Poland vs Non-Woven z o.o., July 2019, Supreme Administrative Court, Case No II FSK 3433/18

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The question in this case was whether or not year-end-adjustments/profit adjustments should be considered part of the market price for acquisition of raw materials used in the production of non-wovens products in the Polish company operating partially under a tax exempt zone.

The Court of First Instance had come to the conclusion, that the payment of year end adjustments were part of the price for acquisition of raw materials and thus not tax deductible as related to tax exempt activities.

This decision was appealed by the company.

The Supreme Administrative Court considered the following :

The appeal should be upheld.

It should be noted that one of the assumptions of transfer prices is respect for the so-called market price rules. It consists in the fact that when transactions are concluded by related entities , the agreed conditions should be consistent with the conditions applied in comparable transactions by independent entities. The means of implementing this principle are the so-called profitability adjustments. In accordance with the OECD Guidelines (OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017), the compensating adjustment is a correction made by the taxpayer in which the taxpayer himself determines the transfer price for tax purposes , i.e. one that in his opinion corresponds to the arm’s length principle in relation to the transaction concluded with a related entity. The so-called profitability adjustments are therefore an issue closely related to transfer prices .

It should be noted that in the legal status in force until the end of 2018, the Corporate Income Tax Act did not contain provisions directly referring to the possibility of applying the transfer price adjustments described above. It was not until January 1, 2019 that the legislator regulated in art. 11e. rules for making periodic adjustments that bring the result or transfer price to market level.

This means that at the date of issuing the individual interpretation being the subject of the assessment in these proceedings , it should be considered unacceptable to interpret the tax law in a manner that would lead to the application of the indicated institution despite its non-regulation by the national legislator.

In the opinion of the Supreme Administrative Court, in the panel hearing the present case, in the legal status in force on the day of issuing the contested individual interpretation, the profitability adjustment described in the application for its issue, which aimed to guarantee the Seller an adequate level of profitability, had to be qualified as a separate economic event, with all the resulting of this circumstance with tax consequences.

Therefore, the position presented in the justification of the judgment of the Court of First Instance, according to which profitability adjustment is not an independent economic event and should be considered in connection with the original purchase or sale of goods or services should be considered incorrect.

The case was sent back to the Administrative Court for re-examination under the considerations contained in the ruling.

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Poland nonwoven II FSK 3433-18

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