Are you wondering what transfer prices are and what obligations are associated with them? What exactly is involved in preparing transfer pricing documentation? All doubts are clarified in the article below.
Basic Concepts in Transfer Pricing
Transfer Price
Documentation obligations are based on the concept of transfer pricing. According to the statutory definition, this means the financial outcome of conditions agreed upon or imposed as a result of existing relationships, including price, remuneration, financial outcome, or financial indicator.
In simpler terms, transfer pricing occurs when transactions between related parties affect their financial results. Transfer price is the impact on this outcome.
Transactions under Transfer Pricing Documentation
Controlled transactions are identified based on the actual behaviours of the parties involved. The economic nature of the transaction criterion determines, for example, that a loan constitutes a controlled transaction, whereas dividend payments do not.
Related Entities
The definition of related entities is directly indicated in the Personal Income Tax Act and the Corporate Income Tax Act. It has its source in international agreements. To speak of related parties, their capital, property, and personal ties (including family ties) must be examined.
Transaction Thresholds in Transfer Pricing Documentation
Not all controlled transactions require the preparation of transfer pricing documentation. First and foremost, this is decided by whether transaction thresholds have been exceeded. Transaction parties are required to have documentation when the following values are exceeded:
- 10,000,000 PLN – for commodity transactions;
- 10,000,000 PLN – for financial transactions;
- 2,000,000 PLN – for service transactions;
- 2,000,000 PLN – for transactions other than those specified in points 1-3.
These thresholds are established separately for each type of transaction and separately for the cost and revenue sides. Separate thresholds apply, for example, for loan transactions and guarantee transactions. Separate verification is also required for the purchase and sale of the same goods.
Transactions exceeding the thresholds may ultimately be exempted from the obligation to prepare transfer pricing documentation. The regulations provide for several cases where such exemption may apply, with the most commonly used being for domestic entities that have not recorded a tax loss.
Documentation also applies to transactions with related or unrelated entities domiciled or managed in a tax haven. The transaction thresholds are then:
- 2,500,000 PLN – for financial transactions;
- 500,000 PLN – for transactions other than financial transactions.
Methods of Calculating Transfer Prices
In the context of calculating transfer prices, it should be understood that determining the transfer price is different from verifying the market level of prices. Related entities are obliged to establish prices at the market level, with complete freedom in determining this price. It can be determined quantitatively, proportionally, or according to an adopted calculation formula. This is irrelevant, provided that the financial result of the transaction is market-based.
The statutory methods of calculating transfer prices are intended to verify whether this condition has been met. Therefore, it is recommended to prepare a comparative analysis with the calculation of the transfer price before the transaction to determine the market value range. However, preparing an analysis determining, for example, the range of the market profit margin does not obligate entities to settle transactions in such a way. It remains possible to determine a fixed remuneration in the contract, as long as it ultimately provides the appropriate market level of profit margin to the relevant entity.
Each of the statutory methods is equal to each other. The method that best suits the particular transaction and market circumstances should be used. Own proprietary calculation methods are also allowed. The condition is that for a given transaction, the application of statutory methods would be inadequate.
Transfer Pricing Information – TPR
Entities that exceed transaction thresholds are required to report controlled transactions in the TPR-P or TPR-C declaration. This obligation also applies to taxpayers benefiting from some exemptions from the obligation to prepare documentation, including those benefiting from exemptions for domestic entities. The deadline for submitting the TPR declaration is by the end of the 11th month after the end of the tax year. For most, this will be the end of November.
If you are unsure whether you have obligations to prepare transfer pricing documentation in your situation, do not wait! Contact specialists and familiarize yourself with our offer!
Paweł Malewski