On 8 May 2020, because of the practical difficulties created by the lockdown measures taken to contain the coronavirus pandemic, the Commission proposed to postpone the introduction…
Taxpayers whose revenue or costs have exceeded the equivalent of EUR10m will be obliged to submit a simplified statement of transactions with related entities (CIT-TP) along with the CIT-8 tax return.
A template of such statement supplements the ordinance of the Minister of Finance and Development on the specification of the template for the simplified statement of corporate income tax, dated 8 June 2017 (Journal of Laws of 2017, item 1190). The statement has been prepared as a form which in most cases can be completed by circling its relevant items. The final version of the form takes account of many objections voiced during the process of public consultations. When compared with its earlier draft, the form has been subject to a significant abridgement and simplification with regards to the data that is to be submitted to the tax authorities. Nevertheless, as some of the items of the form lack specific criteria to be relied on, completing the document can still prove to be quite a challenge for taxpayers.
Determining the functional profile of an entrepreneur can be considered to be one of the most problematic issues. The profile is to be indicated in part D of the form, and should serve to define an entity’s position within a given group. This means that the entity bearing the highest risk should generate a material part of revenue while low-risk entities should demonstrate a relatively insignificant but stable level of revenue. Functional profiles include among others: commissionaires, full-fledged manufacturers, and limited-risk distributors. The legislators, however, have not indicated the typical features of the profiles that could be of assistance to taxpayers. Assigning an entity to its appropriate group requires specialist transfer pricing knowledge.
Below you will find the typical features of the most problematic functional profiles, i.e. typical of entities conducting production and distribution activities.
Depending on the functions they perform and the risks they assume, distributors can be categorized into three types:
- A full-fledged distributor (multiple-function distributors assuming various risks) is an entity acting its own name and on its own account, holding a title to the goods sold. The entity assumes the highest responsibility related to distribution activities. Its tasks include acquiring goods, determining their sale price, marketing and promotional activities, maintaining its own distribution network and inventory levels. Therefore, the entity bears the highest market risk, while having no guarantee of selling the offered goods and thus generating a profit. On the other hand, the risk can be offset by potentially material profits during periods of prosperity.
- A limited risk distributor, similarly to fully fledged ones, sells goods in its own name an on its own account but is subject to the principal’s guidelines. Its activities entail lower risk and a limited scope of responsibilities. The entity mostly orders goods following a client’s specific request, which results in a reduced market risk. The entity does not assume the risk of acquiring goods which do not have specific buyers, which implies lower costs of warehousing or lack of thereof. Its tasks involve acquiring goods, quality control, sales, contacting the clients and technical support. Typically such distributors are compensated in the form of resale price margin which ensures that the costs of running their businesses are covered, and stable profits reflecting the functions performed and assumed risks are made.
- A Commissionaire is an entity conducting distribution activities in its own name but on the account of the principal. It does not hold a title to the goods sold. The distribution activities of the entity involves performing the narrowest scope of functions and assuming fewest risk. Some of its tasks are: acquiring new clients and maintaining relations with them, negotiating the terms of deliveries and representation. A Commissionaire is compensated by means of a commission which is as a rule contingent on the turnover. The remuneration is sufficient to cover the costs of the conducted activities, and to ensure a low, stable profit.
Depending on the functions they perform and the risks they assume, manufacturers can be also categorized into three types:
- A full-fledged manufacturer (multiple-function manufacturer assuming various risks) is responsible for the entire production process including tangible assets as well as intangibles such as patents, industrial designs, know-how, and trademarks. It can undertake research and development activities and deal with the sale and distribution of goods, as well as marketing and promotional activities. It assumes full market, excess and obsolescence, credit, and guarantee risks. Considering its exposure to a broad range of risks, an entity of the type is likely to sustain losses.
- Limited risk manufacturer provides manufacturing services pursuant to an order. It buys and stores the necessary resources independently and holds the ownership title to them. The ownership is transferred upon selling the goods. However, it does not hold ownership titles to intangibles. Assets used by the entity include: machines, tools, production lines and employees. This type of manufacturer derives remuneration that covers the costs of conducting business activities and ensures a stable profit.
- A contract manufacturer is an entity that assumes the narrowest scope of responsibilities. It performs services using materials provided by the principal. In the production process it remains the legal owner of both the materials as well as the goods produced. A contract manufacturer is responsible for producing goods of specific quantity and quality at a predetermined time. The principal, on the other hand, undertakes to receive the goods and assumes the risk of selling them. The manufacturer does not perform any other material functions, except for the production service and does not bear any material risks. The entity receives compensation, that similarly to a limited risk manufacturer, that covers the costs of conducting business activities and ensures a stable profit.
It is important to emphasize that selecting the right functional profile is an important part of form-filling process, as it will influence the choice of a transfer pricing method. Considering the information that is to be disclosed in the statement, the CIT-TP form should be regarded as an instrument that will enable tax authorities to target entities that should be subject to tax inspections. If a functional profile proves to be at odds with the data contained in the tax documentation, the likelihood of coming under the authorities’ scrutiny increases. Considering the above, it is advisable to give a lot of thought to properly determining one’s functional profile.