By Dr. Monika Laskowska, Partner, PwC, Poland
Poland’s Ministry of Finance, on 19 June 2019, released an explanatory note addressing transfer pricing comparability analyses. This general binding ruling is applicable to comparability analyses for transactions between related parties conducted until the end of 2018.
The explanatory note addresses the following transfer pricing comparability analyses issues: local comparables, internal comparables, offering data, secret comparables, elimination of comparables, the minimum number of comparables, choice of the proper point in the comparable range, and comparable analyses updates. It also addresses ways to address the lack of comparables.
Local, regional, global transfer pricing comparables
When discussing local comparables, the Polish Ministry of Finance makes direct references to OECD transfer pricing guidelines.
Tthe note includes guidance on the use of comparables from more than one country, such as when regional markets can be identified. These rules are consistent with section 1.112 of the OECD transfer pricing guidelines, 2017.
Whether comparables should be local, regional, or global should be decided on the basis of all comparability factors, including proper identification of a suitable market.
The Polish ministry explains that while Polish market comparables are not obligatory in a benchmark study, they shouldn’t be artificially excluded or omitted in the selection process.
Poland transfer pricing comparables selection
The Polish finance ministry highlights that selection of proper transfer pricing comparables requires an individual approach to comparability analyses, taking into consideration the quantity and quality of comparables.
The ministry also confirmes that use of secret comparables is not allowed in Poland. The ministry highlights that data from entities with ongoing losses or extraordinary profitability are not comparable with entities that have a limited risk profile.
Individual analyses should determine the proper number of comparables used, with priority given to quality and then quantity in the benchmark study, the ministry states.
Further, when setting the proper transfer price based on a benchmark study, every record in the benchmark must be consistent with the arm’s length principle.
Interquartile range
When comparables have a lower level of comparability, it is feasible to use interquartile range.
All comparables from the range should be of equal value. If significant discrepancies in the range are identified, then the median or arithmetic average or weighted average should be vital. It is not indicated which of those should be prioritized, however.
Inadequate comparables
If due diligence in comparable analyses does not bring satisfactory results, taxpayers can prepare an arm’s length compliance description of the transaction.
In such case, the taxpayer must prove that controlled transaction conditions meet arm’s length principle in another way than by use of comparables.
This should be aligned with commercial rationality. Conditions of the controlled transaction should be as established between independent entities. The taxpayer may include expert opinion, market analyses, proper application of valuation technics, and options realistically available.
Associated company data
What is new is that the explanatory note states that if it is not possible to prepare the compliance description, taxpayers can use data from associated companies.
Such an approach is not fully aligned with the OECD transfer pricing guidelines. Also, the language given to justify this approach is confusing and internally inconsistent. It is not clear what the Polish Ministry of Finance means when justifying this discrepancy.
The ministry states that taxpayers should prove that data of the controlled transaction between associated companies are not affected by associated companies (as an example, if there is a formal association even though no transaction with the associated company).
While this might be difficult to prove, such an approach might be easily be challenged by the tax authorities and trigger a dispute.
The explanatory note will be expanded in the future if important issues arise.
–Dr. Monika Laskowska is a partner at PwC Poland.
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