Tax authority controls on transfer pricing
Tax audits, a concept that causes anxiety for many taxpayers. Especially those who are not prepared for them.
According to the outcome of a report by the Supreme Chamber of Control (The correctness and effectiveness of control, tax and enforcement proceedings of the National Fiscal Administration bodies), the tax administration is intensifying the number of control proceedings aimed at identifying errors or verifying those identified by taxpayers, including in the area of transfer pricing. The risk of identifying irregularities in the course of controls is increasing and is related to the increasing specialisation of the tax administration bodies and the careful selection of entities that are the object of control activities. Therefore, the number of audits concluded with the so-called tax domination is increasing. The tax authorities also have a wider range of analytical tools at their disposal and the information thus obtained is of higher quality.
Due to the level of complexity of tax issues and the number of reporting obligations, the tax authorities have a wide range of possible areas to audit. In the case of transfer pricing, the issues audited by the tax authorities include:
Verification that the transfer price of transactions between related parties has been set at market level (arm’s length principle).
Completion of documentation obligations when certain conditions are met, i.e. preparation of transfer pricing information (TPR), local transfer pricing documentation and group transfer pricing documentation so-called Master File.
The correctness of settlements of the so-called transfer pricing adjustment.
Taxpayers, in order to protect their interests in relation to potential transfer pricing audits, should focus primarily on two types of actions that will limit negative consequences, viz:
1) ensuring the correct fulfilment of transfer pricing obligations, even before an audit is initiated,
2) coordination with regard to the ongoing audit once the audit has already started, in terms of, inter alia, the appointment of a proxy and communication with the auditors.
Activities before the control
In the case of transactions with related parties, taxpayers should pay particular attention to whether transfer pricing obligations arise. A proper analysis of the business conducted allows already at the stage of planning subsequent activities to determine the market conditions of the transaction in the form of a comparative analysis and to identify future documentation obligations or, finally, to take advantage of possible exemptions in this respect.
It is also good practice to have a so-called transfer pricing policy when the number and value of transactions performed between related parties is significant. Although this type of document is not required by Polish law, the policy allows for a systematic verification of transfer prices, identifying the transactions performed, thus limiting the risk resulting from possible tax additions as a result of tax audits.
Actions during an audit
In the process of a tax audit or customs and tax inspection, the collection and provision of evidence by the taxpayer, as well as the submission of appropriate requests for evidence, is crucial. This is no different in the field of audits that deal with transfer pricing.
Taxpayers must remember that actively cooperating with the tax authority and presenting their own evidence and explanations from the beginning of the audit is a strategy that can significantly affect the final outcome.
Proper documentation and presentation of evidence is key to defending the taxpayer’s interests. Failure to do so and leaving the initiative entirely to the tax authorities will never be an action that serves his interests.
Therefore, in the case of the initiation of an audit, it is worth appointing a professional attorney who will be able to set the strategy of the proceedings, prepare the right arguments for the explanations or, finally, ensure proper communication with the auditors.
The activities presented are only a general outline of the actions that taxpayers can adopt in connection with audits relating in particular to transfer pricing. The services offered by our experts focus not only on the proper conduct of tax and administrative court proceedings in the event of a tax audit, but also allow for the determination of appropriate prices in transactions between related parties before the audit is initiated.