The new regulations concern entities located in Poland that engage in transactions with their foreign related parties. The Act states that a taxpayer would be eligible to apply for an income adjustment in Poland if an item of income is also taxed abroad as income of the Polish taxpayer’s foreign related party.

Implementation of the new regulations is linked to Poland joining the arbitration convention (90/436/EEC) which is in force in EU countries. The arbitration convention introduced the opportunity to apply for an adjustment of the income of a Polish entity in cases when the tax authorities of another EU country have assessed additional income to its foreign related party. Under the convention, participant countries are required to reach final agreement concerning the amount of an adjustment by reaching a consensus concerning the arm’s-length price in a given transaction. This consensus would also determine the amount of additional income to be assessed as well as the amount of the adjustment to be made.

The Polish Ministry of Finance is working on a draft of a decree, which would define the manner and procedure of applying for the adjustment. The present version of the decree refers directly to the arbitration convention, which binds only EU countries. However, it is expected that the rules set out in the decree would apply also to the procedures of mutual agreements incorporated in double taxation agreements.

Profit adjustment application procedure
According to the draft of the decree, to obtain an adjustment of income, the taxpayer would be required to file a formal application with the Ministry of Finance. The application would include, among other requirements, the following:

· Copies of tax assessment notices (decisions);
· A tax audit report—or equivalent document—stating that the alleged double taxation actually took place; and
· The taxpayer’s position regarding the correctness of the arm’s length methods applied.

The taxpayer would not be permitted to apply for the tax adjustment more than three years after a taxpayer receives the first tax assessment notice resulting in double taxation.

According to the convention, during stage I of the procedure, the tax authorities of the two countries must conduct negotiations with the goal of reaching an agreement within two years. (The same period of time is indicated in the draft of decree.) If, after two years, the countries have not reached an agreement, then an arbitration committee would be appointed (stage II of the procedure). The opinion of the arbitration committee would be binding for the tax authorities of the countries in question. Note that stage II of the procedure was not included in the draft decree.

Time frame
The resolutions of the act will come into force on January 1 2009. Taxpayers are, however, allowed to apply for the adjustment of their income based
on the arbitration convention, which is already binding in all EU countries (in Poland since February 1 2007)

Advantages for taxpayers
The amendment included in the act, as well as the arbitration convention, regulates the rules of conducting the agreement and arbitration procedures under Polish tax law. Some observers view this as a new tool that can be used to manage transfer pricing risk. Polish taxpayers would be able to obtain a tax refund in cases when a foreign contracting party of a given entity (located in one of the EU countries) has an income adjustment assessed and is charged with additional tax by the tax authorities of the country in question.

The arbitration convention, unlike the mutual agreement procedure, requires EU countries to reach an agreement in terms of the adjustments to be made. The convention has already been used in practice to eliminate double taxation in some cases of transactions concluded between the EU countries’ taxpayers.

Jacek Bajger (jbajger@kpmg.pl) KPMG