Regulations on transfer pricing documentation finally published
On 18 September 2017, nearly 12 months after the proposals, the Decrees regarding information to be included by PIT and CIT taxpayers in the prepared tax documentation were published. The Decrees clarify the scope of information which should be presented in the so called local file and master file documentations, implemented by the amendment which has been effective already since the beginning of this year.
Let us remind – in simplification, the obligation to prepare local file covers, among others, those taxpayers whose revenues or costs in the year preceding the tax year exceeded the equivalent of EUR 2 million, effecting transactions with related parties, having a significant impact on their income, and the basic materiality “threshold” is determined at a level of EUR 50 thousand whereas master file will be prepared by those entities whose revenues or costs will exceed EUR 20 million. At the same time the legislator, having regard to the difficulty of the topic, placed in the Decrees a glossary of used terms, explaining, among others, how to understand the terms such as functional analysis and functional profile, value added chain and significant value added chain, or even characteristic features of goods. For example, as part of the functional analysis, the taxpayer should include a description of functions, assets employed, risks assumed, known from the provisions applicable to date, although, as a total novelty, the taxpayer should describe the scope of exercising control over risks and the possession of financial capacities to incur such risks. In practice, it means that also information about concluded insurance contracts must be disclosed in the documentation.
Local file and master file
The Decrees discuss in detail the scope of data to be included both in local file and in master file.
As regards local file documentation, the requirements to which in our opinion special attention should be paid include the necessity to show financial information on both the value of transactions arising from invoices as well as information concerning received or made payments connected with transactions or events. The taxpayer will be also required to provide detailed identification data of the related parties. Among many data disclosed within master file, the taxpayer will, among others, have to show the group organisational structure in form of a chart, describe the transfer pricing policy applied by the group or describe in detail the objects and extent of the activities carried on by the group (even with description of selected geographical markets), as well as to disclose data about intercompany financing. Master file documentation is to include also detailed data about intangible assets in the group, including the strategy or concluded agreements.
It is evident from the PIT and CIT Acts that the legislator has envisaged the necessity to include the benchmarking analysis in the documentation primarily for those taxpayers preparing local file whose revenues or costs have exceeded EUR 10 million. Pursuant to the adopted Decrees, the analysis should include, apart from description of parties to the transactions, description of assumptions for the analysis of data made (along with justification of the choice made, having regard to, among others, the features of goods/services, the progress of transactions, including the functional analysis, the terms and conditions of transactions and comparable markets), financial data adopted for comparison purposes and also rejected data, applied adjustments, determined market point or range along with description of statistical measures. It is important that, compared to earlier proposals of the Decrees, the adopted wording orders taxpayers to give reasons for lack of any element of the benchmarking analysis.
The Decrees, although they are relatively detailed, do not clear all interpretation doubts. Practice will show how tax authorities will handle individual elements of tax documentations prepared in accordance with the amended provisions. Because of a more extended scope of documentation, compared to the requirements applicable to date, we suggest that work connected with preparing documentation should not be postponed till the final deadline. A lot of work will be necessary to prepare the documentation, especially if the taxpayer is obligated to prepare both local file with benchmarking analysis and master file.
The Regulations will enter into force 14 days after publication.
Barbara Otrzonsek, Tax Consultant, ATA Finance