Although the dust has barely settled after the first battle fought by taxpayers with TPR forms prepared for 2019, it is already worth thinking about preparations of the forms for 2020 as the scope of information provided in the new TPR forms for 2020 may turn out to be significantly wider for some entities.

Amendment of TPR regulations

2021 brings further changes in the transfer pricing regulations, although this time the changes are mainly related to the COVID-19 pandemic and documenting transactions with so-called tax havens. The changes also affected TPR reporting. At a time when most taxpayers were finalizing their works on documentation and transfer pricing reporting for 2019, the Ministry of Finance was working on the amendment of TPR regulations. The works resulted in the Regulation of the Minister of Finance, Funds and Regional Policy amending regulations on transfer pricing information in personal income tax and corporate income tax, published in the Journal of Laws on 29 and 30 December 2020. The amended regulations entered into force as of 1 January 2021 and introduced significant changes to transfer pricing reporting for fiscal years starting after 31 December 2019.

Introduced changes will allow the tax authorities to obtain even more information about transactions conducted with related entities or entities located in the so-called tax havens. On the other hand, new regulations adjust TPR reporting to the specific features of controlled transactions and should eliminate some doubts and practical problems that taxpayers had to face during the first clash against TPR forms.

TPR forms will be even more detailed

One of the main changes in the TPR forms is an extended catalogue of controlled transactions which will include (i) transactions related to partnerships, joint venture agreements or agreements of similar nature, and (ii) as many as thirteen new types of controlled transactions related to restructuring, including spin-offs and acquisitions, exchanges of shares, changes in the functional profile, transfers of intangibles or rights to such assets, business divestitures or contributions in kind of an enterprise or a going concern.

Other changes concern reporting of transactions connected with partnerships, joint venture agreements or agreements of a similar nature. In their case, taxpayers will need to fill in additional fields covering such information as the type of share resulting from the agreement, the shareholder's share in the profit / loss / property in liquidation, as well as the value of contributions made by particular partner and jointly by all partners to the agreement. With regard to restructurings it will be necessary to indicate the form of remuneration for the restructuring. The taxpayer should present the above information even for domestic transactions, which are exempted from the obligation to prepare local transfer pricing documentation. In this respect, however, it is questionable whether the regulation is consistent with the CIT Act, which overrides the regulation. According to Article 11t section 4 of the CIT Act, in case of domestic controlled transactions exempted from documentation requirements, the information on transfer prices shall not include the additional information or explanations regarding the data or information contained in the TPR form. The amended regulation classifies the above-mentioned additional fields regarding partnerships / joint venture agreements / similar agreements and restructurings as additional information or explanations regarding data or information contained in the information on transfer prices. Thus, under the CIT Act, such additional data should not be filled in case of domestic transactions that are exempted from documentation requirements.

A surprise for taxpayers may also be a requirement to provide in the new TPR forms information on the transfer pricing adjustments in case of domestic transactions exempted from documentation requirements. In this regard we also have a doubt whether the regulation is consistent with the CIT Act as the information on transfer pricing adjustments is treated in the regulation as additional information or explanations regarding data or information contained in the information on transfer prices, which, under the CIT Act, should not be subject to reporting in case of transactions to which the domestic exemption applies.

The regulation also introduced changes to the reporting of controlled transactions, in which transfer prices are verified using the so-called "another method". With regard to such transactions taxpayers will have to select one of the six valuation techniques or compliance analysis. If the income-based valuation method has been applied, it will be obligatory to indicate more detailed data such as the forecast period and the value of the discount factor. If the compliance analysis was carried out to verify transfer prices, taxpayers should indicate sources of the data used in the analysis.

The new version of the form will also contain an additional field regarding the so-called compensation of benefits. This change allows for inclusion in the TPR form provisions of paragraph 9 section 1 of the Regulation of the Minister of Finance of 21 December 2018 on transfer prices in corporate income tax, which allow for the possibility to offset (i) fewer benefits related to one transaction with more benefits obtained from another transaction or (ii) lower income reported in one year with a higher income reported in a three-year period. In practice, information on compensation of benefits was most often indicated in section F (additional information) for controlled transactions where the remuneration exceeded the range resulting from transfer pricing benchmarking analysis.

The amended regulation also explicitly indicates the obligation to include in the TPR form transactions carried out with entities from the so-called tax havens. In conjunction with new (in force as of this year), quite controversial regulations on transactions with entities from tax havens, the new obligation may cause for some entities increased reporting obligations (however, the extended scope of transactions with entities from tax havens will be reported in TPR form submitted for 2021).

The types of profit split method applied will be further specified in the new version of TPR form. Moreover, it will be possible to show the split of loss incurred. The changes relate also to the presentation of data regarding transactions involving intangible asset - the legislator extended the list of remuneration methods applied, adjusted the types of transfer pricing analyses to characteristics of such transactions, introduced an obligation to indicate comparability adjustments made (if any), as well as an obligation to specify the type of range which was applied in the transfer pricing analysis.

Other changes to the TPR form include the obligation to (i) present the value of a homogeneous transaction broken down by particular counterparties (so far it was required to indicate only the countries of counterparties), (ii) provide the counterparty's identification data in case of loan transactions where safe harbours rules apply, (iii) indicate the value of interest due and accrued in case of financing transactions or, respectively, the value of fee due and charged in transactions related to guarantees (so far it was required to present only the value of interest/fee payments related to such transactions).

There will also be some simplifications

The legislator introduced also several expected updates of the forms, including a brief text description of the controlled transaction (however, a selection of the appropriate transaction code is still required). Moreover, if the comparable uncontrolled price method is applied to verify whether conditions of a transaction comply with the arm’s length principle, it will be possible to indicate that the transfer price was expressed as a percentage fee and to indicate the type of range used in the transfer pricing analysis.

Another good news is the unification of units of numerical data presented for financial transactions. The value of transaction, principal, debt and interest will be rounded to the nearest thousand in the new TPR form, and the level of margin will be presented in percentage points. Moreover, debt values will be presented as at the last day of reporting period, instead of the average value from the beginning and end of the period as it was in the previous form (only for cash pooling transactions, there will be an obligation to present the average value of daily balances). At the same time, it is worth noting that in case of financial transactions it will be necessary to enter percentages with an accuracy of four decimal places, not two, as it was in the recent form. Moreover, there will be two more options to choose in the field regarding the type of interest, i.e. (i) a fixed interest rate subject to changes during the reporting period and (ii) a different method of calculating the interest rate.

The values of other transactions will also be presented in PLN thousand. The explanations to the amended regulation additionally indicate that if the controlled transaction is subject to withholding tax, the value of the transaction constitutes the value before the tax deduction. It also clarifies that the transaction values should be shown after the TP adjustments as well as explains how to present the value of such adjustments.

The extension of the range of financial indicators used to verify transfer prices with the gross resale margin, which was quite often used to verify transfer prices in controlled transactions involving the distribution of goods and was not included in the previous version of the TPR form, should also be assessed positively.

The explanations to the new TPR regulation also address some information from the responses of the Ministry of Finance to the most frequently asked questions to the TPR form. For example, it clarifies that (i) with regard to entities applying IFRS standards in their financial statement or financial reporting standards for micro or small entities, financial ratios should be supplemented with the most similar categories, (ii) a homogeneous transaction partially benefiting from the so-called domestic exemption from documentation requirements should be shown in this part as a separate transaction, (iii) if more than one transfer pricing verification method is used, the method used as basic should be reported, and (iv) if more than one financial indicators is used for the purposes of transfer prices verification, the basic indicator should be provided.

What is next?

Undoubtedly, new TPR regulations will allow the tax authorities to collect additional, more detailed information on the controlled transactions conducted by taxpayers. It is hard to resist the impression that the biggest changes relate to transactions that may be of particular interest of tax authorities soon (restructurings, partnerships / joint venture agreements or transactions for which valuation techniques were used to determine/verify transfer prices). Due to technical limitations of the previous TPR form, some information about transactions that are crucial from the authorities' point of view were not revealed. On the other hand, it is worth appreciating that the amended TPR regulation also constitutes a response to doubts and practical problems that were faced when filling in the preliminary version of the form submitted for 2019.

Hopefully there will be an appropriate update of the TPR form along with the amendments to the regulations. In some cases, the completion of the TPR form was difficult not only due to its construction and limited selection of fields describing controlled transactions / transfer pricing analyses, but also some inaccuracies between the form and the TPR regulation / the explanations of the Ministry of Finance. The new version of the form has not been published yet, but we will inform you as soon as it is.

Regardless of the above, it is worth remembering that the purpose of TPR reporting remains the same, i.e. to select companies for transfer pricing audit. Given that new TPR forms will be prepared for transactions conducted in 2020, we encourage you to start collecting necessary data as soon as possible. Moreover, once the new interactive version of the TPR form is published, we recommend completing the draft version before the annual CIT settlement, in order to react appropriately and avoid corrections of the CIT return.