The Polish Ministry of Finance has published guidelines regarding due diligence in CIT and PIT
On the 5th of March, the Ministry of Finance released a consultation paper concerning the draft “Transfer Pricing Explanations No. 4 – Presumption and due diligence referred to in Article 11o, paragraph 1b of the CIT Act and Article 23za, paragraph 1b of the PIT Act”. Consultation on this document will last until the 20th of April this year. Most importantly, the explanations apply to all taxpayers, and not only those who have transactions with related entities.
The guidelines may be found here: Guidelines of the MF regarding due diligence in CIT and PIT.
New obligation from 2021
The most significant changes to the tax regulation in Poland that are effective from 2021 are usually considered to be: taxation of limited partnerships, real estate companies, Estonian CIT, tax strategies, SLIM VAT. Nevertheless, at the same time another regulations were passed imposing very far-reaching obligations on all CIT and PIT taxpayers to verify their counterparties and document their transactions – not only with related parties.
We are talking about a new obligation to exercise due diligence in verifying counterparties to determine whether these counterparties make settlements with entities established in so called tax havens. In addition, the legislator has introduced a presumption that if the counterparty is making any settlements with entities located in a tax haven, the beneficial owner is located in a tax haven.
Thus, exercising due diligence for the verification of counterparties is no longer the domain of VAT. An analogous concept, i.e., shifting the burden of proof onto the taxpayer, has also been applied in CIT and PIT. However, in this case, the purpose of the verification is to establish the existence of settlements with tax haven-based entities and the question of the beneficial owner, and not to fight the so-called tax carousels, as it is the case in VAT. Inspiration in this respect can be clearly seen in these guidelines, which refer to the CJEU case law on due diligence in VAT, despite the fact that CIT and PIT are not subject to harmonisation within the EU.
Exemplary application and consequences
In practice, the new regulations require all CIT and PIT taxpayers to verify all their domestic and foreign counterparties (related and unrelated) with whom they carry out any transactions with a total value exceeding PLN 500,000 per year.
According to the regulations and the guidelines of the Minister of Finance, determination that our counterparty has any settlements with a tax haven results in the obligation to:
- draw up local transfer pricing documentation,
- report such transaction in the TPR-C or TPR-P form to the Head of National Tax Administration,
- submit a statement on the preparation of such documentation and examination of the market value of prices by the head of the entity to the tax office.
The last resort may be to rebut the statutory presumption that the beneficial owner is not located in the tax haven, which in practice may be an extremely difficult task, because the taxpayer may not have any knowledge about settlements between their counterparty and third parties (tax haven entities).
The example below, was taken from the Ministry of Finance’s guidelines, and shows how this process may look in practice.
In a given tax year a Polish resident A purchases a product from a non-resident B. The non-resident B makes royalty payments to the tax haven entity C. B has given a statement to A that it has settlements with a tax haven entity. The presumption dictates that the beneficial owner is a tax haven entity. As a consequence, an obligation arises for resident A to prepare the local tax documentation unless the opposite is proved (rebuttal of the presumption), i.e., the taxpayer proves that despite the existence of settlements with the tax haven entity, the tax haven entity is not the beneficial owner within the meaning of Article 4a point 29 of the CIT Act.
SSW actively participates in the preparation of recommendations for the Minister of Finance within the scope of the discussed regulations, which will also be discussed at the April Transfer Pricing Forum. We invite all of you who are interested in cooperation in this area.
How to prepare
Due to high fines provided for in the Fiscal Penal Code on declarations of completeness of transfer pricing documentation and TPR information, it is recommended to take appropriate actions today to:
- implement procedures for counterparty and transaction verification (including obtaining statements, monitoring counterparties, introducing appropriate contractual clauses, collecting arguments concerning rebuttal of the presumption of actual ownership),
- preparation of the transaction documentation and reporting process (including preparation of transfer pricing documentation in line with the new extended requirements, reporting in TPR).