New obligations in transfer pricing from 2021 related to tax havens, or how to understand due diligence in transfer pricing

Everyone wants to end up in a paradise, but let's hope it is not a tax haven.

Article from transfer pricing series: New obligations in transfer pricing from 2021 related to tax havens, or how to understand due diligence in transfer pricing. 

               We are all used to the fact that the area of transfer pricing has become the apple of the Ministry's eye in recent years. The number of regulatory changes in this area of taxation in recent years is incredible. The dust has not yet settled after a comprehensive exchange of whole chapters of the income tax acts PIT and CIT concerning transfer pricing and the legislator introduces new obligations in this area for taxpayers.

Transfer pricing is an area of income taxes. In a situation where two related entities, e.g. a parent company abroad and a daughter company in Poland, carry out a transaction between them, e.g. sell goods or render services, the price or remuneration for these services should be determined on market terms. The market nature of such transactions is subject to examination by tax authorities during tax audits. Management boards of companies, in which such transactions are made, if their value in a given tax year exceeds statutory limits, min. limit of PLN 2 million. The management boards of companies which carry out such transactions when their value in a given tax year exceeds the statutory limits, i.e. the limit of PLN 2 million, are required to submit a statement, under pain of penal-fiscal liability, that the transfer prices applied in such transactions between related parties were market-based.

So far the obligation to prepare transfer pricing documentation covered not only related parties but also those who purchase goods or services from entities with their registered office or management board in so-called tax havens, even if such entities were not related to the purchaser of goods or services.

Will the purchase of coffee in Poland, for a company, from an entity with its registered office in Honk Kong make our contractors obliged to prepare transfer pricing documentation for transactions with us?

Will they want to continue to cooperate with us in such case?

It seems that such situation may occur if we do not show our business partners that our actual owner is not located in tax haven country.

Since 2021 the legislator decided to additionally fight against the outflow of capital to tax havens with the hands of entrepreneurs by imposing on them additional documentation obligations.

The changes, which came into force as of January 2021, concern art. 11o section 1a of the CIT act and 23za section 1a of the PIT act, respectively. Pursuant to these changes, the obligation to document for the purposes of transfer pricing applies not only to transactions with entities from tax havens, but also to transactions above PLN 500 thousand with entities unrelated to our counterparties, whose actual owner has its registered office in a tax haven.

From the perspective of an entrepreneur – taxpayer according to the new regulations it is presumed that the real owner of our contracting party is seated in a tax haven when our contracting party makes a transaction during the year with an entity from a tax haven. What is more, according to the regulations, while establishing the circumstances whether our contractor cooperated with the entity from the tax haven, we have to apply due diligence, otherwise we bear tax and penal-fiscal liability.

How to protect yourself from the effects of the new regulations?

The concept of "due diligence" has been introduced to the transfer pricing regulations for the first time. This means that as taxpayers entrepreneurs are obliged to examine contractors, with whom the turnover during the year exceeded 500 thousand PLN. Did our contractor in such a situation cooperate during the year with an entity with its seat in a tax haven?

If so, and the value of transactions with that counterparty during the year exceeded PLN 500 thousand, we are obliged to prepare transfer pricing documentation.

Thus, as of 2021, the documentation obligation applies not only to related parties, but also to transactions between unrelated parties when one of them cooperates with an entity from a tax haven.

The legislator did not foresee any possibility of "forcing" our counterparty to provide us with an answer: Did he cooperate during the year with an entity based in a tax haven.

The key is to exercise due diligence in verifying the contractor. Therefore, we recommend that companies prepare and implement a procedure for counterparty verification for transfer pricing purposes in order to demonstrate due diligence and so that Board members are not held liable for potential criminal tax liability if transfer pricing documentation is not prepared for a transaction with a counterparty that later turned out to have cooperated with a tax haven entity.

Legal and tax support:

               As a law firm that also specializes in tax law, we have extensive experience both in preparing transfer pricing documentation, including Local File, Master File and comparative analysis and in representing clients before the tax authorities. We support our clients in determining the market value of transfer prices and the proper completion of TP-R forms and CBC-R reports.

As part of the protection of our clients we have prepared a cover package for the proper fulfillment of obligations under the new legislation.

We prepared and implemented for our Clients

– due diligence procedures concerning the verification of contractors in terms of their cooperation with entities from tax havens,

– Inquiry and statement templates for the Clients' counterparties,

– documentation forms for specific transactions between unrelated entities, in case it turned out that our Clients' counterparties cooperated with entities from tax havens.

We encourage you to minimize the tax risks arising from this year's change in the transfer pricing regulations in order to conduct your business safely.