TP-R form for 2022 – the only constant is change

The Ministry of Finance has already made us look forward to annual changes in the TP-R form. Transfer Pricing information gets more and more detailed and complicated every year. This one is no different. We already know that the TP-R form will be expanded to include the so-called statement. By the way, the statement itself has been revised and is now broader (we have covered it in our blog). And what else should Polish taxpayers pay attention to?

A new ratio to evaluate a taxpayer’s situation?

In the latest available draft regulation on transfer pricing information for corporate (and, respectively, personal) income tax, starting this year, no longer four but five ratios in the TP-R would illustrate an entity’s financial situation. In the TP-R form filed for the 2022 tax year, taxpayers were to indicate the share of operating expenses with related entities in the entity’s total operating expenses.

One ratio – a number of challenges

The publication of draft regulations containing information on the need to calculate the new ratio has met with opposition among taxpayers and advisors. Unlike in the case of the previously reported profitability measures (operating margin, gross profit margin, return on assets and return on equity), calculating the new one would involve additional work.

This is because the underlying data are not standard items in the financial statements. Also, it is unclear how operating expenses with related entities should be understood. The financial statements do not include an item “Operating expenses with related entities” while the Accounting Act in force does not provide for the reporting of operating expenses by related and third parties in the financial statements. Another doubt voiced is about how to determine the level of operating expenses with related entities: are these supposed to be costs, for example, resulting from invoices issued by related entities? Moreover, it is uncertain whether every internal system used in accounting supports a fairly automatic compilation of the necessary data.

The late publication of the regulations requiring the new mandatory reporting (Q3 2022) has left taxpayers without any chance to prepare in advance adequate data records for calculating the ratio for 2022, or even for 2023. Certainly, its correct calculation will require appropriate internal aggregation of data. Additional work and time are necessary on the part of taxpayer’s financial staff.

A light in the tunnel…

…or yet another set of draft changes to the regulation for TP-R for 2022. On the one hand, making changes to the regulations – which are the basis for reporting – a few months before the deadline can be controversial. On the other hand, the Ministry’s positive response to the concerns voiced by taxpayers and advisors is welcome. Documents published in the RCL (Government Legislation Center) at the end of May reveal that in the latest version of the regulation (still unsigned and unpublished in the Journal of Laws), the ratio that raises so many doubts will be removed. So, taxpayers will report as before using four ratios indicating the standing of a company. All that remains for us now is to wait for the publication of the changes in the regulations. And, of course, for the release of the latest version of the TP-R form.

The impact of the comparability adjustment on the results of the analysis – the change that remains …

A novelty in TP-R reporting is the obligation to state the impact of a comparability adjustment on the result of the benchmarking analysis. As a reminder, comparability adjustments serve to achieve a greater degree of comparability between the terms of the tested controlled transaction and the sample selected and analyzed in the benchmark. When a comparability adjustment (or adjustments) was made in the process of preparing the benchmarking analysis, taxpayers in the TP-R for 2022 will be required to state whether the comparability adjustment changed the result of the analysis by less or more than 30%.

…and raises doubts

The first one is related to the fact that under currently binding regulations, information on the impact of comparability adjustments on the results of the analysis is not a mandatory part of the benchmarking analysis. What if a taxpayer has an up-to-date benchmarking analysis, prepared in accordance with transfer pricing regulations, but without detailed information on the impact of adjustments on the result? After all, it is quite common that the TP-R for 2022 will report transactions whose arm’s length is verified by analyses prepared in previous years. Will the taxpayer be obliged to complete the analysis for the purposes of correct TP-R filing? And what about the analyses prepared by the group? Will it be necessary and possible (!) to calculate the impact of the comparability adjustment on the result? In such situations, is it a good and safe solution to select the third option: checking the item ‘Impossible to determine the impact of the adjustment on the result’ in the form?

Same old story – how to calculate it?

Another concern is how to calculate the impact of adjustments on the analysis result. The new regulations introduce no details and such calculations can be particularly complicated, especially where the analysis result is a range of arm’s length values rather than a single value. So, in most cases. This is where more questions pop up: (i) should the impact of the adjustment be calculated for individual observations? Should the maximum, average value of changes as a result of adjustments be given?, (ii) and what if there are a lot of observations and it is impossible to verify the impact for each of them?, (iii) is it then sufficient to calculate the impact for extreme values (min, max or first and third quartiles)?, (iv) should the analysis reports include two ranges of arm’s length values – before and after adjustments?

But why?

We are not naïve to assume that the change in the TP-R regarding comparability adjustments is just another formal requirement. We have been there and done that in taxes, so let’s say it loud: what will the authority learn from the impact of comparability adjustments on the result of the analysis? Which option is the “good” one: analyses with result adjustments below or above 30%? If a taxpayer states it was impossible to calculate the level of the impact, will that be a red flag for its TP-R? The lawmaker only clarifies that the additional information is to assess the materiality of comparability adjustments. In my opinion, it can be understood in different ways.

The multitude of questions means that again this year the Ministry of Finance’s TP-R Handbook will be crucial. 

Changes to the TP-R form, related to stating the impact of comparability adjustments on the result of benchmarking analyses, mean that your current benchmarks should be taken off the shelf and reanalyzed. The deadline for filing transfer pricing information for 2022 may seem far off, but it is worth acting in advance. It may be labor- and time-consuming to calculate the impact.