Source Deloitte
Important decision of the Supreme Administrative Court in the field of transfer pricing adjustments
The Supreme Administrative Court by the judgment of August 27, 2020, file ref. I FSK 776/20 questioned the possibility of recognizing in the tax account profitability adjustments reducing the contract manufacturer’s revenues in the legal status valid until the end of December 31, 2018 (in a situation where the contract manufacturer issued correcting invoices reducing the price of products sold).
In the opinion of the Supreme Administrative Court, the profitability adjustment should be classified as a separate economic event with all the tax consequences resulting from this circumstance. The Supreme Administrative Court considered the position of the applicant company to be incorrect, according to which the profitability adjustment does not constitute an independent economic event and should be considered in conjunction with the original transactions. According to the Supreme Administrative Court, the described adjustment does not have a cause-and-effect relationship with the income generated by the applicant company. The court emphasized that the emergence of the obligation to pay for the profitability adjustment does not result from the transaction itself, but from the specific shape of one of the terms of the transaction relationship between the company and its counterparty. The NSA also referred to the fact that
In our opinion, the presented position of the Supreme Administrative Court does not take into account the resulting from Art. 11 of the CIT Act (in the wording before 2019), the essence of the adjustments, which is the efforts of the parties to the transaction to ensure market terms of the transaction. In many cases, making such corrections is even necessary to ensure the correctness of settlements and their compliance with tax regulations, and thus unquestionably related to the conducted activity of the entity as well as securing and maintaining the source of income. The profitability adjustment mechanism is commonly used by capital groups, and the possibility of their application results from the OECD Guidelines. The interpretation of the provisions taken by the Supreme Administrative Court before 2019 in isolation from the currently applicable regulations also seems to be all the more unclear in this context,
Unfortunately, the analyzed judgment proves that the technical solutions commonly used in transfer pricing, aimed solely at ensuring compliance of intra-group transactions with the arm’s-length principle, accepted by tax authorities and courts in most OECD countries (and in Poland – even under pricing agreements), still encounter a barrier misunderstandings, even among Supreme Administrative Court judges. This, in turn, in conjunction with the new regulations of Art. 11k of the CIT Act in the field of transfer pricing adjustments confirms the need to pay much more attention to the process of determining prices between related entities, which, according to the new regulations, from the very beginning should correspond to prices that would be set by unrelated entities. Adoption of the above assumptions and an appropriate transfer pricing policy,
Undoubtedly, due to the negative jurisprudence, taxpayers should pay special attention to the documents in their possession confirming the legitimacy of the adjustments made in the tax years before the change of the legal status as under the new regulations, in particular whether the transfer pricing adjustments meet the new requirements.
