How to avoid mistakes in benchmarking
How to avoid mistakes in benchmarking The provisions on benchmarking as a mandatory element of local transfer pricing documentation have been in force since 2017. Despite this, you can still come across analyses containing significant substantive and at the same time basic errors. Today in the series “On benchmarking in transfer pricing”, we will discuss just that. While verifying comparative analyses recently, we came across benchmarks in which comparable entities were selected inconsistently with the subject of the analyzed transaction. Among the final sample of comparable entities were entities with a profile inconsistent with the activity conducted as part of the verified controlled transaction. Where do such discrepancies come from? Perhaps the preparer wrongly identified the subject of the transaction (production of raw materials for food production) with the core activity of the analyzed entity according to its PKD (production of food products). In another example, in the analysis concerning the production of finished products, among the entities considered comparable were those that obtained approx. 50% of sales revenue from commercial activity. Perhaps the person preparing the report did not verify the compliance of the actual activity of these entities with the PKD code under which they were registered. A separate category of benchmarks is analyses for financial transactions – not only due to their degree of complexity, but also due to difficulties in obtaining the appropriate data. Perhaps this is the reason for the still common practice of referring, for example, in analyses concerning loans to interest rate statistics published by the National Bank of Poland, as comparative data. Meanwhile, these are data with a very high degree of aggregation, which makes it impossible to precisely relate them to the conditions of specific transactions concerning financing between related entities. However, if we decide to use the NBP data, it is worth considering whether the effect of such a comparison is not a comparative analysis, but a compliance analysis – due to the use of data that does not meet the comparability criteria. Finally, the issue of updating the benchmark in connection with the expiry of the 3-year statutory “validity period”. This seems quite simple, provided that after 3 years from the preparation of the analysis, the person preparing the report does not decide, for example, to limit themselves solely to updating data from the reports of a group of entities considered comparable in the original analysis. This group may include entities that have changed their industry or profile in the meantime, entered the structures of capital groups, or ceased operations. Changes in the transaction itself (such as a significant increase in the volume of turnover) may also require modification of previously applied comparability criteria. Therefore, updating always requires re-searching for data based on verified criteria. Do you have any doubts as to whether your comparative analyses are being prepared correctly? Please contact us: infocredit@infocredit.pl . Previous newsNext news Potrzebujesz wyceny lub zamówienia? Napisz do nas bok@inocredit.pl
A good change in transfer prices
A good change in transfer prices Grzegorz Garbarczyk, InfoCredit On August 25, the Sejm received a draft amendment to the Corporate Income Tax Act (https://sejm.gov.pl/Sejm9.nsf/druk.xsp?nr=2544), which included changes beneficial to taxpayers in the area of preparing transfer pricing documentation for so-called tax haven transactions. The most interesting change for taxpayers is certainly the repeal of Article 11o, paragraphs 1a and 1b of this Act – the effect will be the lack of the obligation to prepare transfer pricing documentation for indirect transactions with tax havens. This obligation arose in a situation where a given taxpayer’s contractor (very often an unrelated entity) made a transaction with an entity from a tax haven (reading the provision literally, even transactions of minimal value). From the very beginning, these provisions were widely criticized – by both taxpayers and tax advisors – as an excessive (and often impossible to fulfill in practice) administrative obligation. One of the arguments was that the provisions did not generate any significant benefit for the State Treasury. In our opinion, there are other, better tools to combat transfers to tax havens than transfer pricing documentation dedicated to transactions with related entities. Incidentally, another beneficial change was introduced for taxpayers, this time those entering into direct transactions with entities from tax havens. Although the obligation to document these transactions remains, the thresholds from which it arises have been significantly raised – PLN 2,500,000 for financial transactions and PLN 500,000 for non-financial transactions. The previous threshold was PLN 100,000 regardless of the type of transaction. This change will certainly result in a significant decrease in the administrative burden on taxpayers by reducing the circle of transactions covered by the obligation to prepare transfer pricing documentation for direct tax haven transactions. To sum up – the current legislative proposals of the Ministry of Finance are most advisable and beneficial for taxpayers. In a word: finally! Previous newsNext news Potrzebujesz wyceny lub zamówienia? Napisz do nas bok@inocredit.pl
Survey: SpK about CIT
Survey: SpK about CIT 97% of surveyed entrepreneurs-co-owners of limited partnerships believe that CIT will reduce their willingness to invest. 86.5% claim that CIT will reduce their willingness to employ. 94.5% believe that as a result of the new tax, the competitiveness of limited partnerships will decrease. 65.75% are considering changing the form of business as a result of legal changes, and 27.75% are considering closing their business. – according to a survey conducted in October by InfoCredit in cooperation with CRIDO and the Association of Entrepreneurs and Employers (ZPP). Entrepreneurs and co-owners of limited partnerships unequivocally assessed the impact of introducing CIT on the future of their businesses. The survey results confirm the conclusions from the reports presented in October by CRIDO, ZPP and InfoCredit “SPK in Poland – data analysis” and “Taxation of limited partnerships in Europe”. – The changes are most disturbing for Polish, small, family companies. They were the ones who clearly dominated the survey, responding most willingly and quickly. Over 87% of the completed surveys came from companies employing up to 49 people – says Jerzy Wonka, InfoCredit Development Director. The vast majority of respondents, as much as 97%, believe that the tax will reduce their willingness to invest. Only 2.75% claim that it will have no effect, and 0.25% that investments will increase. 86.5% claim that CIT will reduce their willingness to employ (0.25% increase, 13.25% no effect). 94.5% believe that after the introduction of double taxation, the competitiveness of their companies will decrease (1.25% increase in competitiveness, 4.25% no effect). Entrepreneurs believe that continuing to run their business as a limited partnership after the introduction of CIT ceases to be justified. As many as 65.75% are considering changing the form of business activity, and 27.75% are considering closing the company. Only 6.5% responded that CIT would not change anything. – Contrary to the declarations of the Ministry of Finance, the survey results showed what had already resulted from the reports we had prepared earlier. The overwhelming majority of entrepreneurs, especially small ones, had a decidedly negative opinion of the idea of taxing limited partnerships with CIT. We can only hope that the Senate will hear the voice of Polish entrepreneurs and organizations representing them and, as a result, such bad regulations will not be passed. All the more so because this is happening at a time of creeping lockdown and many other problems that companies have to face. In such circumstances, discouraging entrepreneurs from fighting for their businesses is a very harmful action for the economy – comments Mateusz Stańczyk, partner in the tax advisory team at CRIDO. – The survey results confirm our assumptions – taxing limited partnerships with CIT is a powerful blow to investment and employment. What’s more, it coincides with the crisis caused by the coronavirus epidemic, during which the willingness of entrepreneurs to invest has already fallen to a record low level. It is difficult to understand the legislator’s determination to push for this solution. It will not lead to a reduction in tax abuse, because it is not limited partnerships that are the problem in this respect – not only have we shown this in the reports published so far, but the Ministry of Finance itself has also admitted it. According to information provided by the ministry, the tax office has only challenged tax schemes using limited partnerships six times. One effect of this poor regulation may be to make it more difficult to emerge from the crisis caused by COVID-19 and to practically eliminate limited partnerships from the Polish economic landscape – says Jakub Bińkowski, director of the Department of Law and Legislation at the ZPP. About the survey The survey was conducted from 16 to 30 October in electronic form. We sent questions to limited partnerships registered in Poland and included in the InfoCredit database. We received 400 responses. The most active were micro and small businesses. 189 responses came from companies employing up to 9 people (47.25%), 160 from companies employing from 10 to 49 people (40%). Previous newsNext news Potrzebujesz wyceny lub zamówienia? Napisz do nas bok@inocredit.pl
Press release
Press release Limited Partnerships in Europe and CIT Contrary to the claims of the Ministry of Finance, in most of the countries analyzed in Europe, limited partnerships (or similar ones) are tax-transparent companies. The taxation of limited partnerships in other European countries is not related to the intensified fight against tax avoidance in recent years. Most rationally operating companies will change the form of conducting business to a form that ensures the current level of taxation and foreign companies will pay the same as before. The state budget will not gain much, Polish entrepreneurs busy fighting for survival in the times of the pandemic will lose – according to the report by CRIDO, ZPP and InfoCredit “Taxation of limited partnerships in Europe”. The authors of the report looked at the taxation of limited partnerships in 16 European countries. In most of the countries analyzed, limited partnerships are tax-transparent (not taxed with CIT). They include: Austria, Denmark, Finland, Ireland, Malta, Germany, Sweden and the United Kingdom. In other countries, CIT taxation of a limited partnership results from the historically adopted legal system. Importantly, none of the countries analysed introduced taxation of limited partnerships in the last 5 years. This indicates that in none of these countries taxation of limited partnerships is related to the intensified fight against tax avoidance in recent years. Among the limited partnerships subject to taxation, in France and the Czech Republic, income attributable to the general partner is still not subject to taxation at the level of the limited partnership (contrary to the assumptions of the Polish amendment). In none of the countries analysed are there any differences in the taxation of partners due to the degree of connections between them (i.e. limited partners holding shares in the company that is the general partner). Polish small family businesses will pay more than their counterparts in Germany In the event of the introduction of double taxation of limited partnerships in Poland, compared to the conditions of functioning of limited partnerships in Germany, the situation of Polish small family companies generating annual income not exceeding approx. PLN 230,000 will significantly deteriorate. Despite the use of the preferential 9% CIT rate by Polish SPK, the level of taxation of Polish partners will be higher than the analogous taxation of partners of German limited partnerships despite their being subject to progressive taxation. This situation will affect at least 13 thousand limited partnerships in Poland. The state budget will not gain much Due to EU regulations and international law, CIT taxation of limited partnerships will not threaten the competitive position of such companies with foreign capital in Poland. They will continue to pay tax at the same level (i.e. 19%). On the other hand, Polish entrepreneurs, wanting to maintain their competitive position, will choose an alternative form of conducting business activity. Some of them will transform into a general partnership or a professional partnership. In this way, they will be forced to sacrifice their own safety and that of their families in order to maintain the current level of taxation and competitiveness. Others (mainly larger entities) will conduct business through a limited liability company based on holding structures. As a result, the effect on the state budget will be minimal, because while protecting their competitive position, Polish companies will save themselves by changing their structure. The structure of companies in Poland and Germany In the years 2010-2019, the number of new companies in Poland grew rapidly. The largest number (176.7 thousand) were limited liability companies, which in 2019 constituted 83% of all companies in Poland. There are as many as 429.1 thousand of them compared to 40.6 thousand limited partnerships, which constitute only 7% of all companies in Poland. In Germany, this percentage is more than twice as high and amounts to 15%. Despite the significant increase in the number of limited partnerships in recent years, if only due to the reduction of business risk for entrepreneurs, we are far behind our western neighbor in this respect. – We see other alternative solutions that could help achieve the goal of reducing the risk of untaxed transfer of limited partnership income abroad, e.g. by imposing on the limited partnership the obligations of a payer. In such a situation, a limited partnership with foreign partners – acting as a payer – would be obliged to pay tax on the limited partnership income to the Polish office. Such an alternative scenario would protect Polish entrepreneurs from increased taxation while maintaining their competitive position in relation to foreign entities – comments Mateusz Stańczyk, partner in the tax advisory team at CRIDO. – The fact that limited partnerships are not used for the purposes of international tax optimization was already proven by a report published at the beginning of October. This was later confirmed by the response of the Ministry of Finance to the request for information submitted by the ZPP on this matter public. The latest report also indicates that, in general, limited partnerships are rather transparent tax-wise in Europe. The opposite regulations, i.e. those covering CIT limited partnerships, are the result of a historically adopted approach rather than intensified actions to tighten the system. It turns out, therefore, that the arguments used by the Ministry of Finance in the justification for the draft act are not based on reality. The only effect of taxing CIT limited partnerships will be a deterioration of the competitive position of Polish entrepreneurs, who will be burdened to a greater extent than their foreign counterparts – says Jakub Bińkowski, director of the Department of Law and Legislation at the ZPP. – Entrepreneurs conducting business in the form of limited partnerships are very concerned about the tax changes. All the more so because the economic situation has weakened and their costs, related to, for example, switching to a safe mode of work and investing in new communication technologies, are growing. We are collecting their opinions
CIT and limited partnerships
CIT and limited partnerships The inclusion of limited partnerships in CIT will increase the burden on tens of thousands of Polish entrepreneurs The inclusion of limited partnerships in the CIT tax will lead to a significant increase in taxes for nearly 73,000 Polish entrepreneurs. The most dynamic businesses will suffer the most, as they will not have the chance to benefit from the lower 9% CIT rate, and the actual taxation of partners in these partnerships will increase to 34%-38% instead of the current 19%-23%. Only 1% of limited partnerships have foreign partners, and their share in the total number of partners in limited partnerships is 0.4%, which means that the potential risk of untaxed transfer of profits abroad is marginal – according to a report presented during a joint conference of CRIDO, ZPP and InfoCredit. Consequences for business In connection with the planned tax changes (as of October 2, 2020), there will be a significant increase in the tax rate for nearly 73,000 Polish entrepreneurs. Around 75% of companies with lower turnover will be able to benefit from a 9% CIT rate instead of 19%. However, as many as 25% of limited partnerships responsible for 90% of the revenues generated by these businesses (i.e. nearly PLN 300 billion per year!) will pay 19% CIT. Effectively, the interest rate for partners in these companies, mainly Polish entrepreneurs, will increase to 34% or, in the case of people paying the solidarity levy, to 38%. Even Estonian CIT will not help The new tax benefit in the form of the so-called Estonian CIT does not cover limited partnerships. Even assuming that some entrepreneurs decide to transform into a capital company (LLC or S.A.), it will probably also remain, apart from this, a preferential tax regime – this form of activity is popular in particular among entrepreneurs operating in the trade and services industry, which means no investment expenses that are a condition for using this form of taxation. Limited partnerships are not commonly used for international tax optimization Contrary to the justification of the planned changes, the data do not indicate that limited partnerships are used in international tax optimization schemes. In Poland, approximately 43,000 limited partnerships conduct active business activity. According to the analysis of CRIDO experts, based on data from the InfoCredit database, 92% of limited partnerships are businesses run by individuals from Poland. 72,705 thousand Poles run their businesses in this form. For comparison, only 0.4% of partners in limited partnerships in Poland come from abroad. In first place are Germany (151 partners), for whom this form of running a business is quite common and which is indicated as one of the reasons for Germany’s economic success. In subsequent places are Luxembourg (113 partners), Cyprus (41) and Great Britain (39). We are talking about the entire country and many industries Limited partnerships are scattered all over the country. The largest number of them are in the following voivodeships: Mazowieckie (11,290), Wielkopolskie (5,611), Małopolskie (4,744) and Śląskie (3,792). They operate in various industries, most of them deal with industrial processing, construction and trade. Many transport and logistics companies and the catering industry also operate in this way. This form has allowed more than one Polish entrepreneur to develop, who, having a “flair” for business and running it, was able to simultaneously limit the risk for his family. – The combination of single taxation at the rate of 19% with limiting the risk of running a family business is a positive incentive and motivator for the development of entrepreneurship. This is shown by the example of Germany, whose economic power grew precisely on family businesses run in the form of limited partnerships. The planned double taxation of limited partnerships will not only be a negative signal for Polish, committed entrepreneurs, but will also put domestic companies in a worse market position in relation to their foreign competitors. Taking into account the EU directive, the so-called Parent-Subsidiary, a foreign investor from the EU will pay no more than 19% of income tax – comments Mateusz Stańczyk, partner at CRIDO. – Including limited partnerships in the CIT tax is a bad idea. The data does not indicate that these are entities used for international optimization schemes. However, they are an attractive form of conducting business for Polish, dynamically developing businesses. It should be emphasized that this is another proposal to increase the burden of taxes, which has appeared in a relatively short time. Meanwhile, according to our research, the willingness of entrepreneurs to invest is the lowest in years – this is not happening without a reason. Multiple changes in regulations, the sudden introduction of new burdens, the lack of basic legal security for companies are the main reasons why the investment rate in Poland is far from the level of 25% of GDP expected according to the Strategy for Responsible Development – claims Jakub Bińkowski, director of the Department of Law and Legislation of the Association of Entrepreneurs and Employers. – Today, more than ever before, every proposed change to the tax system should also be analyzed in the context of employment. Greater burdens for tens of thousands of Polish entrepreneurs may mean a reduced willingness to create new jobs or maintain existing ones. InfoCredit will soon conduct a survey among entrepreneurs so that they can assess the proposed changes to taxation in the context of employment and their market opportunities. We will share the results of this survey with you in October. The InfoCredit index has been signaling for many months that when there are fewer jobs, the number of sole proprietorships increases. And these have a much lower ability to achieve market success than companies with an established position – says Jerzy Wonka, InfoCredit Development Director. Previous newsNext news Potrzebujesz wyceny lub zamówienia? Napisz do nas bok@inocredit.pl