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New transfer pricing documentation obligations for transactions with tax havens

2021-02-24

The beginning of the year has brought a number of changes in tax law, including in the field of transfer pricing. The Act of  November 28, 2020 amending the Personal Income Tax Act, the Corporate Income Tax Act, and the act on flat-rate income tax on certain income of natural persons and certain other acts, introduced new documentation obligations regarding transactions with the so-called tax havens. The amendments in question entered into force on January 1, 2021.

According to previous regulations in force until 2020, local tax documentations was prepared by the taxpayers making payments to an entity having its registered office, domicile or administration within a territory or in a country applying harmful tax competition. Thus, until now the obligation only concerned purchase transactions. As a result of the changes, the obligation to prepare a Local File will also extend to transactions as a result of which a taxpayer or a company not being a legal person, receives a payment from an entity from a tax haven The documentation threshold has remained at the level of PLN 100 000 regardless of the transaction type and is to be determined for transaction of uniform nature.

Furthermore, the amendment also extends the obligation to prepare local documentation to transactions where the beneficial owner, within the meaning of the CIT Act, has its domicile, seat or administration in a so-called tax haven. This regulation applies if the amount of transactions in a tax (financial) year exceeds the threshold of PLN 500 000, regardless of whether there are any ties between the parties to the transaction.

At the same time, a presumption has been introduced that the beneficial owner is an entity from a  tax haven if a contractor of the taxpayer on whom an obligation to prepare documentation rests makes settlements in a tax year with an entity having its domicile or administration in a tax haven. Importantly, due diligence is required in determining these circumstances.

In practice, determining a contractor’s beneficial owner and its seat will constitute quite a challenge for taxpayers. Acquiring such information may often prove impossible, particularly in the case of unrelated entities. The very notion of due diligence and the question of its observance also raises considerable doubts.

Another significant amendment is also the implementation of an additional element of the transfer pricing documentation with respect to the above-mentioned transactions, i.e. economic justification. Its purpose is for the taxpayer to explain the economic reasons for entering into a transaction with a given entity. An important part of the justification is a benefit test, which is a description of anticipated economic advantages, including tax benefits.

 

Anna Skórska, Tax Consultant, ATA Tax Sp. z o.o.

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