In the case of development CCAs, variations between a participant’s proportionate share of the overall contributions and that participant’s proportionate share of the overall expected benefits may occur in a particular year. If that CCA is otherwise acceptable and carried out faithfully, having regard to the recommendations of Section E, tax administrations should generally refrain from making an adjustment based on the results of a single fiscal year. Consideration should be given to whether each participant’s proportionate share of the overall contributions is consistent with the participant’s proportionate share of the overall expected benefits from the arrangement over a period of years (see paragraphs 3.75-3.79). Separate balancing payments might be made for pre-existing contributions and for current contributions, respectively. Alternatively, it might be more reliable or administrable to make an overall balancing payment relating to pre-existing contributions and current contributions collectively. See Example 4 in the Annex to this chapter ...

Balancing payments may also be required by tax administrations where the value of a participant’s proportionate contributions of property or services at the time the contribution was made has been incorrectly determined, or where the participants’ proportionate expected benefits have been incorrectly assessed, e.g. where the allocation key when fixed or adjusted for changed circumstances was not adequately reflective of proportionate expected benefits. Normally the adjustment would be made by a balancing payment from one or more participants to another being made or imputed for the period in question ...

K. sp. z o.o. is a Polish company belonging to an international group. The main activity of K is local sale of goods purchased from a intra group supplier. K is best characterized as a limited risk distributor and as such should achieve an certain predetermined level of profitability as a result of its activities. In order to achieve the determined level of profitability, the group had established that, if the operating margin actually achieved by the distributor during a given period is less or more than the assumed level of profit, it will be adjusted. The year-end adjustment will not be directly related to the prices of goods purchased from the intra-group supplier and will be made after the end of each financial year. The Administrative Court decided that the year-end adjustment is not sufficiently linked to obtaining, maintaining or securing the company’s income. Hence the adjustment cannot be recognized as a deductible cost within the meaning of Article 15 Section 1 of the CIT Act. The decision of the Administrative Court was appealed to the Supreme Administrative Court by K. The Supreme Administrative Court upheld the result reached by the Administrative Court according to which year-end adjustments (for the years in question) was not recognised as tax deductible costs. “Although the assessment presented was lacking in the grounds of the judgment under appeal, the manner in which the case was decided by dismissing the application is correct.” Excerpts from the reasoning of the Supreme Administrative Court “The legal problem examined in this case relates to the use by the applicant company of a mechanism applied in economic practice, in group settlements, referred to as a ‘compensating adjustment’. Generally speaking, that mechanism consists in an upward (true-up) or downward (true down) adjustment of the price between the supplier and the distributor, depending on whether the latter obtains income from sales to third parties which exceeds or is less than the margin fixed in the agreement between those entities. In the present case, the essence of the dispute concerns the tax consequences, in terms of corporation tax, of offsetting the net operating margin downwards (true down), under an agreement concluded by the applicant with the controlling company (the supplier). That means that the applicant (distributor) transfers funds to the supplier at an amount corresponding to the excess of the margin set in the contract concluded previously by those entities. There is no doubt that those entities (supplier and distributor) constitute related companies within the meaning of the transfer pricing rules. However, in the case in question, the disputed problem does not concern the assessment of whether the settlements between the supplier and the distributor comply with the arm’s of lengh rules established in the interpretation of Article 11 of the CFR in force on the date of issue of the interpretation of Article 11 of the CFR, to what extent determining whether the downward adjustment of the operating margin described in the application may be recognised as a deductible cost within the meaning of Article 15(1) of the CFR. According to this provision, in the wording referring to the realities of the case, deductible expenses are costs incurred in order to obtain revenue from a source of revenue or to preserve or secure a source of revenue, except for the costs listed in Article 16(1). Since the definition of a legal deductible expense is of a general nature, each cost (including expenditure) incurred by a taxpayer should be subject to individual assessment, with a view to examining the existence of a causal link between its incurrence and the generation of revenue (a real chance of generating revenue) or preserving or securing the source of revenue. Exceptions – both positive and negative – may of course be provided for by the legislator. However, the Supreme Administrative Court, in its composition adjudicating on this case, is of the opinion that the cash transfer incurred by the appellant to the supplier does not meet the criteria set out in Article 15(1) of the Polish Code of Civil Procedure, and in the legal status in force before 1 January 2019 there was no specific provision in the Tax Act allowing for the cost settlement of transfer price adjustments.” BE AWARE! – the result of the decision – non deductibility of downward year-end adjustments – is only applicable in Poland for years prior to 2019 “On the other hand, in the legal status in force before 2019, a typical transfer pricing arrangement concerned settlements between related companies for the direct supply of goods or services. For the sake of order, it should be recalled that until the end of 2018 the legislator, both in the Corporate Income Tax Act, the Personal Income Tax Act and the Value Added Tax Act, did not use the term “transfer prices” but used the term “transaction prices”. The term “transfer prices” was commonly used in the judicature and the literature and there is no doubt that both concepts are related to the same subject matter. The notion of “transaction price” was defined in Art. 3.10 of the Act of 29 August 1997 – Tax Ordinance (Journal of Laws of 2018, item 800 as amended). According to this regulation, the transaction price was to be understood as the price of the subject of the transaction concluded between related entities within the meaning of the tax law regulations concerning personal income tax, corporate income tax and value added tax. “As a result, in the legal status prior to 2019, the margin adjustment, meaning in fact an adjustment of the Company’s profitability, made on the basis of the adopted transfer pricing policy, does not meet the prerequisites resulting from art. 15 section 1 of the Corporate Income Tax Act, and in particular the most important prerequisite, i.e. connection with income. The very nature of the income adjustment excludes that it is a fee for services provided by the supplier to the distributor.” “The situation has fundamentally changed as of 1 January 2019, due ...

A Polish subsidiary performed manufacturing on a limited risk basis (a so-called contract manufacturer) on behalf of the group parent and should be remunerated based on the functions performed. During the year, sales of products are made at constant registration prices based on the standard cost. It is only after the end of the year and the summary of costs and revenues of operations that the applicant is able to determine her own profit level to a fixed level at the level of operating profit. In view of the above, the parties apply a mechanism for determining profitability, including the correction of mutual settlements. The necessary adjustment of profitability to a certain level can take place only after an annual summary of costs and revenues of operations, with detailed data on the applicant’s actual profitability only available at the end of the year or even afterwards. Given that the operating result obtained by the applicant is subject to verification and correction at the end of a given financial year, in practice it is possible that the correcting invoice ( or other document confirming the reasons for the correction ), which respectively increases or decreases the value of remuneration for sold goods or services a) will be issued after the end of the year, or b) will be issued during the ( last day ) of the financial year. Against the background, the company asked whether the year end adjustments should be taken into account for the accounting period in which those adjustment-invoices or documents were issued? In the company´s opinion, the current provisions clearly indicate that adjustments to revenues or tax deductible costs should be made in the accounting period in which the corrective invoice was issued or received or – in the absence of an invoice – another document confirming the reasons for the correction. Only in the event that the correction is caused by a calculation error or other obvious mistake, should the correction be made in the accounting period in which the original income or tax deductible expenses were recorded. The tax authorities considered the position presented by the applicant to be incorrect. As a rule, the moment when the revenue related to business activity arose shall be considered the date of “delivery”. Decision of the Administrative Court The court notes that the applicant applies the profitability adjustment mechanism to a certain level. Under international tax law, the concept of compensating adjustments has developed, which should be understood as a correction by which the taxpayer himself adjusts the price ( income ) in transactions with related entities to a level that in his opinion corresponds to market value, even if the price differs from the amount, which was actually settled between the related parties. In the court’s view, the essence of the mechanism of adjusting the profitability presented by the applicant to the previously assumed level does not manifest itself in the fact that the price of specific , individualized products sold earlier is changed. As a result of its application, the applicant’s profitability level is equalized to the level assumed in advance. The purpose of the correction is not to modify the prices at which specific, individual transactions were carried out during the tax year. Given the specifics of the profitability adjustment described by the applicant, the court concludes that this adjustment should be considered as a new event resulting from an agreement stating that the applicant, in connection with the business activity, should achieve the assumed level of profitability appropriate for the subsidiaries function in the group. The event giving rise to the margin to the previously assumed amount is not due in any way to the incorrect recognition of the amount of revenue previously achieved by the applicant. In this situation, according to the court, the authority did not correctly answer the question aimed at determining the moment at which revenue adjustment should have been made. However, the authority correctly stated that in the facts presented in the application there are no grounds to reduce the value of previously recognized revenues. The authority also correctly stated that the payment received by the applicant would constitute revenue from the moment they were received. Click here for translation ...

In the case of development CCAs, variations between a participant’s proportionate share of the overall contributions and that participant’s proportionate share of the overall expected benefits may occur in a particular year. If that CCA is otherwise acceptable and carried out faithfully, having regard to the recommendations of Section E, tax administrations should generally refrain from making an adjustment based on the results of a single fiscal year. Consideration should be given to whether each participant’s proportionate share of the overall contributions is consistent with the participant’s proportionate share of the overall expected benefits from the arrangement over a period of years (see paragraphs 3.75-3.79). Separate balancing payments might be made for pre-existing contributions and for current contributions, respectively. Alternatively, it might be more reliable or administrable to make an overall balancing payment relating to pre-existing contributions and current contributions collectively. See Example 4 in the Annex to this chapter ...

Balancing payments may also be required by tax administrations where the value of a participant’s proportionate contributions of property or services at the time the contribution was made has been incorrectly determined, or where the participants’ proportionate expected benefits have been incorrectly assessed, e.g. where the allocation key when fixed or adjusted for changed circumstances was not adequately reflective of proportionate expected benefits. Normally the adjustment would be made by a balancing payment from one or more participants to another being made or imputed for the period in question ...