On January 20, 2022, the Director of the National Tax Inspectorate issued an individual interpretation with ref. no. 0111-KDIB1-3.4010.625.2021.2.MA on determining the possibility of using the exemption from the obligation to prepare transfer pricing documentation for transactions that may benefit from the exemption (Article 11n point 1 of the CIT).
Description of the facts and future situation
In 2020, the Company completed a transaction with a related party. The value of the transaction exceeded the documentation threshold during the financial year. The transaction, completed in 2020, has a tax impact on the income from the source of revenue, which is “other sources of revenue” (i.e., they do not apply to income from capital gains). The Company will conduct transactions with related parties and assume that in 2021 and subsequent tax years. The value of which will exceed the documentation thresholds.
In 2020, the Company and a related entity carried out a transaction with a value exceeding the documentation thresholds met the following conditions to benefit from the exemption from the documentation obligation: they did not use the personal exemption in CIT. They did not benefit from the exemption of income obtained from business activity conducted in the SEZ. The Company assumes that these conditions will be met (both by itself and its related entities) in 2021 and subsequent years.
In 2020, only the Company incurred a tax loss from the source of “income other than from capital gains.” However, the loss was not related to the result per transaction with a related party. The transaction did not incur transaction on this source of revenue – the loss was not related to the concluded transaction).
The Company’s doubts concern the determination of:
- In 2020, the tax loss was incurred by only one of the entities (the Company or a related party). And the loss was not related to the transaction concluded between the entities, i.e., it was not incurred on this source of revenue. The loss was not related to the controlled transaction and was not the result of these transactions, which involve transactions for which the possibility of exemption is analyzed. It is possible to take advantage of the exemption from the obligation to prepare tax documentation for 2020.
- In a situation 2021 and subsequent tax years. Transactions will incur the Company (or a related entity) a tax loss on a source of revenue other than the one to which the transaction for which the obligation to prepare tax documentation is analyzed will be related (i.e., the loss will not be associated with the future trade and will not be the result of a prospective transaction). It will be possible to take advantage of the exemption from the documentation obligation for a tax year.
In the Company’s opinion, he will have the right to exemption from the obligation to prepare tax documentation according to Article 11n point 1 of the CIT for both questions (situations). If the conditions might not be fulfilled using the exemption, it will mean the loss of the opportunity to take advantage of the exemption by the Company.
However, the tax authority indicates that condition for exemption from the transfer pricing obligation(Article 11n point 1c of the CIT). It is deemed to be fulfilled when none of the related parties involved in the controlled transaction has suffered a loss from a source of revenue to which transaction, on the assumption that the other conditions are fulfilled necessary for applying for the national exemption.
No duty to documentation should be determined based on the loss from the source of revenue, which includes the transaction subject to this obligation if the transaction concerns a specific source of income. In that case, whether the taxpayer incurred a loss only from this source should be examined.
In the case of the Company, the occurrence of a loss from the source “other than from capital gains,” i.e., from the same source of revenue that concerns the controlled transaction, causes that the condition relating to the absence of a tax loss has not been (will not be) met. In this situation, it is irrelevant that the concluded transaction did not generate a loss for the Company, i.e., the loss incurred was not related to the completed transaction between related parties. Because the Company incurred a beating from the source of revenue to which the analyzed controlled transaction.
In conclusion, the tax authority considered the positions about the Company to be incorrect.
Author: Marta Kiryczuk – Tax Consultant