Key trends in transfer pricing enforcement by the Polish tax authorities

In recent years, transfer pricing has been a key focus of Polish tax authorities, particularly during audits. The topic has gained increasing importance, especially since 2019, when authorities began using the interactive TPR form (Transfer Pricing Reporting).

This tool has revolutionized audit selection, allowing tax authorities to target areas indicative of potential non-compliance. Companies with consistent losses, high management fees coupled with declining revenues, or significant TP adjustments are more likely to be flagged. While the number of audits has decreased, their effectiveness has increased, enabling authorities to focus on cases with a higher likelihood of uncovering discrepancies.

Disputes between taxpayers and tax authorities often end up in court, with particular focus on several critical issues,which will be outlined in this article.

These topics are of significant interest not only to Polish tax authorities but also to those in other jurisdictions. Therefore, businesses must address them effectively both locally and across their entire group. Ensuring compliance and alignment with global standards is crucial for mitigating risks and avoiding costly disputes, making it a key priority for multinational enterprises operating in Poland and beyond.

The accurate determination of a company’s functional profile
 
Polish tax authorities emphasize the functional profile of entities in controlled transactions, including the functions performed, assets utilized, and risks assumed. This profile is crucial for determining if intra-group transactions follow the arm’s length principle. Recently, authorities have moved beyond formal contracts and documentation to assess the true nature of transactions, ensuring that reported profits and losses align with the entity's functional profile.

Companies classified as limited-risk distributors or contract manufacturers are expected to show stable, though lower, profits. Reporting substantial losses raises red flags for tax authorities, prompting further investigation.

Courts support this view, affirming that entities with limited functions and risks should not incur significant losses. Defining an entity’s functional profile during transaction planning and reflecting it accurately in the benchmarking analysis is crucial to avoiding disputes with tax authorities, both in Poland and internationally.
 
Transfer pricing adjustment

TP adjustments are a complex and extensive subject, making their accurate handling crucial. Before making any adjustment, it is important to consider the perspectives of both parties involved in the transaction to ensure:

• Preventing errors in tax reporting,
• Safeguarding the recognition of adjustments as tax deductible,
• Protection against the risk of double taxation.

TP adjustments are becoming increasingly standardized in Europe and globally due to economic globalization and the rise of related-party transactions. However, regulations vary by transaction specifics and jurisdiction. In Poland, specific legal conditions must be met for a TP adjustment to be considered tax-deductible.

Our experience indicates that adjustments between related parties are the most challenging issues for taxpayers. It's important to note that not all adjustments qualify as TP adjustments, making it essential to accurately determine the type of adjustment at the initial stage.
 
Benefit test
 
Intangible services acquired from related parties are of particular interest to tax authorities during audits. Due to their lack of physical form, it’s challenging to assess their execution and determine the actual benefits received by the taxpayer.

Consequently, taxpayers often face challenges in adequately documenting these services and proving their provision. Tax authorities are primarily concerned with verifying whether:

• the services were indeed provided,
• their provision was justified,
• service recipient gained benefit, and
• the remuneration is reasonable and in line with arm's length principle.

This topic is not only of interest to Polish tax authorities but also holds international significance. Therefore, it is important to conduct a thorough analysis from the perspective of the entire group and ensure that the approach is well-documented and consistent.
 
Quality of transfer pricing analyses
 
The quality of TP analyses is a key issue in disputes between taxpayers and tax authorities. Polish tax authorities increasingly scrutinize the comparability criteria and methodologies in benchmarking studies. Courts support this, ruling that poorly defined or overly broad criteria can invalidate an analysis. Encouragingly, courts critically assess analyses from both taxpayers and authorities, suggesting that a well-prepared TP analysis can be defended in court even when challenged.

To mitigate the risk of tax reassessments, taxpayers must prepare detailed benchmarking analyses. This includes selecting comparable entities, justifying financial indicators, and clearly stating all assumptions with robust evidence. A high-quality transfer pricing analysis safeguards against tax authority challenges and provides a solid defense of the arm's length nature of a transaction, both in Poland and internationally.

The essence of debt analysis
 
Financial transactions undergo frequent audits by tax authorities primarily due to their specificity and diversity.
 
Tax authorities no longer limit their scrutiny of financial transactions solely to the level of interest rate/fee. Other terms such as:

• repayment schedules,
• covenants,
• level of financing, and other,
• must also reflect fair market practices.

A key document safeguarding intercompany financial transactions is a high-quality, comprehensive benchmark. It is crucial to include an evaluation of the ability to incur and service debt at the time the financing is provided. Ideally, this analysis should be conducted before finalizing the financing transaction.
 
This helps avoid potential compliance issues and ensures that all terms are reasonable and beneficial for both parties involved. Proper analysis of these conditions maintains financial transparency and integrity within the group.
 
Recharacterization of transaction
 
In 2019, Polish taxpayers faced a major shift with new provisions allowing tax authorities to recharacterize controlled transactions. These provisions enable authorities to determine that unrelated parties, under similar circumstances, would either not engage in a transaction (non-recognition) or would choose a different transaction (recharacterization). A key issue has been applying these provisions to transactions before 2019. Court cases in 2023 highlighted legal limits on retroactive application.

Recent court decisions have reinforced this perspective, ruling that recharacterization or non-recognition of transactions made before 2019 is not permissible under the laws that were in place at the time. These rulings offer significant relief for taxpayers involved in disputes over pre-2019 transactions, as they can now challenge any attempts by authorities to recharacterize such transactions retroactively.

The evolving landscape of TP regulations and enforcement in Poland presents both significant challenges and opportunities for businesses. As highlighted in the article, the TP issues discussed are critical areas requiring careful attention. For businesses operating in Poland and globally, addressing these topics comprehensively and ensuring compliance with both local and international standards is essential for mitigating risks and avoiding costly disputes with tax authorities.

For a more detailed analysis or a comprehensive summary of the issues discussed, we encourage you to contact the authors of this article for further insights and guidance > link.