Failure to provide proper transfer pricing data can be costly
In all the excitement of recent weeks it seems that the perennial favorite, more new transfer pricing regulations, has not made it into the column, an omission that I know has disappointed those of you who live for that kind of thing. Fortunately, the regulations take effect Jan. 1, 2001 so there's still time to prepare, which is just as well as this will require some work, and not doing the work means getting into big trouble with the tax inspectors.
As always, thanks are due to my friend and transfer pricing expert Iwona Georgijew-Ciaston, who did all the work on this column and left me the arduous task of getting my photo next to the title.
In case you've been in a coma for the last five years and missed every single column on this subject, transfer pricing is the price charged by one company to buy or sell goods or services in a transaction with a related party. In the view of tax authorities, transfer pricing can be used by the scheming and devious to magically ensure that the profit seems to be made in the lowest tax jurisdictions.
Now I will try and set aside my obvious cynicism as to why, if Poland's corporate income tax rate is currently 30% and is scheduled to fall to 22% over the next few years, anyone should try and get profit taxed somewhere else.
Most countries where "real" work is performed are likely to have tax rates far in excess of 22%. But the principles are important nevertheless, and in some cases, if transactions are with countries with far lower tax rates or special tax regimes, then there will still be scope for the skillful to manipulate.
The new transfer pricing documentation requirements will affect transactions performed after Dec. 31, 2000 and transactions performed based on contracts concluded after Dec. 31, 2000. Under the new regulations, Polish taxpayers will be obliged, upon request of the tax authorities, to present documentation covering the following areas:
Explanation of functions fulfilled by each party to the transaction (taking into consideration the assets employed and risk taken by each party).
Estimation of all expected costs connected with the transaction as well as explanation of terms and form of payment.
Indication of the profit calculation and pricing method used.
Description of business strategy and other activities undertaken within such strategy where this strategy influenced the value of the transaction, (e.g. a seasonal price reduction aimed at gaining share of a given market).
Indication of other factors influencing the value of the transaction.
Additionally, in the case of the provision of intangibles (e.g. services) the Polish recipient is obliged to present documentation indicating benefits expected from the receipt of such provisions.
The transfer pricing documentation requirements apply to transactions with the aggregate value in a given tax year exceeding:
o100,000 where the transactional value is not greater that 20% of the Polish taxpayer's share capital.
o30,000 in the case of transactions related to the provision of intangibles or services.
o50,000 in all other cases.
The relevant documentation should be presented to the tax authorities within seven days of receipt of their request. Failure to deliver the required documentation in a situation where the tax authorities assess the taxpayer's income at a higher level (or, if loss, at lower) than that declared in the annual tax return results in a 50% penalty tax levied on the difference.
This means that if you don't have the paperwork available within seven days, you are subjected to an additional 50% tax rate on whatever profit they assess you as having hidden by playing with your transfer price. This will be particularly expensive, especially if your price is genuine but you just couldn't prove it in the required time.
We have said it often here and will continue to say it, but the best defense strategy for transfer pricing is to have tons and tons of paper supporting the price you are charging. The additional requirement now is to have it here, and to have it available quickly. Whether this is still enough to get head offices to focus on the need to take this obligation seriously is another matter the days of saying that they know the price is O.K. and they don't need to justify it in a "small" market like Poland are increasingly looking numbered.
Peter Ferrigno is a partner in the Warsaw office of Arthur Andersen. Technical input to this week's column was provided by Iwona Georgijew-Ciaston, a tax manager specializing in transfer pricing.
