Judgment Summary
Tax regulations do not impose an obligation on tax authorities to directly carry out evidence-taking procedures. Instead, they establish the principle of indirect evidence in tax proceedings, whereby the factual state may be determined based on evidence obtained by another authority in separate proceedings, provided such evidence may contribute to the clarification of the case and is not contrary to law. These proceedings do not have to be concluded with final decisions.
Factual Background
A tax audit conducted in relation to a Company engaged in the production, processing, and preservation of pork meat revealed an understatement of income for 2016 in the amount of PLN 71,125,032.92. The Company overstated its tax-deductible costs by PLN 63,457,628.67, which included services such as pig slaughtering, meat cutting, and packaging. It also understated revenue by PLN 3,236,260.32 in relation to loans and gratuitous benefits.
The income understatement stemmed from unreliable invoices issued for services that were, in fact, not rendered — specifically pig slaughtering, meat cutting, and packaging — as well as from the failure to report interest income due under a loan agreement and a gratuitous guarantee provided.
The tax authority noted that the Company had submitted transfer pricing documentation in accordance with Article 9a of the Corporate Income Tax Act. In its assessment, the authority applied the Comparable Uncontrolled Price (CUP) method, determining an average bond interest rate — considered comparable for loan transactions — at 5.1823%.
Practical Implications for Transfer Pricing
The judgment of the Voivodeship Administrative Court has important implications for related entities engaged in transactions subject to transfer pricing documentation requirements. The interpretation of regulations concerning controlled transactions, as applied by the authority, emphasizes the necessity of thorough and reliable documentation of the factual circumstances and the business rationale behind each transaction.
Key Takeaways:
- Related parties must prepare transfer pricing documentation to demonstrate that the terms of their transactions reflect arm’s length conditions. Each transaction must be meticulously documented.
- As indicated in the judgment, tax authorities are increasingly not only verifying whether a company possesses transfer pricing documentation, but also assessing whether the transactions between related parties are consistent with the arm’s length principle.
- Related entities should comprehensively document all transactions, including those involving outsourcing services. It is necessary to demonstrate that such transactions are genuine and conducted on market terms to avoid allegations of invoice unreliability and income understatement.
- For the purpose of verifying the arm’s length nature of transfer pricing, tax authorities may rely on evidence obtained by other authorities in separate proceedings when establishing the factual state.
Expert Support
Should you have any questions or concerns regarding the classification of planned operations as controlled transactions, we encourage you to contact our transfer pricing team for professional support.
