A very recent decision by a Polish court (Provincial Administrative Court in Gliwice) shows that when assessing compliance with the arm’s length principle the authorities, rather than looking at contracts and transaction flows, seek to identify the taxpayer’s functions in the supply chain and its functional profile characteristics.

The decision (ref. I SA/Gl 1563/22) concerns the case of a company that is a member of a multinational automotive group. The company is a manufacturer of automotive components which it supplies directly to unrelated parties. The company purchases materials and semi-finished goods from affiliates as well as purchasing central services (e.g. purchases, sales and OEM customer relationship management) and using funding provided by the shareholder.

Based on evidence collected during an audit, the tax authorities established that, despite the direct supplies to unrelated parties, the company’s role was that of a limited-risk (contract) manufacturer.

Such a functional profile identification was based on the following facts:

  • the company is responsible for:
    • production,
    • quality control,
    • packing,
    • warehousing,
    • arranging for deliveries to customer,
    • invoicing,
    • support during product pricing (manufacturing cost) for RFP purposes;
  • the central entity is responsible for:
    • RFP processes with customers,
    • negotiating prices and delivery terms,
    • contracting with customers,
    • procurement and contracting with suppliers,
    • developing Group strategy.

The authorities challenged the company’s financial result (loss) and assessed its income using TNMM based on a comparability analysis. They said that a company whose functional profile is that of a limited-risk manufacturer should earn a low but stable profit. Thus, their income assesment referred to the profit level indicator value from the lower bracket of the arm’s length range resulting from the comparability analysis.

The court held that the authorities correctly identified the company’s functional profile and were right to assess its income. However, it ultimately reversed their determination and agreed with the petitioner that taxable income was quantified incorrectly due to failure to take into account loss carry-forwards.

If this issue pertains to your business and you are interested in our assistance, please contact us.

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