Inevitability of Fiscal Penalties for Arm’s Length Principle Infringement
Fundamental Changes To Fiscal Sanctions for Transfer Pricing
Until the end of 2018 fiscal sanctions for transfer pricing were imposed if a taxpayer failed to submit the transfer pricing documentation during a tax audit. When tax authorities reassessed income from a transaction, and the taxpayer failed to submit the relevant transfer pricing documentation, the additionally assessed income was subject to a penalty tax rate of 50%.
These fiscal penal regulations caused many problems also to tax authorities. A decision establishing the penalty rate had a shorter statute of limitations (3 years only), which in practice often prevented the imposition of sanctions, taking into account the time interval between the inspected year and the issuance of the decision. In addition, a construction of these regulations based on the failure to submit the transfer pricing documentation caused doubts in interpretation. One of the doubtful issues was the point in time until which the authority should “wait” for the documentation to be submitted by a taxpayer and how filing of an incomplete documentation should be treated. These issues were reflected in the audit practice of tax authorities, who imposed a 50% penal tax rate barely a dozen of times in the period 2011-2018, while the total number of successful transfer pricing (and tax optimization) audits exceeded five hundred in 2017 and 2018 only.
The fundamental changes to fiscal sanctions for infringing the arm’s length principle introduced in January 2019 are much more than just a response to the problems encountered by tax inspectors so far. From the justification to these regulatory changes one can read: “(…) in practice, the current sanction instruments (…) are imposed on taxpayers only if they do not have the transfer pricing documentation, (…) In other words, there is no legal basis to impose a sanction on a taxpayer who has prepared the complete transfer pricing documentation and still infringes the arm’s length price principle and underestimates the taxation basis”.
Under the new provisions of 2019, when tax authorities reassess transfer prices and increase the taxpayer’s income from this reassessment, they impose additional tax liability. The additional tax liability rate is 10% of the additionally assessed income / decreased tax loss. The tax rate may be doubled (20%) if the reassessed income for additional tax liability / decreased tax loss exceeds PLN 15 million (20% tax rate is calculated on income / loss exceeding the PLN 15m), or if the taxpayer fails to submit transfer pricing documentation (unless the TP documentation is supplemented within 14 days). The tax rate may even be tripled (30%) if the two mentioned conditions are jointly met.
The “inevitability” of the new fiscal sanctions result from them being independent from transfer pricing documentation compliance obligations. A taxpayer who files the complete TP documentation will only be protected against the double or triple tax rate of the additional tax liability, assuming the TP documentation is complete. Secondly, the additional tax liability is inevitable because it must be paid regardless of the ‘tax shield’ from the taxpayer’s tax loss . Thirdly, the statute of limitations for the additional tax liability is equal to the standard CIT statute of limitations.
New Personal Fiscal Penalties in Transfer Pricing
The ideas of “prevention” and “tightening up of the tax system”, which are stressed in the justification to the changes in transfer pricing regulations effective from January 2019, are also reflected in the amendments to the Penal Fiscal Code by introducing special regulations referring to the transfer pricing compliance.
The introduction of a new complex transfer pricing reporting (TP-R) obligation is reflected in the Penal Fiscal Code. Specifically, whoever fails to submit a transfer pricing report (TP R) to the Head of the National Revenue Administration, or submits the report past the deadline, or submits an untrue report shall be subject to a fine of up to 720 daily rates (in practice up to PLN 21,6 million).
The key “inevitable” sanctions are introduced in 2019 into the Penal Fiscal Code for incompliance of intragroup transactions with the arm’s length principle. When a taxpayer submits to the tax office a declaration confirming that the transfer pricing documentation is prepared, the taxpayer (or the entity manager(s) as defined in the Accounting Act, e.g. board members) also declares that their related party transactions are arm’s length. At the same time, under the Penal Fiscal Code, whoever fails to submit such a declaration, or submits the declaration past the deadline, or declares untrue information therein shall also be subject to a fine of up to 720 daily rates (in practice up to PLN 21,6 million).
See also:
A Report entitled “APA Procedure: a tool for efficient tax risk management in new transfer pricing realities” was prepared by transfer pricing experts from CRIDO. The Report explains all stages of the APA procedure and shares some statistics of the APA procedure, also from other countries. The Report also summarizes the planned regulations on simplified advanced pricing agreement (sAPA) and the latest statistics regarding transfer pricing audits.
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