Global Tax Alert (News and views from Transfer Pricing) | 19 June 2013

Polish tax authorities increase transfer pricing scrutiny of business restructurings

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Currently, restructurings appear to be a top priority on the agenda of Poland’s Ministry of Finance, which is planning to amend the Polish Transfer Pricing Decree to cover business restructurings. This may be partially driven by the OECD BEPS (Base Erosion and Profit Shifting) report that is expected to trigger active countermeasures against the abuse of transfer pricing policies and tax driven restructurings on an international level.

The increasing interest of the Polish legislators also led to the placement of restructuring first on the agenda for the tax / transfer pricing control for 2013 in the instructions given by the Polish Ministry of Finance to local tax offices. The already increasing number of transfer pricing audits and court rulings on restructurings confirm this trend.

Recent developments in transfer pricing (TP) regulations

Recently, the Ministry of Finance published draft amendments to the TP Decree.1

TP Decree amendment

New provisions will implement the OECD Guidelines on business restructuring locally. Consequently, they will address business restructuring transactions in a specific chapter of the regulations. The amendment introduces a local definition of business restructuring (transfer of economically significant functions or assets or risks between related entities) that covers not only firm-wide supply chain changes, but also less extensive restructurings related to shifts of risks among group companies.

More detailed regulations on business restructuring will require the tax authorities to focus during a tax control on:

  • Substance: verification whether the restructuring actually took place as described in the documentation (i.e., whether, in reality, intra-group relations follow the designed model in terms of functions, assets and risks allocation) and are not artificial, described on paper only;
  • Rationality: examination of whether the expected benefits from restructuring have actually been achieved, in particular, taking into account the perspective of a local company that (in most cases) experiences a drop in profitability, taking into account realistically available options to both parties; and
  • Exit payment: verification of whether a so-called exit payment should be made to the local company as a result of the restructuring and valuation of such payment.

By these means, new regulations will bring the discussion on business restructurings (that has been taking place mainly under APA procedures so far) to a new level, i.e., to an operational discussion with tax auditors under tax control proceedings.

Tax control priorities

Along with other factors already mentioned, the increased interest of the tax controllers is driven by the instructions given by the Polish Ministry of Finance to tax control authorities for 2013. These instructions present the main focus areas for tax control in a given fiscal year. The Ministry of Finance’s instructions for 2013 place restructurings on the top of the agenda for tax control. This is the first year the Polish tax authorities have taken such specific steps regarding transfer pricing aspects of business restructurings.

Since the Ministry of Finance’s instructions determine directions of actual tax audits, it may reasonably be expected that the number of business restructuring controls will increase during 2013.

How to effectively manage the risk related to restructuring audits

The risk of tax / transfer pricing control cannot be eliminated. The more substantial the business change, the greater the risk. Taxpayers should not assume the tax authorities will not challenge the restructuring, because of the complexity of potential issues and analysis.

Therefore, in order to successfully defend the transfer pricing policy, companies should proactively prepare for a potential audit. Actions to be taken prior to the tax audit include:

  • Post implementation verification, in particular examination of how the new business model is followed in practice and whether business restructuring assumptions are sustainable;
  • Preparation for the defense strategy for the company’s position from the ex-post perspective, taking into account any potential issues or deviations from restructuring assumptions that had not originally been considered; and
  • Up-front preparation of answers and justification for the most challenging questions typically asked by auditors.

The aim of the above analysis is to demonstrate that the business restructuring was economically justified from the perspective of the local company and arm’s length. The local perspective, and the local benefit test, is critical in the case of a local audit.

Endnote

1. Decree of the Ministry of Finance as of 10 September 2009 on the methods and procedures for determining taxable income by estimation of prices and the methods and procedures of eliminating double taxation in case of a transfer pricing adjustment (Dz. U. z 2009 r. nr 160, poz. 1268).

For additional information with respect to this Alert, please contact the following:

EY Sp. z o.o., Warsaw
  • Aneta Błażejewska-Gaczyńska
    +48 22 557 8996
    aneta.blazejewska-gaczynska@pl.ey.com

EYG no. CM3528