Comparative transfer pricing analyses

A comparative analysis is a series of steps aimed at verifying whether the terms of transactions with related parties have been determined in accordance with the arm’s length principle, understood as the market price principle. In accordance with the OECD Guidelines (point 3.57, Chapter III), the use of measures of central tendency (quartiles or percentiles) helps to narrow the range of observations and enhance the reliability of the analysis. In practice, the interquartile range (IQR) is more commonly used as a measure of free-market values. Quartiles divide a given set into four parts of equal size in terms of the number of observations. The IQR covers 50 per cent of all values in the range, which fall between the first and third quartiles. If the result of the analysis falls within the interquartile range, the terms are deemed to meet the arm’s length criteria.

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This obligation applies primarily to taxpayers who are businesses carrying out transactions with related parties. The purpose of the comparative analysis is to demonstrate that the terms of transactions with related parties have been determined in accordance with the arm’s length principle, which is understood as the market price principle.

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This obligation applies to taxpayers carrying out transactions with related parties. Transactions must be documented where their value exceeded the following thresholds in the tax year:

 

• PLN 10 million for transactions involving goods

• PLN 2 million for transactions involving services

• PLN 10 million for financial transactions.

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From 2021, micro and small enterprises are no longer required to prepare a comparative analysis.

 

The comparative analysis is based on data contained in the companies’ financial statements. The analysis should include, amongst other things:

financial data in a format that allows for editing and verification of calculations; a justification for the choice of the financial ratio used in the analysis; a calculation of the ratio(s); and an indication of the point or range determined as a result of this analysis, together with a description of the statistical measures (in practice, this is most often the interquartile range).

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Income taxes are not harmonised – unlike, for example, VAT for taxpayers in European Union countries and, to some extent, excise duty. However, international organisations such as the OECD, the G20 and the European Commission recognised that income tax regulations were failing to keep pace with the rapidly changing economic environment. New technologies, the digital economy, the generation of ever-greater added value by intangible services, and the relocation of traditional manufacturing to countries with lower wage levels – these have certainly been, and continue to be, challenges that must be addressed not only at the macroeconomic level, but also in terms of establishing the legal framework for the operation of economic entities. Tax issues are a key aspect of how these entities operate.

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As early as 2010, the OECD published the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, in which Chapter III dealt with the analysis of the comparability of controlled transactions between associated enterprises. It should be noted, however, that the OECD Guidelines do not constitute a source of generally binding law, although, as has often been pointed out in case law and legal doctrine, they should serve as a so-called set of best practices to be followed by both taxpayers and tax authorities. It is important to note, however, that between 2010 and 2016, Polish income tax legislation did not yet contain any provisions that would directly implement the recommendations set out in the OECD Guidelines. Such implementation only took place as a result of the BEPS project. This project (Base Erosion and Profit Shifting) arose from work resumed by the OECD and the G20, in collaboration with the European Commission, in 2015 – as a set of 15 actions providing guidance on how to prevent the erosion of the tax base and the shifting of profits.

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​The scope of the BEPS actions is quite diverse. From the perspective of comparative analyses, which fall within the field of transfer pricing, Actions 8–10 and, in particular, Action 13 of the BEPS deserve special attention:

 

• Actions 8–10: Transfer pricing (aligning transfer pricing outcomes with value creation)

• Action 13 – Transfer pricing documentation and country-by-country reporting

 

The required scope of the comparative analysis is set out in Annex II to Chapter V of BEPS Action 13.

In accordance with Annex II, the comparative analysis should include, in particular:

 

a list and description of selected comparable arm’s-length transactions (internal or external) and information on the relevant financial indicators for independent enterprises on which the transfer pricing analysis is based, including a description of the methodology used to identify comparable information and the sources of such information.

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Poland has implemented the BEPS project recommendations into its income tax legislation. The provisions, introduced at the start of 2017 and subsequently amended at the start of 2019, established rules for preparing transfer pricing documentation that are entirely different from those to which taxpayers were accustomed. First and foremost – in line with the BEPS project’s recommendations – an obligation to prepare comparative analyses was introduced. This analysis, also known as a benchmarking analysis, is a set of activities carried out to compare the terms of a transaction conducted by the entity under review with its associated parties to the terms of a comparable transaction carried out by independent entities operating in the same industry. The comparison may focus on nominal values – such as unit prices of products or hourly rates – but far more often it centres on the company’s performance, expressed in the form of financial ratios. This is driven by the increasingly frequent use of the net transaction margin method as a means of verifying the terms of transactions between related parties.

 

Ever since the regulations on comparative analyses came into force, experts have pointed out that the provisions of the Corporate Income Tax Act and the Personal Income Tax Act, as well as the provisions of the implementing regulations, did not contain detailed guidance on how the required analysis should be carried out.

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The Polish regulations on benchmarking, in force as at 25 August 2023, are as follows:
Article 11q(1)(3)( A of the Corporate Income Tax Act (i.e. Journal of Laws of 2022, item 2587)/ respectively: Article 23zc(1)(3)(a) of the Personal Income Tax Act (Journal of Laws of 2022, item 2647).

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Local transfer pricing documentation shall contain the following elements​ - a transfer pricing analysis, including: an analysis of data relating to unrelated entities or transactions entered into with unrelated entities or between unrelated entities deemed comparable to the terms and conditions established in controlled transactions, hereinafter referred to as the “comparative analysis” § 2(3)(c) of the Regulation on transfer pricing documentation in relation to corporation tax (Journal of Laws of 2021, item 1195)/ § 2(3)(c) of the Regulation on transfer pricing documentation for personal income tax purposes (Journal of Laws of 2021, item 923), as applicable.​

The local transfer pricing documentation includes a description of the comparative analysis (…) containing:

• a description of the process of searching for and selecting data, and an indication of the sources of that data, together with a justification for the selection of search criteria and the relevant assumptions adopted for the purposes of carrying out this analysis,

• comparative data presented in an electronic format that allows for editing, grouping, sorting and verification of the calculations performed, including financial indicators accepted and rejected as part of this analysis, together with a description thereof, relating to transactions entered into by an entity associated with an unrelated entity (internal data) or between unrelated entities (external data), where available,

• a justification for the reasons for including data from multiple years or from a single year in this analysis,

• a justification for the selection of the financial ratio adopted for this analysis, if one was used,

• a description of the comparability adjustment, together with a justification, if one has been applied,

• an indication of the point or range determined as a result of this analysis, together with a description of the statistical measures, if any have been applied.

 

An additional difficulty for taxpayers is that the aforementioned legal acts refer to statistical terms (statistical measures, ranges of analysis results) without explaining which measures are meant, nor do they provide legal definitions of these terms or, where applicable, cross-references to other legal acts. For those without specialist training in economics, mathematics or statistics, this could have posed an insurmountable barrier. In reality, when the legislator referred to ‘statistical measures’, it certainly meant measures of central tendency, which is in line with the recommendations set out in paragraph 3.57 of Chapter III of the OECD Guidelines. Regrettably, however, it must be noted that the Corporation Tax Act and the Income Tax Act are not sufficiently precise in this regard.