Transfer pricing – controversial general tax ruling

by Michał Gosek

15 February 2018

The Ministry of Finance has issued a general tax ruling on transfer pricing. It touches upon the most disputable laws regulating this issue. The Ministry's viewpoint presented in the ruling is partly unclear and partly detrimental to taxpayers as it may lead to more transfer pricing obligations. The ruling is particularly important for those who prepare transfer pricing documentation for the fiscal year commencing after 2017.

Despite numerous doubts over the interpretation the lawmakers neither provided legal definitions of a number of terms nor refined the laws governing fundamental issues like grouping of transactions for documentation purposes. This resulted in taxpayers' concerns and numerous disputes with tax authorities which ended up in court.

The standpoint of the Ministry of Finance as of 24 January 2018

To ensure uniform application of the laws on the transfer pricing documentation, on 24 January the Minister of Finance issued a general tax ruling (file no. DCT.8201.1.2018) on:

1. the method of determining threshold values for homogeneous transactions triggering the documentation obligation;
2. the method of determining threshold values for transactions with different associated enterprises and triggering the documentation obligation;
3. the obligation to prepare transfer pricing documentation;
4. identifying homogeneous transactions.

The biggest controversies and the most significant implications for taxpayers

Out of all issues dealt with by the Minister of Finance the opinion presented with reference to item 2 above is the most controversial.

According to the interpretation adopted by the Minister, to determine whether or not the taxpayer must prepare transfer pricing documentation he must compare the transactional thresholds specified in Article 9a(1d) of the CIT Act (and, accordingly, Article 25a(1d) PIT Act) with the sum of values of homogeneous transactions (or dealings) made with associated enterprises, and not with the value of a homogeneous transaction made with a specific associated enterprise.

This approach may require more extensive documentation than expected. In practice this means that if a taxpayer makes a similar transaction (e.g. supply of goods) with several associated enterprises, to determine whether or not he must prepare transfer pricing documentation he should first add up the values of the transactions made with each enterprise and then compare the sum total with the threshold applicable to him. If the transaction total exceeds the threshold, the taxpayer is obliged to prepare transfer pricing documentation for the transactions made with each enterprise, even if the value of each individual transaction does not exceed the threshold.

Homogeneous transactions?

Further in his ruling the Minister of Finance specifies the criteria that transactions must meet to be considered homogeneous. Namely, if the transaction's key parameters from the transfer pricing perspective (such as key functions, risks, assets, price calculation method, significant payment terms etc.) are similar to each other, the individual cash flows should be consolidated into transactions of one type (homogeneous). At the same time, the authorities emphasise that taxpayers should assess homogeneity of transactions individually, taking into account the specific nature of their business. For taxpayers this means that they have to re-check their transactions to find out whether they need to be disclosed in the transfer pricing documentation or not. However, the Ministry of Finance has still not dispelled all the doubts as they have not explained how to measure comparability of transactions.

In our opinion, the approach adopted by the Minister of Finance is very unfavourable to taxpayers and requires even more detailed analysis of transactions with associated enterprises. Furthermore, it should be emphasised that the approach taken by the authorities issuing advance tax rulings used to be completely different and made the transfer pricing obligation dependent on whether the transaction made with one specific associated enterprise exceeded the statutory thresholds (see for example the advance tax ruling of the Head of the National Tax Information Service dated 16/01/2018, file no. 0111-KDIB2-1.4010.332.2017.1.JP).

Advance tax rulings are issued to ensure uniform application of tax law by tax authorities and fiscal control authorities, as well as to make it easier for taxpayers to anticipate the decisions and approaches of tax authorities and fiscal control authorities. Therefore, there is a justified risk that the viewpoint presented in the discussed general tax ruling will now be followed during tax inspections.