Local transfer pricing documentation in view of a tax loss

Initially, the position in the issued interpretations indicated that a tax loss in any source of revenue excludes the possibility of taking advantage of the exemption. A different position was presented by the Director of the National Revenue Information (KIS) in the interpretation of 15 October 2019. He pointed out that the tax loss should cover only income and losses related to the analysed transaction, which is subject to documentation.

The approach presented in the individual interpretation issued by the Director of KIS regarding the obligation to prepare local transfer pricing documentation with respect to a tax loss triggers certain tax consequences.

Consequences for taxpayers without loss

The above interpretation is beneficial for taxpayers who, being a party to a controlled transaction, did not achieve a loss from the source of revenue which the transaction belongs to. Thus, these entities may take advantage of the exemption under Article 11 n point 1 of the CIT Act, and therefore there is no obligation to prepare transfer pricing documentation by the transaction participants. It should be emphasized that the above-mentioned exemption applies only to domestic entities, i.e. those which have their place of residence, headquarters or management on the territory of the Republic of Poland. It also depends on meeting the other 2 conditions resulting from art. 11n point 1 of the CIT Act. Consequently, the taxpayer avoids additional costs and is not obliged to meet a number of requirements resulting from Article 11 of the CIT Act.

The taxpayer in the analysed situation shall also not be obliged to submit a statement to the relevant tax office concerning the preparation of transfer pricing documentation, which under the amended regulations is mandatory for entities obligated to prepare local documentation. It is also important to note that the entities benefiting from the exemption will not, as a consequence of the adopted position of the tax authorities, expose themselves to tax and penal sanctions, which may threaten the taxpayer in case of failure to comply with documentation obligations. However, it should be born in mind that in this situation, despite taking advantage of the exemption, domestic entities will still be obliged to submit TP-R information to the relevant tax office.

The necessity to prepare TP documentation in case of a tax loss

The interpretation of the KIS Director is unfavourable for a significant part of entities (domestic affiliates) reporting a loss in the source of revenue including a transaction subject to the obligation to prepare transfer pricing documentation under Article 11k of the CIT Act. However, the adopted approach unifies the position of the tax authorities with respect to the issue of defining a tax loss.

However, this position of KIS does not exempt related parties from the obligation to determine transfer prices according to the arm's length principle (this requirement is independent of the documentation obligation). Taxpayers should therefore remember to maintain the marketability and transparency of transactions with related parties, also with regard to transactions exempt from documentation under the regulations in force since 2019. It is also worth pointing out that regardless of the exemptions, the tax authority has the right to demand that transfer pricing documentation be prepared for each transaction if its value is likely to be undervalued.