New sanctions in transfer pricing scare taxpayers

Changes within transfer pricing, introduced at the beginning of 2019 will help to reduce documentation obligations, but they may also may be lay grounds for the transaction to be deemed executed with disregard to terms that independent parties would have set and be subject to serious sanctions, regardless of preparing documentation.

In accordance with the justification to the legal changes, the regulations fulfill the framework set out by the Polish resort of finance. This framework states that transfer pricing sanctions have a preventive character. The main goal of the regulations is to penalize taxpayers for using non-market mechanizms leading to lowering the tax base.

A new concept for sanctioning non-market behaviour

From 1 January 2019, the sanction of taxing with a 50% rate the amount of assessment resulting from the transaction terms being inconsistent with the arm’s lengt principle has been replaced with a new institution- „additional tax liability”.

In accordance with the new regulations, the tax authority sets out additional tax liability, which can be imposed for example in the case where the tax avoidance clause is applied (GAAR and the so called „small PIT and CIT clause”) and in the case of determinations within the scope of transfer pricing. For a tax liability occuring ia. As a result of determinations within transactions carried out between related parties, the tax will amount to 10% of the sum injustifiably presented or overstated tax loss and not presented or not presented in whole income for taxation.

The legislator also introduces:

  • Doubling the sanction rate (20%), if the basis for defining additional tax liability exceeds 15 mln PLN (in the scope of excess over the amount) or the taxpayer does not present tax documentation and
  • tripling (30%) if the amount exceeds 15 million PLN and the taxpayer does not present tax documentation for a given transaction.

What do the new sanctions mean?

In practice, the new sanctions will mean that regardless of the entrepreneurs tax result in a given year, settlements resulting from transfer pricing will fall under a sanctioned rate from 10% to 30% and be connected to the requirement to pay taxes as an additional tax duty. Importantly, the sanction will also apply in the case of diminishing losses.

It is also worth noting that the new sanction will apply to all transactions between related parties, not only those that fall under the documentation requirements.

The additional obligation will be defined in relation to tax advantages (including transactions completed based on non-market terms) obtained after the act came into force, that is after the 1st of January 2019.

The new framework of the transfer pricing sanctions, corresponding with granting tax authorities tools to reshape the transaction or avoid its consequences significantly raises the substance of risk in transactions completed between related parties.

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