Profitability adjustments (upward or downward) made between related parties consisting in the adjustment of the profitability level should not be subject to VAT either as an adjustment of the tax base for the supply of goods or as remuneration for the provision of services for consideration.
This standpoint is confirmed by the individual interpretation of the Director of the National Tax Information dated February 18, 2021. (file no. 0111-KDIB3-1.4012.965.2020.2.KO) and in other individual interpretations.
Pursuant to Art. 5(1)(1) of the VAT Act, supply of goods and services for consideration within the territory of Poland is subject to taxation. Pursuant to Art. 7(1) of the VAT Act, a supply of goods shall be understood as a transfer of the right to dispose of goods as their owner. According to Article 8 section 1 of the VAT Act, a supply of services shall be understood as any service provided to a natural person, legal person or organizational unit without legal personality, which does not constitute a supply of goods within the meaning of Article 7 of the VAT Act. As a rule, supply of goods and provision of services shall be subject to VAT if made against remuneration.
As part of profitability adjustments involving adjustments to profitability levels, there is no transfer of the right to dispose of any goods as owner for which the adjustment could constitute consideration. Such transfer pricing adjustments do not have the character of a supply of goods because they serve only to equalize the level of profit.
The issue of profitability adjustments was also the subject of a report dated April 18, 2018. (VEG no 071 rev. 2) prepared by the European Commission’s VAT Expert Group (VAT Expert Group). According to the Expert Group, transfer pricing adjustments do not lead to a new taxable transaction, nor should they be combined with past transactions. In cases where there are no contractual arrangements which would change the remuneration, even if it is possible to directly link the transfer pricing adjustment to a specific transaction in practice the profitability adjustment should be considered as an event outside the scope of VAT taxation.
Pursuant to Article 106b section 1 of the VAT Act, invoices are evidence documenting sales. Therefore, since transfer pricing adjustments do not constitute activities subject to VAT, there is no need to issue a VAT invoice.
On the other hand, according to the Ministry of Finance Draft “Transfer Pricing Tax Explanations No. 2 – Transfer Pricing Adjustments – October 6, 2020”, “for tax purposes, transfer pricing adjustments may be made, in particular, on the basis of:
1) an accounting note (debit or credit) adjusting collectively the related party’s revenues or costs with respect to a given controlled transaction (without referring to a specific invoice/ note),
2) collective adjusted invoice,
3) an invoice correcting a specific invoice/item from an invoice in a settlement period.
The choice of the type of accounting document should be made individually for a given case, each time based on the given circumstances and facts, as well as taking into account the provisions arising from other legal acts, especially the VAT Act.”
Author: Magdalena Świątkiewicz – Tax Consultant