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Transfer pricing analysis as more and more important element of transfer pricing documentation


 by Marta Woźnik

12 May 2020 


Pursuant to the regulations in force since 2019, transfer pricing analysis is an obligatory element of each transfer pricing documentation, except for transactions made under the safe harbour regime.


A correct transfer pricing analysis is important also because its results are disclosed in the information on transfer pricing (TPR form) which, in turn, is a synthetic source of data for tax authorities and is used, among other things, to identify entities to be inspected. That is why it is worth preparing the transfer pricing analysis as soon as possible so that you have enough time to check its results and adjust the pricing, if necessary.


What is a transfer pricing analysis

Transfer pricing analysis is prepared to prove that in comparable market conditions independent entities would effect the transaction on the same principles as those which were agreed by associated enterprises. This means that transfer pricing analysis is an important element of the documentation in which the taxpayer has to prove that its transactions with associated enterprises are made in compliance with the arm’s length principle, i.e. on market terms.

Transfer pricing analysis may be carried out in the form of a benchmarking study or conformity analysis:


  • A benchmarking study compares data of independent entities or transactions made between independent entities, considered comparable to the terms and conditions agreed in the controlled transaction.
  • If carrying out a benchmarking study is not appropriate for a given transfer pricing verification method or it cannot be carried out with due care, a conformity analysis is carried out. Conformity analysis consists in proving that the agreed terms and conditions of the controlled transaction conform with the terms and conditions which would be agreed by independent entities. 


Tax, management and business implications of transfer pricing analysis

Transfer pricing analysis is carried out to prove that the terms and conditions of the transaction made between associated enterprises are at arm’s length. In this way the taxpayer proves that his relations with the contracting party did not cause an artificial understatement of the taxable base or overstatement of loss. The obligation to apply arm’s length pricing in transactions with associated enterprises follows from Article 11c of the CIT Act. If tax authorities conclude that the taxpayer disclosed a lower income or higher loss than it should be expected if there were no associations between the taxpayer and the contracting party, the authorities assess the taxpayer’s income(loss) taking no account of the terms and conditions resulting from these associations. At the same time, they assess an additional tax liability ranging from 10 to 30% of the unduly disclosed or overstated loss or on the undisclosed (in total or in part) taxable income. A correct transfer pricing analysis is a taxpayer’s tool to defend his viewpoint and to prove that his actions were not aimed at tax avoidance.

Transfer pricing analysis is indispensable to filling out the TPR form. TPR form must be filed by all entities that make transactions with associated enterprises and the value of the transactions exceed the statutory thresholds. In the TPR form the taxpayer must, among others, disclose controlled transactions, specify the applied transfer pricing methods and disclose the profit earned on each of the controlled transactions together with the results of the analysis of the arm’s length nature of each of the transactions. With such information on transfer pricing tax authorities can easily preliminarily assess whether the transactions concluded by the taxpayer with the associated enterprises comply with the arm’s length principle, or whether they raise doubts and need to be investigated.

Entities obliged to prepare transfer pricing documentation must file a statement with tax authorities in which in addition to declaring that they have the documentation ready, they represent that the transfer prices applied in the controlled transactions were agreed on the terms which would have been agreed by independent entities. Such a statement must be signed by the entity’s manager (as defined in the Accounting Act), and failure to file it, filing it late or providing false information in it is punishable with a fine of up to 720 day-fine units. This element makes transfer pricing analysis important not only for tax, but also for management-related reasons. That is because it is a tool which the management can use to check whether the prices applied by the entity were at arm’s length. With that knowledge, they can file a well-informed statement on the compliance with arm’s length principle or make a well-informed decision on adjusting the transfer pricing so that it matches the market level.

Furthermore, transfer pricing is important for business reasons. Carrying out a conformity analysis allows the entity to decide about future pricing. It also allows assessing the entity’s position among its competitors and define the direction of development aligned with the market trends. Transfer pricing analysis gives the management valuable information on the economic conditions in a given industry sector and may prove helpful in company’s business optimisation.

Transfer pricing analysis – practical considerations

The starting point for transfer pricing analysis is carrying out a functional analysis of the transaction. It allows determining the roles of the transacting parties and selecting the tested party. A correct functional analysis helps to identify the comparability criteria and to determine the characteristics to be searched in market transactions or entities considered comparable to the tested transaction or entity.

When looking for comparable data, the internal data should be analysed first. The comparison of the controlled transaction with the transaction concluded by the tested party with an independent entity usually best meets the comparability criteria and allows reaching the highest level of comparability. If there are no internal comparable data available, external data should be analysed. They may be sourced from market reports, scientific and specialist articles and statistics. However, commercial databases, which are available against payment, often turn out to be the only source of data on market conditions. In addition, they provide data which often require further analysis and processing, which may be too difficult for a person who does it for the first time. That is why, and also in consideration of the aforementioned importance of transfer pricing analysis, it is worth leaving it to transfer pricing experts.

Transfer pricing analysis should be updated at least once in 3 years, unless the analysis is not affected earlier by the changing economic conditions. The current pandemic triggers the risk of significant changes in economic conditions in some industry sectors. Therefore, when verifying the obligation to prepare transfer pricing analysis for 2020 it is important to take into consideration a potential change in economic conditions and investigate whether or not it will trigger the need to update the transfer pricing analysis. Another risk generated by the impact of COVID-19 on the economy is the fact that comparable data from external sources are generally data for previous years. So at the time of preparing a transfer pricing analysis for 2020 within the statutory time limit of 9 months of the end of the financial year commercial databases will not have published a sufficient amount of data for that year yet. A transfer pricing analysis prepared on the basis of data for 2019 and for earlier years will need to be adjusted by a factor which will adjust the result to the economic conditions changed in 2020.

Recommendations for entities preparing the transfer pricing analysis

Each year transfer pricing analysis is becoming a more and more important element of transfer pricing documentation If carried out correctly, it ensures tax safety, but it is also of highly informative value to the management. As the arm’s length nature of the transaction must be checked before the statement and information on transfer pricing (TPR form) is filed, we recommend preparing transfer pricing analysis as soon as possible.

It is not an easy task as it requires economic, financial and tax knowledge, as well as analytical skills to interpret the collected data. Uncertain economic conditions caused by the pandemic additionally make it difficult to obtain valuable comparable data.


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Dominika Tyczka-Szyda

Tax adviser (Poland)


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