Transfer pricing adjustment

Pursuant to Article 11c of the Corporate Income Tax Act (UCIT), associated enterprises are required to set transaction terms that would be agreed between independent parties. In accordance with this provision, the general principle is that pricing should be determined at the time the transaction is concluded. This procedure is referred to as the ex ante approach or the price-setting approach. However, the Act provides for the possibility of a subsequent price adjustment (corresponding to the procedure set out in the OECD guidelines, referred to as a TP Adjustment), although such an adjustment may only take place once the conditions specified in the Act have been met.

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In order to adjust prices to market levels, it is extremely important that the transfer price is already in line with market rates at the time of the transaction. However, once the period has ended (after the circumstances for that period have been established or the actual revenues and costs have been definitively determined), a review is carried out and the terms are adjusted once again to market levels. The provision in the Act regarding the requirement for transactions to be at market rates at the very moment they are carried out may cause some slight consternation. If the terms were already at market rates from the outset – what is the actual purpose of this adjustment? The main aim here, however, is to prevent situations where a taxpayer deliberately sells their goods or products during the year at so-called cost price (and sometimes even below that), thereby realising no profit. And even if, at the end of the year, they intend to bring the prices applied into line with market conditions, the conditions for applying a TP Adjustment will not be met in this case. If the terms were already non-market at the time the transaction took place, the taxpayer is obliged to make a retrospective adjustment to the terms, i.e. to adjust the specific transactions on the date they occurred.

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An adjustment within the meaning of Article 11e of the UCIT is therefore made if the transfer price set by the taxpayer, despite appropriate procedures having been followed at the time the transaction was concluded (ex ante), does not comply with the arm’s length principle in an ex post assessment, i.e. after the end of the accounting period. It is only then that a final verification is possible. In practice, this means that the taxpayer should, from the outset, have a benchmark or some other form of comparison confirming that the transaction they are carrying out complies with market conditions.

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The key conditions for an ex post adjustment are set out below. Please note – the conjunctions here are very important (!)

 

1. compliance of the transaction with market conditions on an ex ante basis (Article 11e(1) of the UCIT):

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AND

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2. the occurrence of at least one of the two conditions listed below (Article 11e(2) of the UCIT):

a material change in circumstances which has affected the terms agreed during the tax year​

 

OR

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the application of a budgeting-based transfer pricing model, i.e. the costs actually incurred or revenues actually received, which formed the basis for calculating the transfer price, are only known after the end of the period and, in order to ensure compliance with the arm’s length principle, it is necessary to adjust the transfer prices.​

 

With regard to changes in circumstances, the following, amongst others, may be considered significant changes:

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In each individual case, it is necessary to assess whether the event is linked to general economic risk, which may arise from factors such as the nature of the business or the size of the enterprise. Relevant circumstances include ‘extraordinary’ events that are not linked to the general risks of doing business. It is possible that a given event may be extraordinary for one enterprise but not for another.

However, it is quite common to base current calculations on budgeting. This means that where the transfer pricing model is based on a forecast (budget, cost estimate), and ultimately on the revenue actually received and costs actually incurred, the taxpayer is expressly entitled to adjust transfer prices in accordance with Section 11e(2) of the Corporation Tax Act, even if there has been no change in material circumstances.

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It should be borne in mind, however, that in the case of both the first condition (change in circumstances) and the second condition (budgeted prices), the main requirement is compliance with market conditions in the contract ex ante.

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Where prices are set as budgeted prices, it is assumed that, at the time the transaction is concluded, a comparative analysis must be available to confirm compliance with market conditions. It would therefore be unacceptable, for example, to set an ex ante margin at zero per cent or to set a margin that falls outside the interquartile range (or another range – such as a percentile or full range – provided this can be reasonably justified).​

 

Example:

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The company has an ex ante comparative analysis prepared for the period 2022–2023–2024, according to which the IQR (interquartile range) for the operating margin (EBIT) has been determined as follows:

 

Q1 = 1.5 %

Median 4.0 %

Q3 = 6.5 %

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Therefore, provided that, at the time the budget was drawn up, the prices agreed between related parties fell within the interquartile range of 1.5 per cent to 6.5 per cent, the conditions for making a transfer pricing adjustment (TP Adjustment) after the end of the period should be met. Of course, it would be safest if the margin were already close to the median ex ante, but there is no clear legal basis governing this.​

 

The aforementioned Article 11e of the Corporate Income Tax Act also provides for two additional conditions that must be met in order to benefit from a transfer pricing adjustment:

 

• at the time of the price adjustment, the taxpayer holds a statement from the related party or an accounting document confirming that the related party has made a transfer pricing adjustment in the same amount as the taxpayer;

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• there is a legal basis for the exchange of tax information with the country in which the related party has its place of business, registered office or place of management.​

 

It should also be noted that the admissibility of adjustments to budgeted prices after the end of the accounting period was confirmed in the explanatory notes of the Polish Ministry of Finance dated 31 March 2021 and in the binding interpretation of tax regulations 0111-KDIB1-1.4010.207. dated 31 March 2021, as well as in interpretation 0111-KDIB1-1.4010.207.2024.3.BS dated 26 June 2024.

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Furthermore, the tax guidance issued by the Ministry of Finance on 31 March 2021 does not preclude adjustments being made during the year, provided that a final verification takes place after the end of the full accounting period. It is clear that the actual course and circumstances of the conclusion and execution of a controlled transaction, as well as the behaviour of the parties to the transaction, must be taken into account. In principle, however, it is also possible to make quarterly adjustments to the target margin level, provided that the final assessment is carried out for the whole year.

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Situations in which a price adjustment should NOT take place were also highlighted. This primarily refers to the following cases:

 

• setting prices at the time of concluding the transaction in a manner inconsistent with the arm’s length principle

• a change in the scope of the order, e.g. a change in the range of goods ordered

• return of goods

• complaints regarding quality and quantity

• discounts granted upon reaching a specified order volume

• errors and omissions in settlements.

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Adjustments in the cases listed are made in accordance with the general principles. Such adjustments are also retroactive – that is, revenue or costs are adjusted accordingly for the period to which, for example, the error or mistake relates.