International Tax Planning and Transfer Pricing Planning: Poland from a US perspective

• Author: Professor Dr. Rainer Zielke
• Profession: Professor in business economics at Østfold University College, Halden, Norway
• Updated at: April 2017

Contenido 1 Abstract tax planning 2 Abstract transfer pricing planning 2.1 Introduction 2.2 The high tax country Poland in the OECD context 2.3 Transfer pricing rules of Poland 2.3.1 Country-per-Country (CbC) reporting 2.3.2 Arm's length principle 2.3.3 Transfer pricing methods 2.3.4 Scope of legislation 2.3.5 Reporting requirements 2.3.6 Documentation requirements 2.3.7 Cost sharing 2.3.8 Business restructuring 2.3.9 Interaction between customs valuation and transfer pricing 2.3.10 Dispute resolution 2.4 Calculation of the case studies in international tax planning between Poland and the USA 2.4.1 Design of the tables 2.4.2 The treaty Poland-USA in brief 2.4.3 BEPS Project progress 2.4.4 Poland in brief 2.4.5 The USA in brief 2.4.6 Design of case studies 2.4.7 Case study 1: Dividends from Poland to the US 2.4.8 Case study 2: Interests from Poland to the US 2.4.9 Case study 3: Royalties from Poland to the US 2.4.10 Case study 4: Management and technical service fees from Poland to the US 2.4.11 Case study 5: Capital gains with Poland as asset country to the US as seller country 2.4.12 Case study 6: Dividends from the US to Poland 2.4.13 Case study 7: Interests from the US to Poland 2.4.14 Case study 8: Royalties from the US to Poland 2.4.15 Case study 9: Management and technical service fees from the US to Poland 2.4.16 Case study 10: Capital gains with the US as asset country and Poland as seller country 2.5 Concluding remarks 3 Notes

Abstract tax planning

According to the International Monetary Fund, Poland confirms in 2016 with a gross domestic product (GDP) of US$ 467,350 million the nine-highest GDP of the EU. In Poland, corporate income tax is levied at the rate of 19.00%. The Polish tax system is a classical tax system in which corporate income is fully taxed and the distributed profits are taxed again by way of withholding. Thus, Poland is a high tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in lower taxing countries by means of tax planning measures. Poland has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting. According to the OECD, ^[1] GDP growth is projected to strengthen to around 3% annually in 2017-18, thanks to higher social transfers, low interest rates and rising disbursements of EU funds. Increasing disposable income and consumption, the switchover to the new budgetary period for EU funds and diminishing spare capacity should lead to an acceleration in investment. Stronger aggregate demand is expected to underpin a return to modest inflation. The central bank is projected to start increasing rates towards the end of 2017, as inflation picks up. New social spending was mostly financed by one-off revenues in 2016. This chapter provides a survey on the actual tax law frame conditions in Poland and practical support in international tax planning and transfer pricing planning between Poland and the US based on cross border case studies.

Abstract transfer pricing planning

With respect to transfer pricing Poland applies the arm’s length principle and follows the OECD Guidelines, the following transfer pricing methods are applicable: the comparable uncontrolled price method (CUP), the resale price method, the reasonable margin (“cost plus”) method. If application of the above methods is impossible, the methods of transaction profit shall be applied, i.e. the profit split method and the net transactional margin method. Companies are regarded as related if a Polish resident individual, legal entity (or its foreign permanent establishment) or entity without legal personality directly or indirectly manages or controls a non-resident entity or is a shareholder of that entity (qualifying shareholding of a minimum of 5%); a non-resident individual, legal entity (or its Polish permanent establishment) or entity without legal personality directly or indirectly manages or controls a resident entity or is a shareholder of that entity (qualifying shareholding of a minimum of 5%); or the same individual, legal entity or entity without legal personality directly or indirectly manages or controls a resident and a non-resident entity or is a shareholder of both entities (qualifying shareholding of a minimum of 5%). There are reporting and documentation requirements. Cost sharing is allowed and business restructuring possible according to OECD standards. There is no interaction between customs valuation and transfer pricing. The tax authorities may adjust the taxable income.

Introduction

International tax planning and transfer pricing planning between Poland, a high-income economy that is considered to be one of the largest of the post-Communist countries and one of the fastest growing within the EU, that has a strong domestic market, low private debt, flexible currency, and not being dependent on a single export sector, thus the only European economy to have avoided the late-2000s recession, and the US as most important national economy of the world based on cross-border case studies is of central importance. In addition, the USA confirm with a population of 321 million inhabitants in 2016 3rd place of the most populous countries in the world (4.40% of the world population).

According to the International Monetary Fund, ^[2] Poland confirms in 2016 with a gross domestic product (GDP) of US$ 467,350 million the nine-highest GDP of the EU. In Poland, corporate income tax is levied at the rate of 19.00%. The Polish tax system is a classical tax system in which corporate income is fully taxed and the distributed profits are taxed again by way of withholding. Thus, Poland is a high tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in lower taxing countries by means of tax planning measures. Poland has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the OECD, ^[3] GDP growth is projected to strengthen to around 3% annually in 2017-18, thanks to higher social transfers, low interest rates and rising disbursements of EU funds. Increasing disposable income and consumption, the switchover to the new budgetary period for EU funds and diminishing spare capacity should lead to an acceleration in investment. Stronger aggregate demand is expected to underpin a return to modest inflation. The central bank is projected to start increasing rates towards the end of 2017, as inflation picks up. New social spending was mostly financed by one-off revenues in 2016. Plans to increase tax compliance are welcome, and scaling down exemptions and special rates would improve efficiency, but lowering the retirement age would decrease potential growth and public revenues, which are already likely to be curbed by population ageing. By 2017, interest payments on public debt will have fallen by about 1% of GDP since 2012, and this increase in fiscal space will be partly used to implement a mild current-spending-based fiscal expansion over the projection period. However, the available fiscal room could instead be used to bring forward the planned investment in infrastructure. This would strengthen productivity growth and environmental and health outcomes. Reducing taxes on low wages would also benefit low-skilled employment

According to Orbitax, ^[4] (Daily Tax News Digest of 5 October 2016) on 29 September 2016, amendments to Poland's individual and corporate income tax laws were published in the Official Gazette after being signed into law by the president on 21 September. The measures include a reduced 15% corporate tax rate for small businesses, clarification of the meaning of Polish-source income, the definition of beneficial ownership, and certain anti-avoidance measures. The measures are effective from 1 January 2017.

According to Orbitax, ^[5] (Daily Tax News Digest of 13 September 2016) on 5 September 2016, Poland's parliament adopted legislation amending the country's individual and corporate income tax laws. The main measures are summarized as follows:

Reduced Tax Rate for Small Taxpayers and Startups

A reduced corporate income tax rate of 15% is introduced for small taxpayers with annual sales below EUR 1.2 million and for startups for the first year of operations. The reduced rate is not available for new operations resulting from the restructuring of a former taxpayer.

Polish-source Income Clarified

The meaning of Polish-source income is clarified to include:

• Income from any economic activity carried out in Poland, including activities of permanent establishments;

• Income from property, rights to property, or the sale of property situated in Poland;

• Income from securities or derivatives traded on the Polish stock exchange, including from disposals;

• Income from the transfer of shares or other rights in Polish companies, partnerships, or investment funds, the assets of which consist mainly (at least 50%) of property or rights to property situated in Poland; and

• Income from contractual payments paid by individuals or corporate or non-corporate entities resident in Poland.

The income types above will be automatically considered Polish-source income if not covered by a tax treaty between Poland and the respective jurisdiction in which the income recipient is resident.

Beneficial Ownership Defined

The concept of beneficial ownership is introduced into law, which is defined as the entity receiving income for its own benefit that is not an agent, a representative, a trustee or any other entity entrusted to forward all or part of the income to another entity. The concept is mainly for the determination of whether the exemption under the EU Interest and Royalties Directive (Directive 2003/49/EC) applies

Anti-avoidance Measures

The following measures are introduced targeting tax avoidance in relation to share exchanges, reorganizations and transfers:

• The conditions for the tax...