Local transfer pricing documentation. What should your Local File include?

What is Local File documentation?

Transfer pricing documentation is a legally required document focused on intra-group transactions. You must prepare the Local File documentation when engaging in controlled transactions with related entities. Typically, it is required when the value of such transactions exceeds the financial thresholds set by regulations within the tax year.

The statutory deadline for preparing Local File transfer pricing documentation is the end of the 10th month following the close of the tax year.

What are the transfer pricing documentation requirements?

According to regulations, transfer pricing documentation must demonstrate that, in the documented controlled transaction, the related parties set prices under conditions comparable to those that would have been agreed upon between unrelated entities.

The legislator has outlined the mandatory components of transfer pricing documentation. A complete Local File provides:

description of the taxpayer:

• the nature of the business,
• the markets in which it operates,
• the management and employment structure of the taxpayer,
• market characteristics, including key competitors and the impact of economic and regulatory conditions on operations,
• a description of its economic strategy,
• dentification of transactions in the documented and previous financial year involving the transfer of economically significant functions, assets, and risks (if applicable).

description of the controlled transaction:

• a concise description of the subject matter and conditions of the controlled transaction,
• a description of the functions performed by the parties involved, the assets utilized, and the risks assumed in relation to the controlled transaction (including the parties’ capacity to bear such risks). The functional analysis should also reference the prior financial year to highlight any year-over-year changes,
• a description of the counterparty, including (i) identifying information, (ii) its business activity, and (iii) the nature of the relationship between the taxpayer and the related counterparty,
• the method adopted by the parties to calculate the transfer price, including a description of key assumptions,
• the value of the controlled transaction, broken down by each related counterparty,
• information on payments made within the controlled transaction, including any mutual settlements of claims (if applicable),
• attachment of all documents related to the controlled transaction (e.g. agreements, intra-group arrangements, and other relevant documents),
• information on whether the controlled transaction involved any agreements, such as advance pricing agreements with tax administrations of countries other than the Republic of Poland, or whether tax rulings were obtained for the transaction.

transfer pricing analysis, which justifies the arm’s length nature of the controlled transaction. It includes:

• a description of the method used to verify the transfer price, along with the justification for its selection,
• identification of the tested party or transaction,
• a detailed description of the analysis used in applying the transfer price, including:
  • the process of data search and selection, specifying (i) data sources, (ii) justification for the criteria used, and (iii) key assumptions made in the analysis,
  • comparable data in an editable format to facilitate verification or replication of the analysis,
  • justification for using single-year or multi-year data,
  • justification for the financial indicator applied in the analysis,
  • description of comparability adjustments made,
  • results of the analysis,
  • comparison of the analysis results with the outcomes of the controlled transaction.
• if the transfer pricing analysis takes the form of a compliance analysis, you must also include:
  • justification for the valuation method used,
  • description of the data sources used in the valuation,
  • explanation of the assumptions applied in the valuation, with justification, particularly for the financial indicators used and a description of how these indicators were calculated,
  • description of the assumptions used in the forecasts, with justification, including data sources and the purpose of the forecast,
  • sensitivity analysis,
  • justification for the selection of a specific point within the range.

financial information:

• the approved financial statement of the taxpayer,
• identification of the financial statement line items where the controlled transaction was recorded.

How to prepare Local File?

You can prepare your Local File in any form, as the legislator has not prescribed a specific structure. The key requirement is that the documentation includes all the mandatory elements outlined above.

We particularly emphasize the importance of including the mandatory elements that are often overlooked in transfer pricing documentation:

• a description of the market in which the taxpayer operates, including identification of key competitors and the impact of economic and regulatory conditions on the taxpayer’s operations,
• a description of the functions performed by the parties in the transaction, the assets involved, and the risks borne in relation to the controlled transaction (including the parties’ ability to bear such risks). The functional analysis should also reference the prior financial year to highlight any year-over-year changes,
• information on payments made within the controlled transaction, including any mutual settlements of claims,
• identification of transactions in the documented and previous financial year involving the transfer of economically significant functions, assets, and risks (if applicable),
• identification of the financial statement line items where the controlled transaction was recorded.

It is important to prepare Local File based on actual circumstances. The goal is to accurately reflect the real nature of the cooperation between related entities, rather than simply replicating what is outlined in the documents of the controlled transaction (e.g. contracts).

How to update Local File?

Controlled transactions between related entities are often long-term, and the obligation to document them may extend over multiple tax years. Therefore, once a controlled transaction has been documented, it must be updated in the transfer pricing documentation for each subsequent tax year.

It is a common misconception that updating transfer pricing documentation involves merely adjusting the transaction value. In reality, updating transfer pricing documentation requires a more comprehensive approach. You must, among other things:

• reflect market conditions for the given year,
• verify whether there have been any changes in the business activities of the taxpayer or the related counterparty during the tax year,
• review the actual course of the controlled transaction throughout the tax year and describe any changes that occurred,
• update financial data in the transfer pricing documentation,
• assess whether the existing transfer pricing analysis remains valid for the current tax year or if a new one is required.

What are the penalties for lack of or incomplete Local File?

Article 56c of the Fiscal Penal Code specifies the penalties for non-compliance. If you:

• fail to prepare local transfer pricing documentation despite the obligation,
• fail to attach Master File documentation to the local transfer pricing documentation,
• prepare transfer pricing documentation that does not accurately reflect the actual situation,

you are subject to a fine of up to 720 daily rates. 

The fine for preparing transfer pricing documentation after the deadline is up to 240 daily rates. 

Additionally, Article 58c of the Tax Ordinance specifies potential penalties related to additional tax liability. The standard 10% penalty local tax rate can be doubled or even tripled, especially if the taxpayer fails to submit the required transfer pricing documentation to the authorities.

Ensure your tax compliance

Have the right approach to transfer pricing documentation. Proper preparation and updating of the Local File are not just about regulatory compliance. Local File is a critical tool in minimizing tax risks and avoiding penalties from local tax authorities.

If you need assistance with preparing your documentation or have questions about transfer pricing guidelines, please contact our experts in transfer pricing practices.

We will ensure that your Master File and Local File comply with all applicable regulations and are optimally tailored to the specifics of your business.