Poland APA statistics reveal alarming trends

By Dr. Monika Laskowska, Center of Tax Analyses and Studies, Warsaw School of Economics

Poland’s National Tax Office has published statistics for its advance pricing agreement (APA) program, updated for 31 December 2020.

It should be highlighted that in 2020, because of the COVID-19 perturbations, the Polish APA team was required to shift to an on-line style of work. The team managed this change very fluently and was available for applicants throughout the entire year. They were very active with respect to collaboration and cooperation with other countries’ competent authorities.

As a result of this effort, there is a slight growth in the number of completed APAs. In 2020, the number of final APAs was 18, including 11 unilateral APAs and as many as seven bilateral APAs, the best record since launching the program in 2006.

In comparison, in 2019, there were 15 APA decisions: 13 were unilateral, one bilateral, and one a renewal of a multilateral agreement.

Ten years waiting for a Polish APA

On the other hand, the total number of pending cases is now 429, which means that some applicants may be waiting for APA for more than ten years unless radical changes are introduced to the program soon.

There has been a visible accrual in the number of new APA applications since 2018 when there were 98. In 2019 there were 192, and in 2020, another 50 applications. In comparison with previous years,  in 2017, there were 12 applications, while in 2016, only 6.

Game blocker

The apparent reason for this unreported interest in Poland’s APA program was the introduction in 2019 to Polish tax law of a very peculiar provision for associated companies. This new law limited deductibility for royalty payments and intangible services payments.

The new provision left a slightly open door for full deductibility under the condition of receiving a positive APA regarding the transaction. As the limits for deductibility were set extremely low, most companies with business models involving indicated payments were forced to apply for APA.

According to statistics, the average time to complete a unilateral APA in Poland is 12 months; for bilateral APA s it is 31 months. But it should be noted that these statistics are based, on average, on 14 years of the APA program’s existence in Poland. This means that from year-to-year these statistics will change drastically.

It needs to be said that most companies entering into the APA program never were audited from a transfer pricing perspective.

That’s why every application requires from the APA team a meticulous assessment of what is presented by the taxpayer in the APA process

Commentators’ requests for a simplified approach to the Polish APA program reveal an absolute misunderstanding of this program’s conditions.

Inaccessible APA program

Besides the long waiting period for an APA, there are other unfortunate impacts of the present situation.

The APA program was created to provide an easy way for associated companies seeking tax certainty in complex and sophisticated cases.

The APA team consists of the most advanced transfer pricing specialists in the Polish tax authority, ready to discuss complicated cases in an ex-ante situation.

Even so, the government’s introduction of the abovementioned provisions forced a significant number of companies to seek a transfer pricing agreement only to save their deductibility right in a timely manner (escaping from an unavoidable MAP procedure).

The majority of these companies are certain of their transfer pricing model and arm’s length compliance and are ready to prove it in the course of a tax audit.

While the reason for the introduction of the deductibility provision was the immense amount of profits distributed before tax by associated companies (through royalties and service payments), it is still unclear to many transfer pricing practitioners why the APA program was chosen instead of a  tax audit.

Now we have a situation where, on account of COVID-19 and the growing demand for advance discussions with tax authorities, the APA program has become entirely inaccessible for its original purpose. Moreover, nothing is proposed to resolve this crisis.