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Adjustment of Transfer Pricing
Taxpayers who make transactions with related parties have probably encountered
the problem of transfer pricing adjustments more than once. This issue raises many
questions. When should taxpayers make such an adjustment, what conditions must
be met, is it an obligation or a right of the taxpayer? We will try to answer these and
other questions in the following post.
What is transfer pricing adjustment?
The provision of Article 11e of the CIT Law / Article 23q of the PIT Law indicates that
a taxpayer may adjust transfer pricing by changing the amount of revenue earned or
deductible expenses incurred.
In other words, a transfer pricing adjustment consists of adjusting the taxpayer's
earned income or tax expenses in the tax year to bring the transfer prices, set in a
related party transaction, in line with market conditions.
It is worth pointing out that the Minister of Finance has issued tax clarifications on
transfer pricing adjustments dated March 31, 2021. These clarifications indicate that
transfer pricing adjustment means correcting (adapting) transfer prices. The transfer
price is the price, salary, financial result, financial indicator or otherwise specified
financial result of the conditions established or imposed between related parties as a
result of the existing relationship between them.
Conditions for transfer pricing adjustments
The regulations indicate that transfer pricing adjustments can be applied if all of the
following conditions are met:
1. in controlled transactions carried out by the taxpayer during the tax year, the
terms and conditions that unrelated parties would establish have been set;
2. there has been a change in significant circumstances affecting the terms and
conditions established during the tax year, or the actual costs incurred or
revenues received that are the base for calculating the transfer price are
known, and ensuring their compliance with the terms and conditions that
would have been established by unrelated parties requires a transfer pricing
adjustment;
3. at the time of the adjustment, the taxpayer has a statement from a related
party or accounting evidence confirming that the related party made a transfer
pricing adjustment in the same amount as the taxpayer;
4. there is a legal ground for the exchange of tax information with the state in
which the related party (indicated above in point 3) has its residence,
headquarters or board of directors.
In the context of the above, in the case of the TP adjustment, it is very important that
it can only be applied if related parties have agreed on the terms of the controlled
transaction in accordance with the arm's length principle, i.e. on terms comparable to
those that independent parties would have agreed among themselves.
In practice, it comes down to the fact that entities operating in capital groups prepare
a special document called transfer pricing policy. This document establishes in
advance, so to speak, the amount of transfer prices applied between related parties
in a given transaction(s) occurring in the group. The transfer pricing policy is
preceded by the preparation of a comparative analysis, which indicates what
prices/conditions are applied in similar market transactions between independent
parties.
During the year, taxpayers should determine and apply transfer prices in accordance
with the arm's length principle. After the end of the year, the taxpayer shall make a
TP adjustment only if, despite the fact that he acted reasonably and diligently to
comply with the arm's length principle when entering into the transaction, it ultimately
turned out that the transfer price applied is not arm's length.
Retroactive or ongoing adjustment
A transfer pricing adjustment is always a retrospective adjustment, i.e. it refers to
past related party settlements.
The general rules for adjusting income and deductible expenses in the current
accounting period or retroactively depending on what caused the adjustment
(accounting error, obvious mistake or other reason) do not apply here.
What is not a transfer pricing adjustment
The important thing is that not every circumstance of price adjustment constitutes a
transfer pricing adjustment.
The Minister of Finance, in his tax explanations, has indicated cases when transfer
pricing adjustments are not possible, but revenue/deductible expenses should be
adjusted on general rules. In addition, of course, to the fact that taxpayers during the
year applied transfer prices inconsistently with the arm's length principle, the
following cases will not be transfer pricing adjustments:
1. Accounting error or other obvious mistake - if the adjustment of income
(expense) is due to an accounting error or other obvious mistake, the
taxpayer should make the adjustment retroactively, that is, in the period to
which the error (obvious mistake) relates.
2. Transfer pricing adjustments cannot be applied in cases such as giving or
receiving a discount, rebate, or making a change in the scope of the benefit.
3. It is also not a transfer pricing adjustment if during the year the transfer price
is determined based on plans or estimated costs, and then the taxpayer
usually receives a final settlement after the end of the year, when the actual
costs incurred by the related party are already known. Such an adjustment
should be made under the general rules. The Minister of Finance thereby
confirmed in clarifications the position of tax authorities taken in individual
interpretations.
When to make a TP adjustment
Essentially, transfer pricing adjustments are made for a given tax year, after its
termination. However, it is also possible to adjust TP during the tax year, after the
end of a given accounting period, such as a month or quarter.
In addition, the transfer pricing adjustment should be made before the submission of
the annual return for the year and should cover a period of no more than a tax year.
However, it is also possible to make the adjustment after the submission of the
annual return.
In summary, transfer pricing adjustment is a difficult issue. The key is to determine
whether in a given situation a taxpayer should make a transfer pricing adjustment or
an adjustment under the general rules. It is worth applying for an individual
interpretation in this regard or consulting your accountant and tax advisor.
The author of the article is a tax consultant - Aleksandra Trocinska.
Translation- Dominik Olejniczak
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