Poland transfer pricing laws under review to strengthen system against tax evasive behavior

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

Poland’s Ministry of Finance has been participating since November in a project coordinated by the European Commission to reform the Polish transfer pricing regulations. The project is planned to take around two years.

The project, titled “Strengthening the transfer pricing legal system against tax evasive behavior,” is part of the European Union’s “Technical Support Instrument” program, which is a continuation of the structural reform support program managed by the Directorate-General Reform Department in the European Commission.

Scope of the project 

The project aims to analyze and assess the legal rules in Poland relating to transfer pricing. The project is supported by an impressive number of experts from the OECD, European Commission, and tax authorities from various countries, including the UK, Germany, the Netherlands, Sweden, and the US. It is expected that the consultation should result in an assessment of the Polish transfer pricing rules with substantive suggestions for changes to the domestic law.

The Ministry of Finance expects to launch broad analyses of the digital reporting system for transfer pricing risk assessment that was recently introduced in Poland for the purpose of enhancing the effectiveness of the system. Thus, the first step of the project is planned to involve expert analyses of some specific transfer pricing issues that will be provided through workshops based on case studies. This will also likely decrease the professional transfer pricing capacity of the Polish tax auditors.

Additionally, the Ministry of Finance is seeking an exchange of views on best practices with tax authorities in different countries, including digital tools, to improve analyses and potential adjustments relating to cross-border transactions of multinational enterprises.

Conclusions

The project is part of the European Union program for supporting member countries in the development and introduction of reforms that improve economic growth and social inclusivity. It is widely expected that it will include reviewing the significant changes to the transfer pricing rules adopted in recent years. These changes have been controversial in many circumstances.

While there was a significant increase in the transfer pricing compliance burden, there are some regulations that are not aligned with international standards and result in double taxation for multinational enterprises. Some of these instances of double taxation are impossible to resolve, even through the international mutual agreement procedure, like the impossibility of year-end adjustments lowering tax liabilities in Poland.

Additionally, the tax law includes some special measures limiting the deductibility of costs from passive intragroup transfers. For example, newly introduced provisions limit the deductibility of costs determined to be a “hidden dividend”. The costs can be considered a “hidden dividend” if the level of the cost depends on the taxpayer’s profit (like some royalty payments, costs of goods sold if profit split method is the most appropriate method to set the price) or if a rationally acting taxpayer would not incur such costs or would incur such costs in lower amounts. These provisions have no reservations for taxpayers aligned with transfer pricing rules.