On 7 April 2020 Director of National Treasury Information issued an individual interpretation (ref. 0114-KDIP2-2.4010.47.2020.1.SJ) regarding transfer pricing adjustment. The applicant’s doubts concerned the determination whether making an income adjustment constitutes a transfer price adjustment within the meaning of Article 11e of the Corporate Income Tax Act.
The application presented two models of making the income adjustment, the first of which included making adjustments by the central entity from the group, according to which this entity is obliged to ensure that an appropriate mark-up is achieved not only in relation to sales made to the country of its registered office, but also in relation to sales made by entities from the group to other selected distribution companies. The second model, due to the requirements of some countries where the distribution companies are located, income adjustments may also be made directly between related parties and a given distribution company, i.e. without the participation of the central entity. This means that in the absence of an appropriate profit margin on transactions with a given distribution company, it is then possible to make a profitability adjustment by either increasing the mark-up or decreasing the mark-up directly with the distribution company.
In both presented models, the profitability adjustments will lead either to additional revenue for the group’s entities or to a reduction in already declared tax revenues. The adjustments in question result from the group’s transfer pricing policy and constitute its implementation and are made pursuant to art. 11e and art. 12 par. 3aa of the CIT Act, according to which when determining the amount of revenue, account is taken of:
- a transfer pricing adjustment reducing revenue, aimed at meeting the requirements referred to in Article licenses, through the correct application of the methods referred to in Article 11d (1) to (3), meeting the conditions referred to in Article 11e (1) to (5);
- a transfer pricing adjustment increasing revenue in order to meet the requirements referred to in Article 11c, by correct application of the methods referred to in Article 11d(1) to (3), fulfilling the conditions referred to in Article 11e(1) and (2).
However, pursuant to Article 11e of the CIT Act, a taxpayer may adjust the transfer prices by changing the amount of obtained income or incurred tax deductible costs if the following conditions are met jointly:
- in controlled transactions carried out by the taxpayer during the tax year, conditions were established which would be set by unrelated entities;
- there has been a change in material circumstances affecting the conditions established during the tax year, or the actual costs incurred or revenues obtained are known, which are the basis for calculating the transfer price, and to ensure their compliance with the conditions which would have been established by unrelated entities, a transfer price adjustment is required;
- at the time of the adjustment, the taxpayer has a statement from the related entity that it has adjusted the transfer prices in the same amount as the taxpayer;
- the affiliated entity, referred to in item 3, has a place of residence, seat or management on the territory of the Republic of Poland or in a country or on the territory with which the Republic of Poland concluded a double taxation convention and there is a legal basis for the exchange of tax information with this country;
- the taxpayer will confirm the transfer pricing adjustment in the annual tax return for the tax year to which the adjustment relates.
The Director of the National Revenue Information Office confirmed that making the income adjustment both according to the first and second model constitutes a transfer price adjustment within the meaning of 11e of the Corporate Income Tax Act.
Let us recall that the main purpose of transfer pricing adjustments is to bring about such a level of revenue generated in transactions with related entities as resulted from the previously developed algorithms, confirmed by comparative analyses as to their compliance with the market level.
An adjustment in which a taxpayer itself adjusts for tax purposes the originally determined transfer price to a level that it believes to be in line with the arms length principle is a compensatory adjustment.
Author: Izabela Lipka – Tax consultant