Changes to the Minister of Finance Decree on transfer pricing – part9: Low value adding services – the level of the mark-up

 

The change of 17 June 2013 to the transfer pricing Decree in Poland introduced the notion of „low value adding services”. This term comes from the Report prepared by the EU JTPF – that is Joint Transfer Pricing Forum established by the European Commission. Unlike OECD Guidelines, which are used as reference practically in all the countries of the world, this Report is addressed only to EU member states.

  

The Report has made some conclusions about the level of the mark-up for low value adding services.

 

The Report says, that more important than the level of the mark up, is the proper identification of the cost base for the service. After that, the level of the mark-up can be considered.

 

The report says that there are situations where no mark-up is justified.

 

A typical, observed margin is in the range of 3% to 10%. The most often observed mark-up is 5%.

  

An in-depth analysis of comparability factors and market research may be too exhausting, therefore a simplification is suggested instead: reviewers (taxpayers and tax controllers) may only provide the rationale behind the chosen level of the mark-up and the experience they have, that was used to set this level of the mark-up, eventually they may add some public statistics and cases or data made available by the tax administration.

  

The changes introduced to the Polish transfer pricing Decree are silent about the level of the mark-up. However, the fact that in the Decree they are called low value adding services implies a modest mark-up.

  

Taxpayers, in transactions concluded with other EU entities may use the JTPF Report as reference, but its conclusions are not obligatory.

  

Next week, in our next edition of “Tax Newsletter” , we shall write about the kind of documentation which can be prepared by tax-payers for these low value adding services.

    

Prepared by Tax Advisory Company TCA Advisers Sp.z o.o. , Konstancin-Jeziorna, Warsaw

 

NOTE: This material is prepared for information purposes only – care was taken to make it as simple and clear as possible, so it is not complete nor precise enough to be the basis for any action in practice – therefore, in case you need to resolve your particular situation, please seek professional tax advice. 

 

Changes to the Minister of Finance Decree on transfer pricing – part8: Low value-adding services

 

The change of 17 June 2013 to the transfer pricing Decree in Poland introduced the notion of „low value-adding services”. In the Decree, they are defined as:

 

·         services that have a routine nature,

 

·         support the core activity of the service recipient,

 

·         are generally or easily available,

 

·         do not contribute to adding great value neither to the provider of the services nor to the recipient of the services.

 

Costs related to the provision of these services cover direct and indirect costs, excluding shareholder costs – that is costs that bring benefit only to the shareholder. A catalogue of exemplary shareholder costs is attached to the Decree.

   

In the Decree, there is also a catalogue of examples of low value-adding services; it includes the following services:

   

A.      Information technology services,

 

B.      Human resource services,

 

C.      Marketing services,

 

D.      Legal services,

 

E.       Accounting and admin services,

 

F.       Technical services, including the transfer of technical knowledge,

 

G.     Quality control,

 

H.      Other, for instance, services on strategy and development of a companies.

  

The level of Mark-up on these services and the special documentation for these services (so called description) we shall summarize in the next issue of our Newsletter, next week.

   

Prepared by Tax Advisory Company TCA Advisers Sp.z o.o. , Konstancin-Jeziorna, Warsaw

 

NOTE: This material is prepared for information purposes only – care was taken to make it as simple and clear as possible, so it is not complete nor precise enough to the basis for any action in practice – therefore, in case you need to resolve your particular situation, please seek professional tax advice. 

   

Changes of 17 June 2013 introduced to the Minister of Finance Decree on transfer pricing – part6: Restructurings of supply chains

 

The OECD Guidelines on Transfer Pricing indicate that in case of business restructurings the functions, including risks and assets should be analyzed before and after the restructurings.

 

For example: before the restructurings a full function manufacturer was selling goods to a related full function distributor. After the restructuring, the distributor is converted into a limited risk distributor or a commissionaire or an agent of some sort.

  

In order to determine an arm’s length compensation for the restructured entity and to answer the question which entity or entities from the Group shall bear that compensation it may be necessary to make an evaluation of the rights and obligations of the restructured entity under the pre-restructuring arrangements and also review the contractual provision or the provisions of the commercial law and also the manner and the extent to which the rights and obligations have changed as a result of the restructuring.

  

Even if the contract provides for a short term arrangement or at-will arrangement the actual conduct of the parties should be analyzed to see if the relation had a long-term nature and hence greater rights than those indicated by the contract.

  

In case there is no evidence of rights or obligations in a comparable situation the evaluation may be done on the basis of what rights and obligations would independent parties have put in place. In this process it is forbidden to use information that was not known to the parties at that time (hindsight).

  

Prepared by Tax Advisory Company TCA Advisers Sp.z o.o. , Konstancin-Jeziorna, Warsaw

 

NOTE: This material is prepared for information purposes only – care was taken to make it as simple and clear as possible, so it is not complete nor precise enough to the basis for any action in practice – therefore, in case you need to resolve your particular situation, please seek professional tax advice.

 

Changes of 17 June 2013 introduced to the Minister of Finance Decree on transfer pricing – part7: Business Restructurings and profit potential

 

 

The Polish Decree on transfer pricing does not mention the term “profit potential”, although this term is used in the OECD guidelines and in some countries, for a few years the tax on the exit of profit potential is applied.

 

That is because the OECD Guideline say that the transfer of “profit potential” is not a separate transaction that calls for a separate remuneration – such a remuneration could be due at the time of the transfer of a valuable asset or at the time the existing arrangements are terminated or substantially renegotiated.

 

The profit potential is similar to the profit considered by independent entities  in case of the sale of an on-going concern or termination / substantial renegotiation of a contract.

 

The Guidelines give an example of a distributor converted from a full - fledged distributor to a limited - risk distributor, without the transfer of any valuable assets. Historically, the distributor achieved a profit in the range from -2% to 6%, or from 5% to +10%, or 0% to 4%. After the restructuring, the risk is transferred to the foreign associated entity, while the distributor is given a guaranteed risk of 2%. The question is whether such restructuring is arm’s length?

 

The answer depends on the future expected profit and options realistically available in future for the distributor. If for instance,  it is excepted that new technology will be introduced and the distributor would not be able to keep pace with it, then it could be possible that such a restructuring is arm’s length.   

 

 

Prepared by Tax Advisory Company TCA Advisers Sp.z o.o. , Konstancin-Jeziorna, Warsaw

 

NOTE: This material is prepared for information purposes only – care was taken to make it as simple and clear as possible, so it is not complete nor precise enough to the basis for any action in practice – therefore, in case you need to resolve your particular situation, please seek professional tax advice.

 

  

Changes of 17 June 2013 introduced to the Minister of Finance Decree on transfer pricing – part5: Restructurings and other options realistically available to the parties

 

Below we quote section 5 par 23a of the Polish transfer pricing decree regarding business restructuring:

 

5. Tax controllers examine the right to remuneration for restructuring of the related party and the amount of the remuneration for the related party taking into consideration options realistically available to the entities participating in the restructurings.

  

How the options realistically available are to be considered by the tax administration?

   

The OECD Guidelines on Transfer Pricing indicate that the consideration in the transaction between related companies may be adjusted by reference to the profits that could have been obtained in an alternative structure, because independent parties would have chosen such a transaction offered by the related party, only if there were no other more attractive options available.

 

If an independent entity would have seen that another alternative is clearly more attractive, it would have agreed to this transaction and not to the transaction offered by the related party.

 

In accordance with the arm’s length principle the evaluation should be done from the point of view of each, separate entity and from the group perspective; the fact that the restructurings is justified from the group perspective, e.g. synergy benefits appear on the group level does not mean that such benefits appear from the perspective of each separate company.

 

Taxpayer should review their agreements, circumstances and surrounding to the transaction, further conduct and documentation to see if there are no alternative options that are clearly more attractive. This will help taxpayers to reduce the risk that their income is adjusted according to the more attractive option.

 

Source: Prepared at Tax Advisory Company TCA Advisers Ltd , Konstancin-Jeziorna

 

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