The transfer pricing analysis should cover one controlled transaction involving the attribution of income to the foreign permanent establishment(s), rather than several transactions involving the attribution of income or expenses of a certain type by source.
The above position was confirmed by the Director of the National Tax Information in an individual interpretation issued on February 26, 2021 regarding corporate income tax in terms of the obligation to prepare transfer pricing documentation in connection with the allocation of income/loss to a foreign branch of the Company (file no. 0111-KDIB2-1.4010.496.2020.1.AR).
In the facts described above, the applicant is a corporate income tax payer, conducting electrical engineering activities in Poland and Sweden. In connection with the construction or installation work performed in Sweden, or activities related to this work (over a period of more than 12 months), a so-called tax permanent establishment arises – profits earned by the Company in Sweden in connection with the performance of this work should be allocated to the permanent establishment and taxed in Sweden. The Company has analyzed its transfer pricing obligations under the 2015-2019 legislation.
With respect to 2019 and subsequent years – the values of revenues/costs (whichever is higher) applicable to the respective tax establishment operating in Sweden during this period, when added together, exceed the documentation threshold applicable to the Company under Article 11k(2) of the Corporate Income Tax Act, as amended as of January 1, 2019. The Company has assumed that it is appropriate to prepare transfer pricing documentation for a controlled transaction involving the allocation of income (loss) to the Company’s foreign permanent establishment pursuant to Article 11l of the Corporate Income Tax Act, as amended effective January 1, 2019. The Company believes that the transfer pricing analysis accompanying the documentation prepared for 2019 should cover one controlled transaction involving the attribution of income (loss) to the Company’s foreign permanent establishment and should refer to the methodology adopted by the Company for such attribution.
The transfer pricing analysis included in the local transfer pricing documentation should indicate the market nature of the controlled transactions described in the local documentation. The controlled transaction in the case of the Company is the allocation of income (loss) to a foreign permanent establishment, so this analysis should justify the fact that the financial results realized by the Company’s foreign permanent establishments correspond to the financial results that would be achieved by independent entities operating in a comparable manner. The purpose of this analysis should be to prove that the income (loss) allocation methodology adopted by the Company is correct.
Pursuant to Art. 11l and Art. 11k of the Corporate Income Tax Act, the value of a transaction (which should be described within the local documentation and the transfer pricing analysis) is the total value of revenue or costs allocated to the foreign operation, and not the partial values of revenue or costs, which are categorised depending on their source.
Author: Magdalena Świątkiewicz – Tax Consultant