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Year-end adjustment of transfer prices

by Monika Laskowska

19 January 2023

According to Polish CIT law, there are limitations for the possibility of including transfer pricing (TP) adjustments into tax-deductible expenses.

Generally, taxpayers should set transfer prices at arm's length on an ongoing basis throughout the tax year. Adjustment of transfer prices to match the arm's length principle is always treated as a TP adjustment (Article 11e Polish CIT Act) which is not a separate transaction, but only a part of a controlled transaction. Such an adjustment is allowed retrospectively only if certain conditions are met. Tax-deductible expenses generated as part of a controlled transaction can be increased ex post only through a TP adjustment.

Tax-deductibility of transfer pricing adjustment– requirements

To include such an adjustment in tax-deductible expenses, the following conditions must be met:

conditions agreed for the controlled transaction should be compliant with those agreed between independent enterprises,
there has been a significant change in relevant circumstances affecting the terms and conditions set in course of the tax year or the taxpayer has become aware of the actual costs incurred during the year that are the basis for setting the transfer price and an adjustment is required to adjust the transfer price using the arm's length principle,
at the time of the adjustment, the taxpayer received a statement or other document confirming that as part of the controlled transaction the associated enterprise made an adjustment in the same amount as the taxpayer,
there is legal basis for exchange of information between countries of controlled companies.

Relevant circumstances

An important condition for the tax-deductibility of a year-end adjustment is item 2, i.e. relevant circumstances. The concept of relevant circumstances is not defined in the statute, thus the Ministry of Finance (MoF) issued "soft law" explanation to clarify the meaning of that concept.

Relevant circumstances may include:

relevant changes in market prices of raw materials,
significant fluctuations in currency exchange rates,
changes in interest rates,
significant changes in market supply and demand caused by factors beyond taxpayer's control.

Ongoing transfer pricing adjustments

As part of transfer pricing adjustments, adjustments may also be made to align budgeted transfer prices representing tax-deductible expenses with their actual value. All other adjustments should be made as and when needed, including changes to the TP methodology. According to MoF, as-needed TP adjustments may include necessary price list changes made on a monthly, quarterly or annual basis during the year.

The same conditions should be applied when decreasing taxable revenues. For transfer pricing adjustments resulting in a decrease in tax-deductible expenses or an increase in taxable revenues, it is necessary to meet the conditions listed in items 1-2.

Taxpayers are therefore obliged to set transfer prices on an ongoing basis and compliance with the arm's length principle must be assessed on ex ante basis. Tax-deductible TP adjustments are allowed only in cases when properly set transfer prices deviate from arm's length prices due to objective market conditions resulting in a departure from the arm's length price.

Transfer pricing adjustment as a result of a tax inspection

A transfer pricing adjustment should not include adjustments made as a result of a tax inspection in the following situations:

TP adjustment is made in Poland as a result of a tax inspection aimed at verifying transfer pricing (primary adjustment),
TP adjustment in Poland is made in connection with an adjustment of a controlled transaction made by tax inspectors in another country (corresponding adjustment) for the purposes of eliminating double taxation – then the adjustment is allowed only under mutual agreement procedure (MAP) or under unilateral procedure (regulated by separate domestic law and by international tax law),
TP adjustments are made following secondary adjustments required by domestic law in certain other countries (secondary adjustment).

The above TP adjustments can only be made by competent authorities under specific procedures. Thus, it is strictly forbidden to make such adjustments on your own.

Detailed information on how to correctly make adjustments under mutual agreement procedure or under unilateral procedure is available at the Ministry of Finance website.

If you have any questions about transfer pricing adjustments, please contact us.

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