term covered by it (Article 15e(15)(b) of the amended CIT Act).

Similarly as with APA, signing a tax compliance agreement regarding transfer pricing allows the taxpayer to:

• get exempted from the cost limit as per Article 15e CIT Act;
• protect himself against negative consequences that arise whenever tax authorities challenge the arm’s length nature of transfer prices.

The tax compliance agreement is concluded as part of the cooperative compliance agreement. It can be entered into only by the biggest taxpayers who have obtained a positive pre-audit opinion and have undertaken to fulfil various reporting obligations. As a consequence, the tax compliance agreement regarding transfer pricing cannot be a real alternative to the APA if the taxpayer only wants to achieve the benefits described in letters a and b above.

The main advantage of the tax compliance agreement regarding transfer pricing is that you must pay only half of the APA application fee. Thus, this option may be attractive to those taxpayers who are already parties to a cooperative compliance agreement but would like to sign also a tax compliance agreement regarding transfer pricing.