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2022 / 04 / 13

When accounting for and reporting CIT/PIT for 2021, special attention must be paid to a new obligation regarding “indirect tax-haven transactions” referred to in Art. 11o sections 1a and 1b of the CIT Act and Art. 23za sections 1a and 1b of the PIT Act.

What requirements apply to 2021 transactions?

The obligation to prepare tax documentation applies not only to transactions concluded with related parties but also transactions with counterparties established in countries which use harmful tax competition (“tax havens”), even if those counterparties are unrelated.

Pursuant to the regulations in force since 2021, taxpayers are obliged to prepare tax documentation not only for transactions made directly with entities established in “tax havens” but also in situations where the “beneficial owner” of the amounts paid by them (not necessarily a direct supplier) is established in a “tax haven”.

Moreover, the provisions of the CIT/PIT Acts directly provide that a Polish entity is required to presume that the “beneficial owner” may be established in a “tax haven” if the other party to a transaction makes settlements with such an entity.

In practice, this means that the Polish tax authorities may expect preparation of a local transfer pricing file for transactions concluded by Polish entities with unrelated suppliers, if those suppliers purchase goods from entities established in “tax havens”. It is the Polish entity that bears the burden of proof that the “beneficial owner” is not an entity from a “tax haven”.

The materiality threshold applies to a homogeneous cost transaction exceeding the value of PLN 500 thousand with a single supplier. The value of a homogeneous transaction is established for a given tax year (it does not apply to a one-off value in an invoice exceeding PLN 500 thousand). It needs to be emphasized that the obligation applies to transactions concluded not only with related suppliers but also with unrelated ones.

Why is it important?

The absence of tax documentation and failure to fulfil the reporting obligations relating to transfer prices (filing the TPR and statement on preparation of the documentation) is an infringement of the tax regulations and is subject to sanctions imposed by tax authorities (including personal sanctions for the responsible individuals under the fiscal crime code). The risk for Polish entities is mitigated if due diligence has been exercised when verifying the potential obligation to prepare the local file.

In this situation, it is in the interest of Polish companies to verify whether their suppliers are the “beneficial owners” of the amounts paid to them and whether they account for cost transactions concluded with entities established in tax havens amounting to min. PLN 500 thousand in total (if so – whether the payments are related to a transaction made with a Polish company).

The verification helps identify transactions which should be included in the local file, and confirm whether such an obligation exists with respect to other transactions, while also mitigating the risk of the Polish entity in the event of a potential dispute with tax authorities, as it indicates that due diligence was exercised in the process of verification of the obligations to document transactions.

Presented below is an example of an incomplete procedure for “indirect tax-haven transactions” and the consequences of applying it:

– the scope of works – verification of the basis for the presumption (i.e. verification whether an entity from the Netherlands [NL] makes purchases from tax havens to an amount of min. PLN 500 thousand in total) with no attempt to verify whether the Dutch (NL) entity is the beneficial owner;

– conclusions: the beneficial owner is not from a tax haven.

– the impact for the obligations: the local file was not prepared, no TPR, no statement and no verification of the obligation to file the ORD-U form.

Presented below is an example of a different approach to the procedure for “indirect tax-haven transactions” with a sample outcome:

– the scope of works: commencement of the process of verification whether a Dutch (NL) entity is the beneficial owner;

– conclusions: the beneficial owner is a tax-haven entity (an entity from HK).

– impact for the obligations: the local file was prepared, and so was the TPR and the statement, and the obligation to file the ORD-U form was verified.

The taxpayer commenced the process of (made an attempt at) verification of the beneficial owner and accurately identified the owner of the payments, which will help him fulfil the reporting obligations. Additionally, the taxpayer gains an argument that the scheme proposed in the draft tax explanations of the Ministry of Finance of December 2021 was used (December explanations). Hopefully, the final version of the December explanations will include an additional simplification for taxpayers and some issues will be made more precise. For example, the December explanations refer to the possibility to rebut the presumption, but the flowchart does not include it. As rebutting the presumption may lead to limitation of some of the analyzed obligations, the tax-haven procedure should take it into account.

According to the December explanations: “The presented scope of activities and diligence should not be transposed to tax regulations other than Art. 11o (1a) and (1b) of the CIT Act, in particular the withholding tax regulations. However, it cannot be ruled out that some aspects of the due diligence practices developed with respect to the withholding tax will be incorporated in the due diligence practice when verifying the obligation to document under Art. 11o (1a) and (1b) of the CIT Act (e.g. the necessity for the taxpayer to identify the beneficial owner).

How can we help?

We observe various practical approaches to the issue of tax havens and some of them are incomplete. The transfer pricing team of Andersen may support you with:

– developing and implementation of the relevant procedure intended to:

verify in practice the obligation to prepare the documentation for “indirect tax-haven transactions” (including avoidance of implementation of an incomplete procedure) and
provide formal security against tax authority’s potential claims that no due diligence was exercised.

– the process of verifying the counterparty status (e.g. preparation of templates for the required statements and organizing the process of their collection or verification of selected counterparties and their relations in the global databases);

– preparation of the local file and related statements, transfer pricing reports, as well as verification of the obligation to file the ORD-U form – if such an obligation exists.

With our experience, if the works are commenced promptly, we can guarantee that the statutory deadlines for preparation of the local file, TPR and statement for 2021 will be complied with.

Should you have any questions, please contact us.

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