To limit base erosion and profit shifting, many tax administrations have instilled additional requirements for taxpayers conducting intercompany transactions with entities in tax havens. In some countries, taxpayers must document an economic rationale for such transactions with descriptions of the expected economic benefits. Or, tax administrations may lower documentation thresholds, so more taxpayers will be required to prepare it.
In a post-BEPS world, such obligations come as no surprise, and taxpayers would be wise to address those requirements diligently. But in 2021, the Polish tax administration went well beyond those types of demands into what you might call, unchartered territory. The tax administration introduced a new rule mandating that taxpayers linked to tax havens in any way, prepare a transfer pricing local file for transactions with non-related parties—that’s right, non-related parties. The rule applied even if the non-related parties weren’t tax-haven residents.
The rule, of course, didn’t come out of nowhere; regulations from prior years had been building up to it. After the 2017 revolution, Polish transfer pricing regulations took a more aggressive stance regarding transactions in tax havens. For example, a rule stated that company deeds/contracts of incorporation and joint ventures with entities in tax havens were subject to transfer pricing rules. Starting in 2019, the scope of regulations was extended to the payments made to tax havens. And then in 2021, the next-level regulation came into force: If the beneficial owner of a given transaction was a tax-haven resident, you may be obliged to prepare a local file even if your counterparty is not a tax haven resident.
Incidentally, it’s assumed that the beneficial owner of a given transaction has tax residency in a tax haven if the counterparty of that transaction has any payments/fees with an entity in a tax haven in a given year. This payment/settlement made by a counterparty does not have to be directly linked to a transaction with that counterparty.
In determining these circumstances, the taxpayer is obliged to act with due diligence. Some taxpayers tried to get statements from counterparties confirming they didn’t have even the slightest tax-haven connections. Can you imagine getting a request like that from a non-related counterparty? And that was only step one. Acting with due diligence, the taxpayer had to investigate to make sure the statement was true. That’s a lot of jumping through hoops for tax compliance.
Fast-forward to 2022, and fortunately, Polish taxpayers no longer face those burdens anymore. The Polish tax administration recently repealed 2021’s regulations relating to the beneficial owner as it was a huge administrative burden for both taxpayers and the tax administration. The state’s potential benefits didn’t warrant effort on either side. What is more interesting is that the regulations have been repealed retroactively, starting from 2021, so now it’s like the rule never existed.
Do we still expect tax administrations to closely examine transfer pricing transactions involving entities in tax havens? Yes. And do we still expect additional compliance burdens when operating in low- or no-tax jurisdictions? Of course, we do. But it’s good to see that when those burdens are taken to an extreme that at least one tax administration is reasonable enough to initiate change.
