We have gathered feedback from the tax authorities of various key countries to find out the specifics about their APA programs. Read the following Q&A interview on the topic of APAs in Poland with Ms. Monika Laskowska, head of the Polish APA team at the Polish Ministry of Finance.
Q: What are, in your view, the main achievements of your APA program?
A: First of all, the fact that APA proceedings have been implemented and are actively conducted in Poland (i.e. the Ministry of Finance receives applications; APAs are prolonged willingly, etc.), is, in itself a certain success. A further achievement is the fact that Ministry of Finance has provided a platform for open discussion (dialogue). For example:
- negotiations during APA proceedings are conducted in the form of an exchange of views between the tax administration and the interested party
- all information disclosed during APA proceedings by a taxpayer are subject to fiscal confidentiality
- decisions about the establishment of an APA are made based on a detailed analysis of economic issues performed in relation to a particular transaction without using any predetermined scheme or model
- an APA proceeding is treated as a 'win-win' situation for both the tax administration and the taxpayer.
Additionally, we also see the established practices and the experienced team (permanently updating knowledge in relation to APAs efficiently) which have been created as achievements that represent an important asset in the field of APAs in Poland.
Issues and challenges
Q: What are the main challenges facing your APA program?
A: The main challenge is to ensure an effective exchange flow of information between tax administrations participating in bilateral and multilateral APA proceedings (e.g. information about related parties of the Polish company abroad). In the age of globalization, it is not enough just to focus only on local issues (i.e. on issues related to a given jurisdiction) since tax administrations should look more widely. Exchange of information between tax administrations should be similar to the flow of information between different companies in a capital group (e.g. there should be some common instruments in place such as cross-checks and coordinated controls, including the right to ask for TP documentation from different countries). Furthermore, completed APAs should be delivered not only to parties concerned, but also to tax administrations in respective jurisdictions.
Flow of information is beneficial for all tax administrations because:
- costs are incurred and allocated not only in one place (jurisdiction)
- tax administrations (parties observing business) may understand building the chain of value in their jurisdictions in different ways.
As consequence of the above, every delay in communication both between competent authorities and taxpayers involved in proceedings causes an extension of duration for the entire APA negotiations. As a result, the challenge facing the APA program in Poland is also to improve efficiency by decreasing the duration of APA proceedings.
Furthermore, the challenge for the Ministry of Finance is to raise awareness of the importance of TP issues in Poland. Currently, for various reasons (e.g. due to insufficient staff resources or due to cost-cutting policies etc.), many entities in Poland neglect their transfer pricing obligations. In particular, they prepare TP documentation in a way that only fulfils formal tax requirements in the Polish jurisdiction focusing on characteristics of a transaction, ways of calculating thresholds, etc. As benchmarking studies are not an obligatory element of TP documentation in Poland, many taxpayers do not focus on verification of arm’s length prices in their intra-group transactions. Although, the transfer pricing documentation protects the entities in Poland from the application of 50 percent tax rate, it does not provide protection from any potential adjustment made by the Polish tax authorities.
In general, as a result of low awareness of taxpayers concerning importance of TP issues, related companies do not recognize any need for application for APAs.
Q: Are there particular substantive issues (for instance, marketing intangibles or buy-ins for cost-sharing arrangements, etc.) that have been more difficult to deal with?
A: The following substantive issues, in the opinion of the Ministry of Finance, have been (or are going to be) more difficult to handle:
- restructuring – this is going to be the main subject for the next few years
- marketing intangibles – due to the fact that in Poland there are many related distributors and marketing intangibles have not been subject of thorough focus so far, there are going to be many international disputes/multilateral APA proceedings in this respect
- long-term losses
- appropriateness of treating costs as tax deductible (i.e. determining the cost basis)
- transactions actually undertaken with regard to recharacterization (realization versus transfer pricing policy model).
Q: Are there particular procedural issues (for instance, APAs involving more than two jurisdictions or APAs where prior years are under the mutual agreement procedure and these involve large proposed adjustments, etc.) that have been more difficult to deal with?
A: The following procedural issues, in the opinion of the Ministry of Finance in Poland, have been relatively more difficult to handle:
- bilateral and multilateral APA proceedings are the most effective tool in dealing with cross-border transfer pricing issues. However, they require a long period of time to complete the whole necessary information between competent authorities involved. As Poland just entered into these procedures, there is a need for implementing the best practices from other jurisdictions
- constraints of the Ministry of Finance in Poland resulting from fiscal confidentiality related to discussions with interested parties
- Polish regulations in respect of APA proceedings are based on standard tax proceedings; experience gained during the 7-year period of APA programs in Poland creates an opportunity for further improvements to successfully regulate such a non-standard and complex instrument as the APA.
Q: Are there any other issues that you would like to bring to the attention of taxpayers as potentially difficult?
A: The most difficult issue, in the opinion of the Ministry of Finance, seems to be business restructuring related matters. The issue is new and challenging because (despite provisions on this matter proposed in the Decree) it is hard to apply a case-based approach. Furthermore, restructuring issues are risky (e.g. conflicts of interests, exit tax issue in Germany) and time-consuming. Nevertheless, they are very important because they represent a significant burden for the parties involved in such transactions.
Q: From your experience, what are the main best practices that you would recommend that taxpayers adopt in requesting and filing for an APA?
A: The following are examples of best practices in respect to APA proceedings in Poland:
- very good practice developed so far by the Polish Tax Administration with regard to initial pre-filing meetings with interested parties (taxpayers) regarding APAs
- striving to obtain a good understanding of business – by communication not only with management but also with operational staff – as an elementary element in the process of issuing a decision.
Trends and outlook
Q: Based on your experience, have you noticed certain trends in any of the following topics:
A: The Ministry of Finance in Poland has observed some trends in types of APA requested since the inception of the APA program in Poland so far. At the beginning, interested companies requested only unilateral APAs because at this stage there was not enough exchange of information between tax administrations in different jurisdictions to discuss bilateral and multilateral APAs. Since then, the Ministry of Finance gained more experience in cooperation with other tax jurisdictions and became more in favor of bilateral and multilateral APAs. However, efficiency of MAP-APA procedure needs to be improved, particularly the flow of information both between competent authorities as well as taxpayers involved in the procedure. Duration of such international proceedings may decline its popularity in favor of unilateral APAs.
A: The majority of transactions covered by APA proceedings primarily relate to foreign direct investments. The subjects of such transactions include distribution activities (foreign companies investing in Poland most commonly operate in Poland as limited risk distributors), production, and more and more frequently intangibles (in which case proceedings may relate to both the method and valuation of intangibles).
- Transfer Pricing Methodology (TPM) proposed
A: The most commonly proposed TPM methodology is the Transactional Net Margin Method (TNMM).
A: The TPM agreed in APA proceedings is the method mainly proposed by interested parties in their applications (i.e. TNMM).
A: The Ministry of Finance assumes that parties interested in APA proceedings generally aim to ensure certainty of price within a new model.
A: The number of APAs completed in Poland is still insufficient for data aggregation thus such information can’t be published due to fiscal confidentiality.
Q: Looking to the future, what do you foresee for APAs?
A: According to the Ministry of Finance in Poland, new OECD project on 'Base Erosion and Profit Shifting' (BEPS) may have a significant impact on any APA program.
In turn, the Common Consolidated Corporate Tax Base (CCCTB) is not perceived by the Ministry of Finance in Poland as any threat for APAs because even if the CCCTB resolves some issues inside of capital groups, there will be undoubtedly many flows outside the group. These flows (for example cost basis and allocation keys) can be the subject of a detailed audit by the appropriate tax administrations.
Given the above, it is very hard to predict any specific trends with regard to APAs. However, the Ministry of Finance in Poland views the APA institution positively and believes that APA proceedings should be developed and promoted. As a result, the number of APA proceedings should increase.
A: The Ministry of Finance in Poland believes that there will be a need for additional staff.
In particular, due to the fact that the new report regarding intangibles will introduce new techniques of valuation, this will force the Ministry of Finance in Poland to hire extra staff specializing in the valuation of intangibles and assessment of valuations who also possess knowledge in the field of transfer pricing.
However, the Ministry of Finance in Poland (apart from employing additional staff) can also appoint experts.
A: From experience acquired by the Ministry of Finance in Poland, triangular issues arise where an intermediary is present between the taxpayer and beneficiary. Due to the fact that the intermediary receives only a commission payment for its function, the mechanism applied should relate to core transaction (i.e. the transaction between taxpayer and beneficiary). Furthermore, due to the fact that invoices as a rule only name two parties, the aim should be to identify the core transaction directly between the two interested parties rather than introducing a multilateral transaction.
However, the new arbitration procedure allows additional parties to participate in arbitral proceedings (both in the role of observer or active participant). This may improve arbitration, but can slow down APA proceedings. The Ministry of Finance in Poland does not intend to implement any special procedure for APAs in this respect, because it does not have any experience with triangular APA proceedings.
A: There is a possibility of double checking the unilateral APA terms by another tax administration. In case of arbitration procedures with other jurisdictions, the aims of the Ministry of Finance in Poland are: (i) to reveal the reasoning assumed in the APA decision (from one side) and (ii) avoiding double taxation for the taxpayer in Poland (on the other side).
A: According to the Ministry of Finance in Poland, businesses expect to be able to receive guidance for taxpayers (e.g. determining the preferred method for a given profile of activity; safe harbors, etc.). Until now, the Ministry of Finance in Poland has gained experience in handling particular cases, and has collected knowledge about business conducted on the Polish market and has widened its understanding of the way APA proceedings are conducted, etc. Furthermore, due to the fact that APA proceedings are a relatively new instrument in Poland, it is very hard to put into practice detailed instructions. Nevertheless, the Ministry of Finance in Poland will formulate such instruction/guidelines in the future.