This article is relevant for candidates sitting the Taxation – Poland (TX-POL) (F6) exam from the June 2018 sitting onwards. It is based on the tax legislation applicable to the tax year 2017.
For many years the Polish tax regulations have not provided for a general anti-tax avoidance clause to prevent taxpayers from complex tax optimisation arrangements which enable the avoidance of taxes which would otherwise be payable in the normal course of business.
Historically such a clause has been part of Polish tax law, but this was abolished by the Constitutional Tribunal back in 2004. Since then, the application of Polish tax law (especially in the area of income taxes) was largely guided by the ‘form over substance’ rule which often allowed taxpayers to achieve extraordinary tax savings in situations where tax would normally be payable.
This changed in July 2016, when the Tax Ordinance Act was supplemented with the provisions of article 119a, reinstating general anti-avoidance rules.
Tax avoidance vs tax evasion
At this point it should be noted that tax theory (and the legal system) distinguishes the concepts of tax avoidance and tax evasion.
The latter refers to the unlawful act of not paying taxes due via means which are contrary to the tax law. For example, not declaring sale revenues, hiding sale invoices or increasing tax costs with receipts for services that were never acquired. Tax evasion is simply an act of breaking the (tax) law and can and always could be countered with basic tax regulations. Tax evasion is also a criminal offence.
The concept of tax avoidance is more troublesome as it refers to actions of a taxpayer which are technically in line with particular tax regulations but allow the taxpayer to receive an unjust reduction of taxation. It is important that in order to be called tax avoidance such actions should be deliberately performed by the taxpayer in order to reduce tax and have as its main purpose the avoidance of tax. For example, rather than simply selling a high value asset which would generate taxable income, the taxpayer could perform a number of corporate restructurings and internal transactions (each one separately in line with tax regulations, but not necessary for other material economic reasons) which combined together give the result that the final transfer of the asset to the buyer would not result in income taxation (or the amount of tax would be reduced). The GAAR targets these types of operations.
To add further complication, tax theory also uses a concept of tax optimisation or tax planning which is perceived as a taxpayer’s right to choose the way to carry out a transaction or other economic operation in a manner which is more tax efficient. For example, choosing to lease an item rather than buy it in order to match costs with revenues or decreasing the tax depreciation of an asset to allow full tax loss utilisation, both of which should be considered as economic choices allowed under the tax law. In other words the taxpayer is not obliged to choose the form of transactions or economic operations which would result in the maximum amount of tax.
It should be noted though (to add more confusion) that Polish tax authorities tend to use term ‘allowed tax optimisation’ and ‘not allowed tax optimisation’.
Nevertheless, putting terminology aside, we should be aware that it is necessary to distinguish the three different types of taxpayer actions from a GAAR perspective:
|Tax evasion||Reducing tax in a manner which breaks particular basic material tax regulations||Not declaring revenues from sales made|
|Tax avoidance||Reducing tax through artificial actions which do not break particular basic material tax regulations but would not otherwise be performed if not for tax reasons||Number of unnecessary (from a business point of view) corporate restructurings resulting in final sale of an item with economic gain but without taxable income|
|Tax planning (allowed tax optimisation)||Reducing tax through choice of a manner of transaction or operation which is beneficial or neutral from an economic point of view which also brings a tax saving||Reducing depreciation rate to fully offset the tax losses carried forward which would otherwise expire|
GAAR regulation in Tax Ordinance Act
The regulation introduced in 2016 adheres to the principles outlined above.
In particular it states that anti-tax avoidance regulations evasion rules may be applied where a taxpayer performs an action which is done either predominantly or solely for the purposes of achieving a tax benefit and such action is in its particular situation contrary to the aim and objective of the tax law or the manner of the taxpayer’s action is artificial.
The GAAR regulations distinguish two model situations subject to its rule:
(i) Actions of the taxpayer are mainly guided by tax benefits
In such a situation, the taxpayer would structure transactions mainly in order to reduce the tax however there would also be some other economic benefits aside from tax. However, the tax benefits would be of a higher value than the other economic benefits.
In this case, the tax authorities have the right to identify a so called ‘adequate’ action, which in the given situation would have been performed by a reasonable entity in order to achieve the same economic aims other than the avoidance of tax. Once such adequate action has been identified, the tax effect is assessed based on this theoretical action.
So, for example, if a taxpayer, rather than simply sell its product to a business partner would devise a complicated and artificial chain of leases and corporate structures resulting in delivery of the product to the ultimate acquirer without taxation (or with reduced taxation) the tax authorities may disregard the operations and take a simple sale transaction as a benchmark. They could then assess the revenue received but also take into account the costs which would normally be claimed and thus arrive at an acceptable figure of taxable income and tax to be paid.
(ii) Actions of the taxpayer are only guided by tax benefits
A slightly different situation may occur if a taxpayer’s operations are solely driven by tax avoidance.
In this case, the tax authorities have the right to completely disregard the tax effect of such transactions.
For example, a taxpayer who performs a series of demergers, share disposals and mergers upon which a tax loss is crystallised and no other external economic benefit is gained. In this case the tax authorities have the right to simply disallow any tax reduction due to this tax loss carried forward.
Special GAAR rulings
Historically, the main argument used against the GAAR in Poland was a lack of safety and stability for taxpayers.
This was also a concern in the case of the new regulation, especially given the fact that the new regulations may override the protective power of individual tax rulings issued (which are still binding unless tax authorities prove they were used in a tax avoidance transaction).
Hence, the new regulation allows taxpayers to ask for a special GAAR tax interpretation (tax ruling) which may protect the taxpayer’s actions from any GAAR consequences. In the application for a tax ruling, the taxpayer should describe all elements of planned operations not only performed by the taxpayer itself but also by other entities involved in the transaction.
GAAR rulings differ from standard tax rulings both in terms of time to receive them (six months for a GAAR ruling versus three months for a normal ruling) and costs. While the cost to obtain a normal ruling is symbolic, the GAAR ruling procedure fee is PLN 50,000. It should be noted that although the GAAR regulation has been in place for more than a year and a number of applications have been filed, there have currently been no GAAR rulings issued to date.
Other anti-abuse regulations
It should be noted that the GAAR does not substitute other anti-abuse regulations which continue to be in force. These regulations include:
- Transfer pricing (TP) regulations
- Corporate income tax (CIT) regulations aimed against tax avoidance in merger, demerger, share swap and profit distribution operations
- Income tax regulations requiring market value as the price of goods or rights sold unless there is a valid reason to apply a different price
- Value added tax (VAT) regulations allowing the tax authorities to assess the VAT turnover in a transaction if it is unduly understated (‘VAT TP’).
New TP rules
Another important change to Polish tax regulations is the modification of the TP regulations effective from 2017.
TP rules have been present in Polish law for many years and require taxpayers to apply arm’s length terms to transactions with related parties.
This has not been changed although the catalogue of related parties has been modified a little.
In the past arelated party was identified when at least one of the following situations occurred:
- a company had a common direct or indirect owner holding at least 5% of shares
- a company is managed directly or indirectly by the same persons that the taxpayer is managed by.
The 2017 modification increased the shareholding requirement to 25% (thus actually reducing the number of related parties). The second condition of common management remained essentially unchanged.
New TP documentation rules
The biggest change in TP regulations relates to documentation requirements.
In the past the TP documentation had to be provided to tax authorities upon request within seven days. Thus the taxpayer did not have the obligation to have the TP documents in file for every tax year and only had to promptly provide the documentation for the transaction asked for during a potential tax inspection.
Starting from 2017 the TP documentation has to be prepared every year and kept on file.
New regulations also provide for a different scope of TP documentation depending on the amount of revenues or costs of a taxpayer. It is worth noting that the TP documentation thresholds relate also to costs thus even if company has no sales in a period and only incurs costs it may still be obliged to prepare TP documentation. The costs should be understood to be costs charged to the statement of profit or loss so any capital expenditure would not impact the TP thresholds.
The new TP documentation requirements are as follows:
(i) Companies with yearly revenues (or costs) below EUR 2,000,000
Such entities do not need to prepare transfer pricing documentation at all.
(ii) Companies with yearly revenues/costs above EUR 2,000,000
Such entities need to prepare a so called ‘local file’ which is roughly equivalent to the scope of TP documentation required under the pre-2017 rules.
The local file should comprise a description of transactions (or other arrangements) with related parties, including in particular:
- the type and subject matter of those transactions
- financial data
- identification data of related parties
- the functions performed by the taxpayer and related parties, the assets used and the risks assumed, and
- a description of the method of calculation of the taxpayer's income (loss) including a justification for the choice.
(iii) Companies with yearly revenues/costs above EUR 10,000,000.
Companies in this threshold should prepare the local file as described above, and in addition prepare a benchmark study comparing the related party transaction terms with the terms of comparable market transactions between non-related entities.
(iv) Companies with revenues/costs exceeding 20,000,000 EUR
The reporting obligations in this threshold increase and comprise the local file and benchmark studies (as above), and in addition a so called ‘master file’ being the report on the taxpayer’s group of related parties.
In particular the master file should comprise:
- structure of the group
- transfer pricing policy of the group
- description of the group's business profile
- information on intangibles operated by the group
- information on financial standing of related parties, and
- information on any agreements with Tax Authorities on TP rules.
The master file should also provide information on the entity preparing the group TP reporting as it does not need to be prepared separately by every entity in the group (it is enough if one company from the group prepares it and shares with others).
(v) Companies with consolidated accounting revenues exceeding EUR 750,000,000
Huge companies with consolidated profits exceeding EUR 750,000,000 apart from reporting obligations described above (local file, plus benchmarks, plus master file) have to prepared a so called ‘country by country report’ on income and tax paid as well as places of business, subsidiaries and foreign permanent establishments owned by the capital group.
Written by a member of the TX-POL (F6) examining team