Poland issues guidance on controversial rules requiring additional disclosures for transactions involving tax havens

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

In early March, Poland’s Ministry of Finance launched a public consultation on guidance clarifying new rules that impose due diligence and reporting obligations on taxpayers that conduct business with tax haven entities. Comments are sought by 20 April.

The guidance, an explanatory note, would be legally binding and has attracted plenty of attention from practitioners.

Poland’s approach to entities from tax havens

Poland introduced new rules addressing taxpayers’ relations with tax haven entities that entered into force earlier this year.

The newly introduced provisions require additional documentation from taxpayers that conduct any transaction (directly or indirectly) with any person or entity located in a tax haven.

There is no definition of such transactions, but it is expected that the notion covers all economically recognized relations with such a person or entity.

If the transaction is between associated companies, the transfer pricing regulations’ documentation requirements enter into force with appropriate thresholds.

For other transactions with a tax haven entity or person, the threshold for the imposition of documentation requirements is approximately EUR 22,000. If the transaction is with a beneficial owner located in a tax haven, then the threshold (both for controlled transactions and all others) is EUR 110,000.

The information required in the documentation for transactions with a tax haven entity or person is exactly the same as that for local transfer pricing documentation. In particular, such documentation should include a functional analysis, financial information, and a comparable analysis.

The information required in the documentation for transactions with a tax haven entity or person is exactly the same as that for local transfer pricing documentation. In particular, such documentation should include a functional analysis, financial information, and a comparable analysis.

Considering that such obligations, among others, involve transactions with unrelated parties, this requirement will be difficult to meet. It is also interesting to consider how this sort of information will be verified by the Polish tax authorities, as some tax havens are not covered by the Polish network of tax treaties allowing for the exchange of information.

The essence of presumption of law

In the new regulations, there is a presumption that when conducting a transaction with a party (related or unrelated), the party has a relationship with an entity or person from a tax haven; the transaction is deemed to be conducted with a beneficial owner from a tax haven.  As a result, the documentation and threshold of EUR 110,000 comes into play.

According to the explanatory note, it is possible to challenge this presumption by identifying the proper beneficial owner located in a non-tax haven jurisdiction. However, this exclusion does not appear to be provided for in the underlying law.

Due diligence

The new guidance provides that Polish taxpayers should undertake a due diligence analysis to identify whether it has transacted with a domestic or foreign contractor located in a tax haven.

Through the explanatory note, the Ministry of Finance introduced different levels of due diligence requirements. In the case of controlled transactions, taxpayers are subject to a higher standard to ensure that there is no potential transaction with an entity located in a tax haven.

For transactions with unrelated parties, it is enough to make a written statement, provided by the party, confirming that it has no relations with person or entity located in a tax haven. One statement per fiscal year should be received ex-post after the fiscal year closure.

However, such a statement might be insufficient when the taxpayer knows that the statement could be false. If there are circumstances suggesting to the Polish taxpayer that the statement is incorrect, then further due diligence should be undertaken. It is expected that taxpayers will undertake proper activity to verify the information.

The explanatory note provides examples of information that would benefit from the due diligence exercise. These are transfer pricing documentation (local and master files), financial statements, and professional expertise.

Taxpayer burdens

The new provisions add an immense burden on Polish taxpayers, regardless of whether the transaction is with an associated company or not. The explanatory note confirms the Ministry of Finance’s prerogative to make taxpayers collect information that previously was the tax authorities’ responsibility.

This is the latest example of growing micromanagement by Poland’s Ministry of Finance. In the last few years, not only did the tax authority receive access to worldwide tools to investigate transactions, it has required taxpayers to provide it with significantly more information. This creates compliance burdens, especially because information must sometimes be double or even triple reported for different purposes.

Such taxpayer reporting now includes mandatory disclosure (the Polish obligation is significantly broader than the EU directive), tax strategy, transfer pricing documentation, beneficial owner verification. All of this adds to taxpayers’ costs amid the COVID-19 crisis.