Benefit test under the magnifying glass of tax authorities and KAS

Recently, intangible services have been one of the key areas reviewed during tax audits. As statistics made available to us by the Ministry of Finance show, service transactions account for almost 30% of all transactions reported by taxpayers in 2020-2021 in the TPR form, of which as much as 10% are intangible services.

Intangible services under the magnifying glass of tax authorities

The catalog of the most popular intangible services includes consulting, management, legal, financial, accounting, IT, employee recruitment, among others. Intangible services are most often not associated with a specific tangible and tangible result. This causes significant problems in verifying their economic viability, as well as the marketability of the executed transaction. It is also difficult to properly document a given service, as well as to demonstrate that the service was actually performed by the entity that received payment for it.

Tax authorities are looking more and more closely at issues related to the purchase of support services and asking detailed questions in this regard, both during tax audits and when taxpayers apply for an advance pricing agreement (APA).

Taxpayers are primarily asked to submit:

• evidence of services purchased from contractors,
• confirmation of the market level of remuneration (including the cost base used and allocation keys),
• demonstrating the relationship of these services to the revenues generated.

Practice in transfer pricing audits shows that authorities also expect:

• justify the benefits of receiving services provided by a group entity,
• confirmation that the amount of costs incurred corresponds to the benefits achieved.

Therefore, it is worthwhile to analyze the benefits of purchasing services from contractors in advance and gather reliable evidence of their provision by preparing a so-called benefit test.

All the more so because, as practice shows, in the event that the authorities find that the submitted evidence is not sufficient to clearly recognize that the services were actually performed, they can exclude from the taxpayer’s deductible expenses almost 1 million zlotys![1]

Benefit test is not only related parties

It should be remembered that the issue of benefit test also applies to transactions with unrelated entities . In their case, too, the taxpayer must demonstrate the marketability of the remuneration, the actual performance of the service and its relationship to the income earned or to securing the source of income. 

This is because the tax authorities verify whether the costs incurred are in connection with the income earned by the taxpayer in question. It is essential that there be a clear link between the incurring of a given cost and the creation or actual chance of tax revenue, or the preservation or safeguarding of the source of such revenue. Failure to provide adequate evidence of the provision of services may result in their exclusion in part or in whole from deductible expenses.

Risk protection tool

Proper documentation of services rendered must confirm that they were actually performed and specifically indicate how they affect the taxpayer’s business efficiency and financial performance. In most situations, a mere contract, invoice, or other proof of payment is not sufficient evidence.

With help here comes conducting and documenting the so-called benefit test, summarizing the scope, benefits and evidence of the performance of a given service, as well as justifying their economic and business rationality. Its preparation allows you to protect yourself from the risk of tax authorities questioning the reasonableness of the performance of services (especially intangible services) and the amount of remuneration paid, and thus the inclusion in deductible expenses of intragroup services and from unrelated parties.

It is also important for the taxpayer to collect documentation confirming the provision of services on an ongoing basis. During inspections, the authorities ask not only for documents confirming the effect of the work (e.g. reports or opinions), but also for working materials, project correspondence or time records. And yet, the inspection may concern a period going back as far as 6 years! Gathering materials several years after the transaction can therefore prove problematic and time-consuming, so it is worthwhile to address the issue in advance and streamline the process in question by preparing an appropriate procedure in the form of a policy or instruction.

And although the benefit test is generally not required by law, it can bring many tangible benefits to the taxpayer. Preparing such a document saves time associated with searching for data on transactions carried out several years back, reduces costs associated with audits, and sends a clear signal to the tax administration that the taxpayer is pursuing a transparent tax strategy.

! Preparation of a benefit test is only necessary for controlled transactions carried out with entities from so-called “tax havens”. As a result of changes introduced by the legislator, as of January 1, 2021, the economic justification of such transactions has become a mandatory element of local transfer pricing documentation.

We invite you to learn more about our full range of support in this area – link here.

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[1] Judgment of the Supreme Administrative Court of November 8, 2011. (ref. II FSK 1048/10)