In one of the rulings, the Director of the National Revenue Information Service (DKIS) referred to the obligation to prepare a Local File, in the event of concluding a service agreement with long-term implementation and settlement in subsequent year(s). What should be done with such a "hibernated" settlement from a TP perspective according to DKIS?

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What was the case about?

Based on a Project Development Agreement (PDA) concluded in year X-1, the Service Provider provides the so-called project development services to the SPVs. According to the facts presented, the planned remuneration for the services exceeds the documentation threshold of PLN 2 million, however, at the time of concluding the PDA, it is not possible to clearly determine the transaction value. This is influenced by, among other things, the fact that the calculation of remuneration for services depends on one of the parameters of the installation owned by the SPVs, which may change during the performance of services.

The Company concluded several PDA agreements with SPVs in previous years (X-1), however -- as expected -- the services will only be completed in subsequent years (X, X+1), depending on the actual progress of work. Thus, the service implementation is long-term in nature, and the invoice is issued only when the project is completed. The question concerned determining whether the obligation to prepare a Local File arose at the moment of concluding the PDA (X-1) or only in subsequent years (X, X+1 -- the moment of tax settlement).

What is the taxpayer’s view, and what is the DKIS’ view...?

The Company argued for the absence of an obligation to prepare a Local File in the year of concluding the agreement, citing purposive and practical considerations. In its view, the obligation will arise only when the service is performed and remuneration is received, i.e., in relation to the settlement between the Parties and the tax recognition of the transaction. At that time, the value of the transaction – which is not certain in the course of services performance – will also be known. According to the Company, only at the moment of tax effects that are subject to verification "the tax authority receives complete information about the concluded transaction, while fulfilling the purpose of the provisions regarding the obligation to document transfer prices".

The authority deemed the Company's position incorrect, indicating that the documentation obligation arises already in the year of concluding the agreement. DKIS emphasized in its ruling that the transaction value should be determined (1) based on invoices, (2) if invoices have not been issued -- based on the agreement or other documents, and if this is not possible (3) based on payments made / received. Thus, when:

  • the agreement has been concluded for the provision of services for a period longer than one tax year,
  • no invoices were issued in the tax year of concluding the agreement, as the service was not performed,
  • the service is not settled on a periodic basis,
  • the payment will be made after the service is performed,
  • the contract value exceeds PLN 2 million (which was indicated in the factual state as the planned value of remuneration),

then the value of the controlled transaction should be determined in the year of concluding the agreement based on remuneration resulting from the agreement or other documents.

Issues worth remembering

Based on the commented tax ruling, it is evident that tax authorities want to have knowledge about the widest possible spectrum of a taxpayer's activities in relationships with related entities, including transactions where no settlements have yet occurred between these entities. The occurrence of a tax effect is not relevant; what is important is that the contract value exceeds the statutory threshold. So how to determine the contract value? In this regard, the authority does not provide a clear answer, but in the analyzed case, it would probably be appropriate to refer to the cost budget and the expected capacity of the installations (one of the parameters of installations owned by SPVs), which would allow estimating the service value already at the moment of concluding the agreement.

It is worth noting that this type of service transaction will not be visible in the current flows between the Parties (only the costs of services are shown on an ongoing basis in the Service Provider’s tax books). However, such a transaction should be remembered when preparing local transfer pricing documentation, so that it is not inadvertently overlooked when analyzing the documentation obligations. A similar situation occurs, among others, with the so-called capital transactions, which, despite not generating direct cash flows, are subject to transfer pricing regulations. In addition to the doubts regarding transfer pricing regulations from a Polish perspective, it is also worth bearing in mind that – with regard to VAT – such a subject is not that obvious due to very specific criteria concerning, for example, invoicing or transaction recognition.

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