Safe harbour for low-value-added services – how to ensure the comfort of using a safe harbour mechanism in 2023

Safe harbour is a mechanism to reduce documentation and transfer pricing reporting obligations provided that the taxpayer meets several statutory requirements. Once such conditions are met, the taxpayer is supposed to gain certainty as to the arm’s length nature of the price applied in the transaction carried out. However, is compliance with the conditions sufficient to provide the taxpayer with the full comfort of a safe harbour? Unfortunately, this is not always the case in practice. Although the authorities waive verification of the market level of the mark-up, it happens that they control, for example, the cost base or the allocation keys.

Safe harbour simplifications apply to two categories of controlled transactions:

• loans, credits and bond issues, and
• low-value-added services.

This year, under safe harbour simplifications, taxpayers can benefit not only from the exemption from preparing a transfer pricing analysis but also from preparing full transfer pricing documentation.

It is worth analysing exactly what conditions need to be met in order to benefit from the safe harbour and what obligations still lie with the taxpayer. In this way, we can avoid unnecessary risks and additional costs, especially as, in our experience, this type of transaction often occurs for taxpayers.

Scope of low value-added services covered by safe harbour

The simplification applies only to low-value-added services that are listed in Appendix 6 of the CIT Act. These services include accounting and auditing services, human resources management, IT services, legal services, tax services, administrative and office services, communication and promotion services and corporate finance services. 

The use of simplifications is possible provided that the services:

• are in the nature of services supporting the business activity of the service recipient,
• do not constitute the core business of the group of related parties,
• the value of those services provided by the service provider to unrelated parties does not exceed 2% of the value of those services provided to related and unrelated parties,
• are not resold by the recipient of the service, with the exception of the resale of services purchased in its own name but on behalf of another related party (re-invoicing).

Conditions for benefiting from simplifications

As in previous years, a condition for the use of safe harbour for low-value-added services is that the requirements for how the remuneration in the transaction is determined and the level of that remuneration are met.

The first condition is that the transaction remuneration, understood as a mark-up on the cost of services, is determined based on the net transaction margin method or the cost-plus method.

The mark-up on cost, determined by one of the above-mentioned methods, for services purchased may not exceed 5% and for services provided may not be less than 5%.

The last, but as we see from our observations, the most difficult requirement set by the legislator is that the taxpayer must have a calculation including:

• the types and amount of costs included in the calculation,
• the way in which the allocation key is applied and the rationale for the choice of the allocation key for all related parties using these services,

as well as (for the first time for transactions concluded in 2022)

• a description of the transaction, including an analysis of functions, assets and risks.

Thus, although a taxpayer may benefit from the exemption from preparing documentation for 2022 transactions it must have a document containing basic information about the transaction, including its description and functional analysis.

How to verify compliance with safe harbour conditions

Fulfilment of the conditions for benefiting from simplifications is key to waiving the determination of income or loss by the authority. It is therefore important to verify each time that the services in the group meet all these requirements. It may be helpful to compile in one place the information justifying the use of the safe harbour simplification and the fulfilment of the conditions for its application, together with a description of the transaction and a calculation of the remuneration. Such a document will make it easier for the taxpayer to respond in the event of a possible request by an authority for clarification as to whether the safe harbour conditions are met for a particular transaction.

Furthermore, it should be borne in mind that if the authority finds that the taxpayer does not comply with one of the conditions, the tax authority will be able to request the preparation and submission of local transfer pricing documentation for the controlled transactions indicated by the tax authority, within 30 days of the delivery of such request.

It is therefore worth considering the preparation of a complete document summarizing the fulfilment of the safe harbour conditions  along with the elements required to benefit from simplification, i.e. functional analysis and remuneration calculation.

What else should be borne in mind

Despite the application of the safe harbour simplification, the transaction should be included in simplified form in the TP-R form, indicating that it is a transaction for the provision or purchase of low value-added services subject to the safe harbour exemption.

However, it should be borne in mind that by selecting the appropriate category of transaction, the taxpayer confirms that the conditions for the application of the safe harbour mechanism are met. Therefore, indicating in the TPR form a transaction as benefiting from the safe harbour mechanism, while not meeting the conditions, may generate risk. The TPR is a tool for authorities to select taxpayers for audit. Therefore, before selecting the safe harbour simplification for a given transaction, it is worthwhile to carefully analyse whether it meets the conditions for benefiting from the simplifications and document the analysis performed for your own purposes or for possible future audits.