Cost optimization-oriented payment management as a controlled transaction

Payment management to optimize costs of the payment settlement process using the PoB (payments on behalf) model is a controlled transaction – as stated by the District Administrative Court in Warsaw in the judgment of 10 August 2022 (file ref. III SA/Wa 3029/21). The Court was of the opinion that the PoB model is a form of financing related parties that results in cash flows, and this type of transaction should be classified as a financial transaction.

The judgment concerns an individual interpretation over a payment transaction in the PoB model.

In the transaction, the liabilities of several participants (companies belonging to a group) to the same creditor (a third party) are settled by one of the designated participants (the coordinator). The coordinator repays debts to the creditor for and on behalf of each of the participants. They are then obliged to reimburse the coordinator for the amount of their debts it had repaid.

According to the taxpayer, the repayment of liabilities under the PoB model should not be classified as a controlled transaction. It is only a ‘technical measure’ facilitating the repayment of debtors’ liabilities to creditors. The taxpayer claimed that the activity actually lacks one of the prerequisites for the definition of a controlled transaction, i.e. economic activities that should be identified on the basis of the actual behavior of the parties to the transaction. Therefore, the transaction made by the taxpayer is not, in the taxpayer’s opinion, a controlled transaction and, at the same time, it is not subject to transfer pricing obligations.

The element of profit

In its interpretation, the authority considered the taxpayer’s position to be incorrect. The authority believed there is an element of profit involved in the transaction for participants of the PoB model. Payments to the creditor are made from the funds of the coordinator and not of the debtor (participant). Therefore, the participants enjoy a benefit if a given participant lacks sufficient cash at the time of settling liabilities. In the authority’s opinion, the repayment of participants’ liabilities under the PoB model results in a cash flow between related entities. As a result, the authority concluded that this type of action should be classified as a controlled transaction covered by transfer pricing obligations.

DAC confirmed the authority’s position

The Court shared the authority’s position. It highlighted that payments made in the PoB model are a controlled transaction. According to the Court, settlements in the PoB model are of an economic nature: there is a cash flow to settle liabilities as part of the current business activity of the participants. The Court emphasized the element of profit featured in the transaction which could not have occurred in a similar situation between third parties. Participants of the PoB model are not charged with additional costs for early repayment of liabilities by the coordinator, which – according to the Court – is a benefit. Given the above, the Court confirmed the correctness of the authority’s position whereby the transfer of payments in the PoB model is a controlled transaction (the judgment is final and binding).

Summary

Intra-group financial transactions once again proved to be a major challenge for taxpayers from the perspective of transfer pricing obligations. This is also confirmed by the judgment of the District Administrative Court concerning a less typical financial transaction involving the management of payments in a group of related entities.

You should remember to include this type of financial transactions in the verification of transfer pricing obligations and keep in mind the obligation to prepare documentation to confirm it is arm’s length. It is worth analyzing the latest case-law also with regard to those transactions since at a first glance they may seem – from the taxpayer’s perspective – not subject to transfer pricing obligations.