On 1 August 2019 The Director of National Fiscal Information issued an individual interpretation, ref. 0111-KDIB1-1.4010.215.2019.2.BK, which concerned the determination whether the system of adjustments applied by the Applicant actually constitutes a transfer pricing adjustment within the meaning of Article 11e of the Corporate Income Tax Act in force from 1 January 2019. (hereinafter referred to as ‘ITU’).
The Director of National Fiscal Information stated that pursuant to Article 13 § 2a, Article 14b § 1, Act of 29 August 1997 Tax Ordinance (i.e. Journal of Laws of 2019, item 900, as amended) the position of the Applicant is correct.
The application presented the following event: The Applicant, hereinafter referred to as the Company with its registered office in Poland, belongs to an international group (hereinafter referred to as the “Group”) from the optical sector. The Company provided accounting services within the entire Group (books of accounts, liabilities, fixed assets, etc.). In order to properly calculate the price of the service, the Company divides it into separate sets of activities (e.g. separate accounting of invoices, separate assessment of creditworthiness). Based on the transfer pricing policy within the Group, the unit price includes the mark-up and the cost base.
Remuneration for services rendered to the Company is calculated on the basis of a fixed lump sum fee, fees related to particular processes (price per one process serviced + number of processes), as well as other fees re-invoiced by the Company to the Client. The Company’s remuneration is calculated by estimating the number of processes – necessary due to the impossibility of precise determination of their number, so the monthly remuneration of the Company in the following financial year is based on estimates, in addition, the books are closed a few days after the end of each tax year (the tax year lasts from 1 October to 30 September), which makes it impossible to accurately summarize the number of serviced processes. That is why the Company applies the method of adjusting the volume of services from estimated to actual after analysing the data. Corrections concern only the number of services rendered and not their unit price. However, the intragroup transfer pricing policy allows for adjustments to invoices between Group entities only when payments are less than or greater than 10% of the estimated amount.
The applicant asked whether the system of adjustments is subject to the new provisions of the Corporate Income Tax Act in force since 1 January 2019 with respect to transfer pricing adjustments (Article 11e of the aforementioned Act). In his opinion, adjustments to compensate for the resulting differences are not transfer pricing adjustments within the meaning of the aforementioned article of the Act, which allows for taking into account these adjustments in the settlement periods in which they arose.
In the opinion of the NIS Director, the most important thing is to determine whether the system of adjustments in the Group fits into the legal definition of transfer pricing adjustments. Transfer pricing adjustments occur when the price, financial result or financial index of the Applicant changes. Processed adjustments do not change in any way the prices of the service – which is fixed – but only their number. The system of adjustments also does not affect the financial index of the Group, due to the use of a mark-up in the prices, taking into account the actual market values, which is already included in the estimated prices. Therefore, the adjustment system does not result from relations between the Group’s entities, and therefore transfer pricing adjustments cannot be considered in this situation. Pursuant to the general rule under Art. 12.3 of the CIT Act, if the adjustment is not the result of a calculation error or other obvious error, it affects the revenues generated in the year of its issue. Since the dictionary definitions of “accounting error” and “obvious error” do not reflect the situation presented by the Applicant (an accounting error would be the indication of an incorrect price on the invoice, while an obvious error should be a different error than the accounting error), and the original invoices are issued in accordance with the Group’s policy and do not contain the above errors, corrections to them are only a determination of the actual number of completed processes.
Thus, the Applicant’s position on the legal assessment in its entirety was confirmed by the Director of the National Fiscal Information in his interpretation.
Author: Olga Kamińska – tax assistant