Transfer pricing adjustments: global challenge, national responsibilities

Transfer pricing adjustments (TP adjustments) are a complex and wide-ranging topic and their correct accounting is crucial. It is important to consider the perspective of both parties to the transaction before making adjustments. Why are they so important?

1. Eliminating tax return errors – correct adjustments can help eliminate potential tax return errors,
2. Secure recognition of the adjustment in revenue/tax costs – adjustments allow local, secure recognition of changes in revenue and costs,
3. Safeguarding against the risk of double taxation – correct adjustments protect against the risk of paying taxes in two jurisdictions.

The topic of TP adjustments is standardised both in Europe and around the world, due to the globalisation of the economy and the increasing importance of related-party transactions. Nevertheless, transfer pricing rules are complex and depend on the specifics of the transaction and the jurisdiction.   

It is worth noting that the OECD Guidelines take into account TP adjustments. Their purpose is to ensure that entities are adequately compensated for their actions and the risks they take, and that costs are allocated to those who actually bear those risks. Adjustments are also included in the draft EU Transfer Pricing Directive, which aims to harmonise key transfer pricing rules across the European Union.

Despite the introduction of regulations at the international and European level, some countries (including Poland) have their own regulations on TP adjustments.

Local requirements in Poland

According to the specificity of Polish regulations, a taxpayer has the possibility to recognise a TP adjustment for tax purposes, provided that the following conditions are met at the same time:

• in the corrected transaction during the tax year, the terms and conditions that unrelated parties would have agreed upon;
• there has been a material change in the circumstances affecting the terms and conditions determined during the tax year, or the actual costs incurred or revenues earned that are the basis for the calculation of the transfer price are known, and ensuring their compliance with the terms and conditions that would have been determined by unrelated parties requires a TP adjustment;
• at the time the adjustment is made, the taxpayer has a statement from the related party or accounting evidence that the related party has made an adjustment in the same amount as the taxpayer;
• there is a legal basis for the exchange of tax information with the country with which the adjustment is implemented.

With in-plus adjustments, only the first two conditions need to be met.

However, compliance with the Polish requirements does not automatically guarantee correct adjustment in other jurisdictions.

For example, in Romanian law, as in Polish law, the TP adjustment should be attributed to the period to which it relates. It should also be shown that the other party to the transaction has made an adjustment of the same amount. In addition, local accounting regulations prescribe that these adjustments should be reflected in the taxpayer’s financial statements (income statement) as a result of the assessment of the transaction (income/costs).

But regulation of TP corrections is not limited to European countries only. Countries such as Thailand, China and Singapore have introduced special regulations in this regard.

There are also still some countries that do not have this type of regulation in place, such as Angola and Malta, which can also be a hindrance of sorts.

Given the complexity and multifaceted nature of the topic, we recommend a thorough analysis to determine whether the issue of TP adjustments and the associated risks apply in your case. If so, it is worthwhile to tax-proof them appropriately from the perspective of both parties to the transaction.