Trends in tax audits during the pandemic

Andrzej Zubik Partner, PwC Poland

Despite the ongoing pandemic restrictions, the National Revenue Administration (NRA) is actively continuing tax audits and initiating new ones. Due to the specific nature of transactions carried out in the retail sector, it can be assumed that the risk of tax disputes arising in this sector in the near future could be significant.

What kind of entities are investigated?

Based on our practice, we understand that currently tax audits are most frequently initiated at the largest taxpayers, which generate the highest turnover and are seen by the NRA authorities as being of key importance from the perspective of generating tax revenues. The entities that are audited are frequently members of international groups with large numbers of inter-company transactions that have an impact on the company’s tax account. The retail sector in Poland is dominated by international distribution groups, and the tax authorities are frequently interested in the transactions that are typically concluded by such organizations.

According to our recent experience, preventive audits are now far less common, and the selection of entities to be audited is more and more effective thanks to the improved analytical capabilities of the NRA. 

The representatives of the Ministry of Finance have announced that the NRA is continuing to undertake numerous activities, with a particular focus on the analytical stage; in addition, many activities are carried out without the direct presence of auditors at the enterprise. Despite the current pandemic, the audits are not random and are well prepared. Usually the auditors know beforehand which area of tax settlements will be covered. Moreover, specific transactions which the NRA has doubts about are frequently identified before the inspection.

 

Which tax issues in the retail sector may be of particular interest to the NRA?

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Restructurings and transfer pricing audits

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General Anti-Avoidance Rule (GAAR)

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Intangible services

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Withholding tax (WHT)

Restructurings and transfer pricing audits

Since this is now probably the key area of focus for the NRA and the number of transfer pricing audits has been steadily increasing, it can be assumed that the tax authorities will remain focused on these issues in the coming year. Taxpayers involved in related party transactions of significant value, which are common in the retail sector, are exposed to the risk of such audits.

Transfer pricing audits are targeted not only at related companies with low profitability, i.e. those reporting tax losses, but also at entities that have changed their functional profile as a result of restructuring decisions affecting the group model. Quite commonly, already at the pre-audit stage, the entity’s profitability is compared to that of other entities operating in the sector, and if the NRA has any doubts about the profitability level, full customs and tax audits are initiated.

Transfer pricing audits are very detailed. Extremely thorough examinations of the entities’ actual functional profiles are observed. Furthermore, tax documentation is analysed in detail during such audits, with a particular focus on benchmarking studies.

In our opinion, the risk of transfer pricing audits used in intercompany transactions will remain significant in the following tax year. It should be pointed out that due to the new reporting obligations the NRA will gain access to even more precise information on related party transactions that is included in the CIT-TPR forms (detailed results of benchmarking studies reported in accordance with uniform standards), which may make the analysis of transfer pricing settlements more effective and help identify new areas for investigation.

Intangible services

The NRA authorities are still interested in transactions relating to royalties and other intercompany fees for intangible services. The tax authorities have always been interested in intangible services and attempted to challenge them as unrelated to income or incorrectly documented. Currently, we can observe the increased interest of the tax authorities in the limit resulting from Article 15e of the Corporate Income Tax Act of 15 February 1992 (the CIT Act). The NRA authorities perform detailed analyses of the nature of intangible services provided between related entities to ascertain whether they can be recognized as tax deductible and with respect to the limits of amounts resulting from Article 15e of the CIT Act.

General Anti-Avoidance Rule (GAAR)

After nearly four years of not using the anti-avoidance clause (GAAR), the tax authorities have started to apply it. According to the Ministry of Finance, the Head of the NRA had completed as many as 20 GAAR proceedings by the end of September 2020. Twelve firms were charged with concluding artificial business transactions aimed at achieving tax savings. The additional tax amounted to PLN 82 million, and the taxable income amounted to approx. PLN 0.5 billion.

Due to the complexity of transactions between related parties in the retail sector, there is a risk that the NRA authorities may verify whether or not they have been concluded for the sole purpose of avoiding taxation (this concerns in particular restructuring transactions). In our opinion, it can be expected that audits focused on the application of GAAR will become more and more common.

Withholding tax (WHT)

Recently, we have observed increased activity by the NRA in the area of WHT audits. After the Court of Justice of the European Union issued its judgments in the Danish Beneficial Ownership Cases (joined cases C-115/16, C-118/16 and C-119/16), we have observed increased interest of the NRA in identifying beneficial owners and challenging withholding tax exemptions. The problem of cross-border payments taxed with WHT (e.g. dividends, interest, royalties) is common in the retail sector. Therefore, there is a risk that transactions exempt from WHT may be audited by the NRA, in particular if the amount is significant.

More rigorous investigations of entities benefiting from subsidies from the Financial Shield of the Polish Development Fund

As declared by the Ministry of Finance, irrespective of the areas referred to above, the tax administration will also identify the entities which benefited from the Financial Shield of the Polish Development Fund (PFR) to verify potential overstatement or understatement of their declared income. Therefore, if a retail entity benefited from such aid, it should be seen as an additional risk factor which may result in a tax audit being initiated by the NRA.

According to the Ministry of Finance, the NRA does not directly control the application of the funds from the PFR Financial Shield; however, the accuracy of the turnover declared, on the basis of which the aid is granted, will be verified.

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