Poland's Ministry of Finance has announced the release of a final explanatory note (tax explanation) that provides guidance on a taxpayers' ability to make transfer pricing adjustments under an ex-ante arm's length price setting approach. In particular, the explanatory note addresses adjustments within the meaning of Article 11e of the Corporate Income Tax Act and corresponding provisions in the Personal Income Tax Act, which have been in force since 1 January 2019.

Under Article 11e, taxpayers may make transfer pricing adjustments by changing the amount of revenues obtained or tax-deductible costs incurred, if the following conditions are met:

• The controlled transaction must be carried out in accordance with established arm's length conditions;
• There must be a change of relevant circumstances that have an impact on the conditions of a controlled transaction, or a taxpayer must gain new information on actual costs (if the transfer price was determined on budgeted costs) or on actual revenue from a controlled transaction;
• The taxpayer must have a written statement from the associated (related) company that a corresponding transfer pricing adjustment has been made for the same amount;
• The associated company must be resident in Poland or in a jurisdiction that has an income tax treaty or exchange of information agreement with Poland; and
• The taxpayer must confirm that the transfer pricing adjustment has been made in the annual tax return for the tax year to which the adjustment relates.

The explanatory note provides that where there is downward adjustment resulting in a decrease in taxable income in Poland, all the conditions of Article 11e must be met. Where there is an upward adjustment resulting in an increase in taxable income, only the first two conditions must be met.

Other important points provided by the explanatory note include:

• At the time of engaging in a controlled transaction, the associated companies are expected to establish - to the best of their knowledge - the conditions of the controlled transaction that would be agreed by independent companies;
• Changes in circumstances that may permit adjustments include a change in the market price for raw materials, exchange course, and volatility in sales or demand due to changes in customer demand;
• Adjustments are retrospective, and cannot be made for future transactions;
• Taxpayers are not allowed to make year-end self-initiated adjustments when foreign tax authorities make a primary adjustment of a controlled transaction, in which case corresponding adjustments can be made only through the mutual agreement procedure (MAP);
• Adjustments should be made before filing a tax return and cannot cover a period that exceeds the fiscal year;
• Adjustments can be made without an adjustment clause in a contract between associated companies; and
• Taxpayers can make downward adjustments only after receiving a statement from the associated company confirming that it actually made a corresponding adjustment, so that double non-taxation can be prevented.

The final explanatory note also includes relaxed requirements for statements on corresponding adjustments in response to the COVID-19 pandemic. This includes that, given the impact of the COVID-19 pandemic, companies in many sectors will be forced to make adjustments in transfer prices used in controlled transactions to account for new market conditions and maintain arm's length pricing. As such, provisions have been introduced to provide an exemption from the statement requirement as a condition for taking into account transfer pricing adjustments when determining the amount of revenue and tax-deductible costs. This exemption only applies for the period of the COVID-19 crisis.