Poland business transfer pricing forum advises on Covid-19 impact

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

On 13 July, Poland’s Ministry of Finance published for public consultation on its website recommendations on the impact of Covid-19 on transfer pricing. The document presents recommendations from businesses and a consulting body created by the Ministry of Finance (Transfer Pricing Forum) for advisory purposes. 

After public consultation, this document will be treated as an official recommendation for the Ministry of Finance to consider changes into soft and hard law with respect to the impact of Covid-19. The document is not binding for the Ministry of Finance, serving only as recommendations and practitioner input on creating the proper legal environment.

Overview of recommendations

The recommendations cover all relevant issues concerning the impact of Covid-19 on transfer pricing practice in Poland. The document is well-structured, carefully drafted, and sets out clear goals. One of these goals is to implement OECD guidance on the Covid-19 impact on transfer pricing into Polish practice, through creating practical tools for taxpayers doing self-assessments of controlled transactions conditions in Covid-19 circumstances.

Recommendations concerning comparable analyses

Several propositions included in the document might require some changes into law. For example, Polish taxpayers are required to update benchmark studies every three years, unless the circumstances require an update earlier.

According to the recommendations, if there is no Covid-19 impact on the transaction, no update should be required and the data before Covid-19 should be accepted. When data for the Covid-19 period meet comparability criteria, they should not be rejected only because the financial outcome is negative (loss).

Moreover, while preparing a benchmark study for an entity, the core analyses concern identifying whether an already assumed risk materialized due to Covid-19 circumstances. If so, such entity is allowed to incur losses.

Leaning the comparability analyses based on financial data from other economic crises (like financial crises from 2008/2009) is improper. However, such results might be useful on an auxiliary basis. 

The Covid-19 impact on transfer prices should be analyzed in a prospective way with respect to year-end outcome. It is not realistic for tax authorities to expect that taxpayers could gain immediate information on the financial impact of Covid-19 on their financial results. Aligning the conditions of a transaction to Covid-19 circumstances requires in many cases year-end ex-post adjustment, including after filling of the tax return (outcome testing approach in price setting).

The recommendations also state that the whole range of results should be respected (i.e., the excessive results which are outside of interquartile range, like minimum and maximum results) under the condition that the comparable analysis is solid (i.e., with high degree of comparability).

Covid-19 losses and extraordinary costs

The recommendations suggest that the historical record of a controlled transaction is decisive when assessing the actual delineation of a transaction and allocating losses and extraordinary costs due to Covid.

When analyzing changes in a significant risk allocation in a controlled transaction due to Covid-19, one should prove whether such terms would be accepted between third parties and check whether restructuring took place with remuneration required in particular cases. 

With respect to extraordinary costs, according to the recommendations, it is a novelty that performing a function or incurring risk should be treated equally as the right to bear extraordinary costs. This might mean that it is satisfactory to prove performing only a function (no matter where risk is assumed) to gain the right for allocating the extraordinary costs. This condition might be difficult for the government to accept.

If an extraordinary cost cannot be attributed to risks assumed by the investigated party, then such cost should be reallocated particularly by including it in the transfer price.

Entities with limited risk do incur risks (some of them in limited scope). While they should not generate losses in the long term, it is possible to incur losses in the short term. However, if an entity with limited risks does not assume market risk or other specific risks that materialized in the course of Covid-19, then losses incurred due to Covid-19 risk materialization should not be attributed to such entity.

Following the OECD transfer pricing guidelines on Covid-19 impact, the recommendations confirm that Covid-19 is a hazard risk. Thus it should not be treated as a reason for utilizing the force majeure clause.

Government support

According to the recommendations, comparable analyses should consider the government support impact on available data. While government support might be identified as an economically relevant factor, comparable analyses should include an indication and valuation of potential incentives gained through such support and potential allocation of such incentives among stakeholders on the same conditions as would be done by third parties.

The stakeholders of such incentives are the entities where Covid-19 risk materialized. Thus the purpose and kind of support should be analyzed. Receiving government support does not eliminate the risk and should not influence risk allocation.

Government support should be considered in transfer pricing analyses only if it is significant to the value of the controlled transaction, is aligned to the transaction, and was received in one of three forms (wage subsidy, government debt guarantee, short-term liquidity support).

Covid-19 impact on advanced pricing agreements (APA)

Besides general recommendations about the validity of APAs during Covid-19, there are some additional recommendations related to diversification of conditions in agreed APAs for the Covid-19 period as well the rest of the period covered by the APA, diversification of critical assumptions, financial criteria for the same reasons or agreeing the blended profit level for both periods despite testing every year covered by the APA.

Additionally, it is recommended to introduce roll-backs into the APA Program in Poland, as well as return the possibility of converting the unilateral APAs into bi- or multilateral APAs during negotiation.

Documentation burden

Covid-19 per se did not create further documentation requirements beside those already included into the law, i.e., there is no additional obligation to prove whether Covid-19 has, or has not, impacted transfer prices besides general requirements already existing in the law.

Both publicly available data as well as internal data are equally acceptable to prove Covid-19 impact compliance with the arm’s length principle.

Conclusions

The recommendations are a welcome addition to transfer pricing practice in Poland. They include additional explanations, examples and schemes to help taxpayers in self-assessment of their situation and setting prices in the Covid-19 context.

It is expected that the Ministry of Finance will accept the recommendations by issuing generally binding rules and proper changes to the law, as well as some de lege ferenda postulates.

In the meantime, on 26 July, the Ministry of Finance also issued for public consultation a new draft bill called the “Polish Deal” that includes a broad package of tax law amendments. However, the package does not include any changes concerning the Covid-19 impact on transfer pricing. The proposed minor changes concern mostly simplification and clarification to transfer pricing documentation and reporting requirements, introduce some relief in highly formalistic approach in transfer pricing documentation, and delete some double reporting requirements. The changes also strengthen fiscal penalties for non-compliance.  The bill is planned to enter into force on 1 January 2022.