Following media information number of entrepreneurs started wondering what the transfer price and their documentation, that are so uncomfortable to tax authorities, mean. They are wondering whether it is something that concerns also them, and if yes whether they can just tell the accountant to deal with the matter. Not all business people however, are aware of the risk they are putting on the company and themselves should the issue be disregarded.

 

What should the entrepreneur do not to find themselves in trouble while a fiscal control?

 

First of all, one must know that fiscal policy (not only in Poland) is modified according to processes and changes taking place in global or domestic economy. In times of crisis (and those are still current in Poland) the policy gets harsher and the tax authority tries to seal the tax system, what is justifiable and even praiseworthy. It is also understood that actions taken by fiscal authorities aim at possibly the greatest tax revenue.

 

The provisions concerning obligation to prepare tax documentation and transfer prices are to prevent hidden outflow of profit form business or personal income tax to countries where the taxation system is more favourable, as such outflow results in lower income from CIT and PIT declarations. The "hidden" character of such transfers needs to be underlined as the polish tax law allows only for some kind of such transfers, in a given scope, therefore they are legal. In the mentioned area the provisions (as well as inland revenues) concentrate on polish tax payers associated (in terms of capital or personally) with foreign entities or an individual. Even though gaining foreign business partner and putting their capital in Poland was crucial for polish economy at the beginning of its transformation at present, when the situation improved greatly, foreign affiliations with polish tax payers with are under special control. It is worth mentioning that in case of affiliation of polish entities the value of the same kind of transaction exceeds stipulated threshold, the transactions need to be documented, due to the fact that affiliations resulting in outflow of incomes out of Poland may emerge as the next link in the connections chain.

 

According to the provisions it is assumed that, broadly speaking, a foreign affiliated entity has stronger market position and therefore puts stronger economic pressure on a polish partner, which results in polish party selling goods or services at reduced price or buying some goods or services from foreign partner for inflated price. Particular attention is paid to intangible services and to intangible fixed asset as "correct" pricing of those is difficult, or even impossible.

 

This assumption is however, disputable as not every entrepreneur, whether polish or foreign, acts in bad faith. Even more disputable is the way tax authorities determine hypothetical income which could be acquired should the transactions with affiliate entities be carried out in free-market circumstances. Those activities are discretionary, and the criteria not clear.  But what can we say - the end justifies the means...

 

Preparation of tax documentation for transactions with affiliate entities is the main safeguard for entrepreneurs and that is why the most sensible action is to pay special attention to this task. The scope of information that must be included in tax files exceeds greatly the data that conventional company accountancy has. Therefore prudent entrepreneurs who are wondering if, and in what scope, the issue of transfer prices concerns their company should be aware of the fact that good documentation of transfer prices cannot be prepared by a regular company accountant as a part of the duties.  Neither because of lack of competence, nor due to amount of work but simply because transfer pricing documentation is a complex strategic document, not a reporting one.

 

The accounts must cooperate, if the company falls under the obligation to prepare the transfer pricing documentation, by adjusting the chart of accounts and introducing other instruments that allow for ongoing collection of data and source documents thinking about keeping the transfer pricing documentation. According to the Polish law an entity prepares tax settlement for the whole fiscal year and the results display both the gainful transactions and those that brought loss. Income tax is paid on the profit of yearly activity. In view of the Polish law in documentation of transfer prices the elements that are analysed are results on particular transactions / contracts, which are compared by tax inspection authority to some hypothetical results which arose from estimates. It is a novelty that every entity, which falls under the duty to prepare documentation, needs to be prepared both mentally and organizationally.

 

An absolute benefit for an entrepreneur is preparation and possession of transfer pricing documentation. When a fiscal control starts in a company and the authorities demand submission of such documentation, entrepreneur has only 7 days to fulfil this request. It is a very limited time especially that fiscal controls usually concern at least one of 4 - 5 fiscal years.  Failure to demonstrate transfer pricing documentation in front of a controller contributes to estimation of the income, prepared by controllers, and imposition of a very painful, penal, rate of taxation.

 

Even if a tax payer be able to provide demanded documentation within 7 days controllers do not have to agree with the delivered establishments and calculate another amount of income and income tax (which luckily can be appealed against). Most importantly, in such situation the danger of penal taxation rate does no longer exist.

 

For the above mentioned causes a rational action for an entrepreneur is:

Taking into consideration numerous media reports on dynamic development of the above mentioned course of controlling actions, undertaken by better trained staff of tax inspection authorities, the necessary costs incurred on preparation of professional documentation of transfer prices can bring greater benefits.