Transfer pricing adjustments – key points to know

As the year draws to a close, companies are preparing their final accounts for 2024. Now is the last opportunity to carefully review and make any necessary adjustments to settlements, pricing, or contract terms.

The adjustments themselves continue to raise numerous interpretative questions, not only about their definition but also regarding the conditions for their proper tax treatment.

What is a transfer pricing (TP) adjustment?

A transfer pricing adjustment is the process of aligning prices in transactions between related parties (e.g. entities within the same group) to be consistent with the arm’s length principle—that is, reflecting the terms and conditions that would be agreed upon between independent entities.

When and how to make a TP adjustment?

A transfer pricing adjustment is made when, even though the taxpayer acted reasonably and fairly to comply with the arm’s length principle in entering the transaction, the transfer price applied is still not at arm’s length.

The adjustment can be performed in two ways:

1. In-year adjustment – determined in advance based on projected financial results and transfer pricing analysis. This type of adjustment can be applied during the financial year to continuously align transactions with market levels.
2. Post year-end adjustment – performed after the fiscal year ends, based on actual financial results.

The provisions of the CIT Act do not mandate a specific type of adjustment or require that it be documented through a particular accounting document. Depending on the circumstances, adjustments can be made based on:

1. an accounting note (debit or credit),
2. a collective corrective invoice,
3. a correcting invoice for a specific invoice/item from an invoice from a billing period.

We select the appropriate accounting document in each case based on the specific circumstances, while also considering provisions from other legislation, particularly the VAT Act.

Other key considerations

Analyzing the adjustment solely from a transfer pricing perspective is insufficient. Other aspects should definitely be taken into account as well:

– VAT considerations and the selection of the appropriate document for settling the adjustment,

– customs duties, particularly when adjusting transactions involving goods outside the EU.

Keep in mind that compliance with local regulations and fulfilling the requirements for recognizing a transfer pricing adjustment in Poland is only part of the process. It is equally important to consider the perspective of the other jurisdiction to ensure a comprehensive approach.

Common questions and doubts

Here are the three questions we frequently encounter regarding transfer pricing adjustments.

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1. Is every adjustment to related party settlements a transfer pricing adjustment?

Not every adjustment of related party settlements qualifies as a transfer pricing adjustment. However, every transfer pricing adjustment involves transactions between related parties.

There is no definition of a transfer pricing adjustment in the Act; instead, it can be found in the explanatory notes from the Ministry of Finance. A transfer pricing adjustment refers to the correction (or adjustment) of transfer price, which is understood as the remuneration, financial result, financial indicator, or other specified financial outcome established or imposed between related parties due to their existing relationships. The purpose of a transfer pricing adjustment is to align the transfer price for a given period with the arm’s length principle.

In practice, a distinction can be made:

1. adjustments where we are certain

• profitability adjustments are considered transfer pricing adjustments,
• discounts and price list changes are not classified as transfer pricing adjustments,

2. ambiguous cases that may require an interpretation from the tax authorities. Example: the so-called true-up.

To determine whether an adjustment qualifies as a transfer pricing adjustment, it is essential to verify its purpose and underlying reasons.

1. Can a transfer pricing adjustment be safely included in tax revenues/costs?

Yes, this assumption holds true, provided that the conditions outlined in Article 11e of the CIT Act are met, effective from 2022:

Condition 1

• in controlled transactions conducted by the taxpayer during the tax year, the conditions established must reflect those that would have been agreed upon by unrelated parties,

Condition 2

• the circumstances in the controlled transaction being adjusted must have materially changed (e.g. due to extraordinary market developments or changes in interest rates), or the actual costs incurred or revenues received that form the basis for calculating the transfer price must be known. Ensuring compliance with the terms and conditions that unrelated parties would have agreed upon may necessitate a transfer price adjustment,

Condition 3

• having a statement from a related party or accounting evidence confirming that a transfer pricing adjustment has been made in the same amount as that of the taxpayer is also required,

Condition 4

• there must be a legal basis for the exchange of tax information with the country where the related party is resident, has its registered office, or is managed.

For in plus adjustments, the first two conditions must be met. For in minus adjustments to be included in tax costs or revenue, all conditions must be fulfilled.

1. With what frequency should transfer pricing adjustments be made?

The Ministry of Finance has clarified that transfer pricing adjustments should be made as frequently as independent entities would adjust their transactions. However, independent entities do not record transfer pricing adjustments in their accounts, as these adjustments specifically pertain to transactions between related parties.

However, a helpful guideline is provided in the explanatory notes, which list the factors that determine the frequency of transfer pricing adjustments:

• industry specifics,
• specifics of transactions and settlements,
• variability of economic factors,
• circumstances having a significant impact on the change in the original price,
• availability of more reliable comparative data.

Therefore, we assess the frequency of transfer pricing adjustments on a case-by-case basis. In practice, quarterly, semi-annual, or annual adjustments are the most common. However, it is crucial to consider the size of the adjustment. A substantial adjustment may attract the attention of tax authorities, who may closely verify that the first condition has been met—that is, that prices were set at market level from the outset.

How to correctly identify a transfer pricing adjustment

Transfer pricing adjustments are complex and require thorough analysis. The end of the year is an ideal time to verify that the prices applied throughout the year are market-based.

Since adjustments are multi-faceted, we recommend reviewing which document is best suited for recording the adjustment and understanding how it impacts customs matters. Additionally, it’s essential to ensure that adjustments comply with the requirements of the other jurisdiction involved.

#MORE on price adjustments.