Last chance to prepare the 2024 Local File!

The deadline for preparing local transfer pricing documentation (the so-called Local File) for the 2024 tax year is inevitably approaching – it falls on 31 October (for taxpayers whose financial year coincides with the calendar year). This is an appropriate moment to ask: why is it particularly important to prepare this document carefully?

The answer is simple – the Local File is not only a statutory obligation but also a fundamental and key document that tax authorities reach for first during audits or verification procedures.

What risks arise from improperly preparing the Local File?

Improper preparation of the Local File may generate significant risks, such as:

• Questioning the arm’s length nature of transactions between related parties;
• Additional assessment of taxable income by tax authorities;
• Imposition of fine on individuals responsible for related-party transactions – in particular, members of the management board.

Who is required to prepare the Local File?

Regulations impose an obligation on taxpayers to prepare local transfer pricing documentation for a controlled transaction of a homogeneous nature, where the net value in the tax year exceeds:

• PLN 10 million – for transactions involving goods or financial transactions;
• PLN 2 million – for service or other transactions.

The obligation applies not only to typical service, goods, or financial transactions. Taxpayers often overlook atypical transactions, such as providing gratuitous benefits (e.g., guarantees, sureties), re-invoicing, or increases/decreases in share capital.

The Local File is not limited to transactions with related parties

The obligation to prepare transfer pricing documentation also applies to transactions with unrelated parties if their place of residence, registered office, or management is located in a jurisdiction or country practising harmful tax competition (so-called tax havens). Jurisdictions on this list include, among others, Hong Kong, Panama, and Monaco.

Attention! For transactions with tax havens, documentation thresholds are significantly lower, and they may be exceeded very easily in practice. They are as follows:

• PLN 2.5 million for financial transactions;
• PLN 500,000 for transactions other than financial.

Key elements of the Local File

Transfer pricing documentation should demonstrate that the terms agreed in controlled transactions correspond to those that would be applied by unrelated parties. According to regulations, it comprises four fundamental elements:

• A description of the taxpayer;
• A description of the controlled transaction;
• A transfer pricing analysis justifying the arm’s length nature of the controlled transaction;
• Financial information.

At the same time, regulations do not impose a rigid form for presenting these elements – the format and level of detail can be adapted to the specifics of the taxpayer’s operations.

Of particular importance is the functional analysis of the controlled transaction, which precisely defines:

• The functions performed by the parties;
• The assets utilised;
• The risks assumed.

This element is crucial as it determines the functional profile of each entity involved in the transaction and, consequently, influences the method of remuneration calculation that should be applied.

In the event of doubts, tax authorities may apply a recharacterisation mechanism – challenging the classification of the transaction adopted by the taxpayer and determining its nature, including the method of calculating remuneration, according to their own assessment.

Equally important is the transfer pricing analysis, which aims to demonstrate the arm’s length nature of settlements. As a rule, taxpayers are required to have a current benchmarking analysis or compliance analysis for each transaction with related parties covered by the documentation obligation. More on how to prepare an analysis that withstands scrutiny can be read here -> https://www.mddp.pl/transfer-pricing-benchmarking-2024-how-to-prepare/

Why is it worth preparing the Local File diligently?

Considering the mandatory elements the documentation should include, it is evident that it is one of the most important sources of information about the taxpayer and the transactions they conduct. This is why tax authorities start their transfer pricing audits with this document.

It is therefore particularly important that the documentation is prepared in accordance with applicable regulations and accurately reflects the taxpayer’s actual situation. A carefully prepared Local File helps minimise risks arising from gaps or inconsistencies with the actual state of affairs. It is therefore worthwhile to approach the preparation of all descriptions within the documentation diligently, as every sentence may be significant in the event of a tax audit.

It is useful to view the documentation from the perspective of the tax authority – considering how the information might be used and interpreted. For example:

• If there is a significant year-on-year change in the functions, assets, or risks assumed by the parties to the transaction, it may raise suspicions of restructuring;
• A substantial difference between the transaction value and the payment value may indicate potentially hidden financing.

Moreover, information contained in the Local File must also be consistent with the TPR form, which in practice summarises the information in the documentation, as well as – for entities required to prepare it – with the Master File.

Sanctions

It is also important to remember the severe penalties that taxpayers face for failing to prepare transfer pricing documentation, preparing it after the statutory deadline, or preparing it in a manner that does not reflect economic reality.

The Fiscal Penal Code explicitly states that if a taxpayer:

• Fails to prepare Local File;
• Fails to attach Master File to the Local File;
• Prepares transfer pricing documentation inconsistently with the actual state of affairs;

they may be subject to a fine of up to 720 daily rates (almost PLN 45 million!).

The fine for preparing transfer pricing documentation after the deadline is up to 240 daily rates (approximately PLN 15 million).

Ensure tax compliance and security

Carefully prepared documentation demonstrating the economic rationale of transactions between entities can effectively prevent questioning the arm’s length nature of settlements and reduce the risk of scrutiny by tax authorities during audits.

Therefore, if you wish to ensure that your documentation complies with applicable regulations, and that the information presented is tailored to the taxpayer’s business specifics and does not generate risk – we encourage you to contact our experts.