Transfer pricing adjustments – a tool for restoring the arm’s length nature of controlled transactions

Transfer pricing adjustments (hereinafter: TP adjustments), introduced into the Polish legal system as of 1 January 2019, constitute a key instrument for ensuring that settlements between related parties comply with the arm’s length principle. 

In practice, however, even the most carefully designed transfer pricing models do not protect controlled transactions from losing their arm’s length character as a result of factors beyond the taxpayer’s control. 

Such events include, among others: 

1. 1. Sudden changes in interest rates. 
   2. High volatility of foreign exchange rates. 
   3. Fluctuations in commodity or production material prices. 
   4. Geopolitical events affecting costs and demand. 

The above factors may very quickly cause deviations from the target margin or mark-up in transactions with related parties. A TP adjustment enables the restoration of arm’s length conditions, protecting taxpayers against the consequences of a non-arm’s length financial result. 

How can a TP adjustment be applied safely? 

Reporting a non-arm’s length mark-up or margin achieved in transactions with related parties in the TPR-C form entails significant tax risks. It may result in fiscal penal liability and increase the likelihood of being selected for a tax audit. In such circumstances, submitting the statement referred to in Article 11t(2)(7) of the CIT Act, confirming that transfer prices are arm’s length, also becomes problematic. 

However, provided that certain conditions are met, taxpayers may use a remedial mechanism in the form of a TP adjustment, the purpose of which is to reflect market conditions in settlements where deviations arise from circumstances beyond the control of the parties. Article 11e of the CIT Act sets out four conditions allowing a TP adjustment to be applied: 

1. 1. During the tax year, the taxpayer carried out transactions with related parties on terms that would have been agreed between unrelated parties. 
   2. There was a change in significant circumstances affecting the terms agreed during the tax year, or the actually incurred costs or revenues forming the basis for calculating the transfer price became known, and ensuring consistency with conditions that would have been agreed between unrelated parties requires a TP adjustment. 
   3. The taxpayer holds a statement from the related party (the other party to the transaction) or accounting evidence confirming that the related party has made a TP adjustment in the same amount as the taxpayer. 
   4. There is a legal basis for the exchange of tax information with the state in which the related party has its residence, registered office or place of management. 

Meeting the above conditions allows the taxpayer to carry out a TP adjustment safely, i.e. in compliance with legal requirements and without a material risk of being challenged by the tax authorities. 

TP adjustment only for transactions that were arm’s length ex ante? 

Article 11e(1) of the CIT Act indicates that a TP adjustment is only possible where the price agreed between related parties was arm’s length ex ante, i.e. determined at a market level already at the transaction planning stage. Therefore, taxpayers engaged in controlled transactions who intend to use the TP adjustment mechanism should prepare a transfer pricing analysis (benchmarking or compliance analysis) to demonstrate that the prices applied were arm’s length from the outset. 

This approach was confirmed in an individual tax ruling of 26 June 2023 (0111-KDIB1-2.4010.216.2023.1.DP). A Polish taxpayer established an operating margin in a transaction involving the purchase of distribution services which, as demonstrated by a benchmarking study, was too high and non-arm’s length. The taxpayer planned to make an adjustment under Article 11e of the CIT Act; however, the Head of the National Revenue Information Service (KIS) concluded that the conditions set out in Article 11e(1) and (2) had not been met, as the price was not arm’s length ex ante, and there were no extraordinary circumstances or later discovery of actual costs. 

Impact of TP adjustments on VAT 

As TP adjustments affect the value of settlements between the parties, the practical question arises as to whether such adjustments are subject to value added tax (VAT). In particular, do they result in an obligation to issue corrective invoices, or should they be regarded as falling outside the scope of the VAT Act? 

As a rule, where a TP adjustment is directly linked to a prior supply of goods or provision of services and can be attributed to specific transactions, it will be treated as an adjustment to the original taxable transaction, giving rise to a VAT settlement obligation. Conversely, where the adjustment relates to an overall correction of profitability and is not allocated to specific supplies, it may fall outside the scope of VAT. 

Accordingly, each TP adjustment should be carefully analysed in terms of its link to transactions and its impact on revenues and costs. The VAT consequences of a TP adjustment always depend on the broader context; therefore, businesses should assess each case individually to mitigate tax risk and ensure correct VAT treatment. 

Frequency of TP adjustments – what do the regulations and practice say? 

Polish regulations (Article 11e of the CIT Act) do not specify either the frequency or the form of TP adjustments. These issues are clarified in the Ministry of Finance’s Explanatory Notes, according to which TP adjustments should, as a rule, be made after the end of the tax year and before filing the tax return. However, more frequent adjustments (including monthly or quarterly) are also permitted, provided that such an approach can be regarded as arm’s length and is applied by independent entities, for example in the same industry. 

This position is reflected in individual tax rulings. In a ruling of 14 December 2020 (0111-KDIB1-1.4010.416.2020.1.SG), the tax authority emphasised the need to make a TP adjustment “without undue delay” after the end of the year, while indicating that the frequency should depend on the specifics of the industry and the volatility of economic factors. In turn, in a ruling of 8 November 2024 (0114-KDIP2-2.4010.451.2024.3.RK), the Head of KIS accepted a model of ongoing profitability monitoring and monthly adjustments, justified inter alia by exchange rate fluctuations as well as transport and labour costs. 

Summary: the practical value of TP adjustments 

A TP adjustment can restore the arm’s length nature of a transaction disrupted by external factors or discrepancies between budget assumptions and actual data. However, before applying this mechanism, taxpayers should ensure that all statutory conditions set out in Article 11e of the CIT Act are met. 

At the beginning of the current tax year, this is an appropriate time to verify the arm’s length nature of controlled transactions and, where necessary, adjust profitability levels or relevant contractual provisions. In the context of multinational groups, it is also important to take a broader view: TP adjustments operate within the framework of OECD guidelines and differing national requirements, which affects the risk of disputes and double taxation – more on this topic in our latest article: https://www.mddp.pl/transfer-pricing-adjustments-global-challenges/

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If you are considering a TP adjustment or wish to assess the correctness of an approach already adopted, we invite you to contact us and take advantage of our support: https://www.mddp.pl/price-adjustments/