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Polish garment manufacturer LPP SA Capital Group is contesting a corporate income tax audit charging it with 16.4 million zloty ($4.3 million) in tax liabilities for 2012.
With interest, the payment due could climb above 20 million zloty, making it one of the largest tax assessments for a company to face in Poland’s modern history, not counting value-added tax fraud investigations, local tax practitioners said.
The audit centers on whether LPP overstated its tax-deductible costs by including trademark licensing fees paid to its Cyprus and United Arab Emirates (UAE) subsidiaries. It is also significant as it may determine the ability of Polish tax authorities to challenge other tax optimization schemes preceding the 2016 adoption of a general anti-avoidance rule (GAAR), Piotr Wyrwa, a tax consultant with RSM Poland, told Bloomberg BNA June 21.
According to LPP’s 2016 annual report, the audit was launched in 2015 and concerns “the reliability of declared tax bases and the correctness of calculation and payment” of corporate income tax for 2012.” In the report, LPP estimated the maximum amount of tax with interest, which it would potentially have to pay, at approximately 22 million zloty.
In its interim financial statement for the fourth quarter of 2016, LPP went on to say that “the company’s management board holds the view that LPP SA has correctly settled income tax and that there are no prerequisites” for the tax office “to issue a decision charging the Company with an additional tax liability for 2012.”
“I think the ministry of finance is trying to say to the taxpayers that your past returns are not safe if you did some risky things because we can try to argue not only using the anti-avoidance clause but also other provisions,” Wyrwa said.
In LPP’s case, “they may try to go after some technical aspects—not using the anti-avoidance clause, but arguing from the definition of a tax-deductible cost that it should be reasonable and concluded in a standard form, for example,” he explained.
But whether this line of reasoning will sway Polish courts, where the case appears to be headed, is yet to be seen, he added. “Without the clause, it will be hard to prove,” he said. “I would say that neither side can be sure of winning.”
In its 2012 annual report, LPP described the purpose of creating the subsidiaries—Cyprus-based Gothals Ltd. and Dubai-based Jaradi Ltd.—as trademark management, including trademark protection and activities aimed at increasing the trademarks’ value.
Both Gothals and Jaradi were created in 2011, and subsequently became recipients of Reserved LPP’s flagship trademark, as well as Cropp, House, Mohito, and Sinsay.
But the structure, where Jaradi as the ultimate holder of the trademarks provided Gothals with a paid license for their use, and where Gothals in turn granted LPP a royalty-bearing sub-license, according to LPP’s 2011 annual report, also had financial benefits, the tax practitioners said.
Not only was the company able to book the trademark licensing fees paid to Gothals as a tax-deductible cost, but it was also able to take advantage of Jaradi’s tax-free status in the Dubai International Financial Center free-trade zone, they explained.
Such a structure was risky but not illegal at the time, Wyrwa said. “It was some gray scope of law,” he said. “Without the tax anti-avoidance clause, such actions were risky but the potential amount you could save on taxes was tempting to take such risks. Today, I would not recommend such actions.”
Maria Kukawska, a Warsaw-based tax adviser and partner at Stone & Feather Tax Advisory, agreed that such structures are passé in today’s Poland. “The message is to stay clear of all these tax optimization schemes and, if in doubt, ask the finance ministry whether your transaction or considered transaction falls within the scope of the GAAR principle in Poland,” she told Bloomberg BNA June 21.
Slawomir Ronkowski, director of communications and sustainable development at LPP, declined to comment other than to say that “we are currently involved in appeal proceedings.”
LPP has 14 days to appeal the May 30 decision of the Tax Audit Office in Gdansk to the Polish tax chamber, which is the upper level of the Polish tax authority. The 14 days are counted from June 20, when the decision was officially delivered to LPP.
“At this stage we will not provide any information on these activities, as it cannot be excluded that the disclosure of such information may adversely affect the pending proceedings,” he wrote in a June 21 email to Bloomberg BNA. “We would like to further note that we have no knowledge of any other control proceedings pending with respect to the reliability of the stated tax bases or correctness of the manner of calculation and settlement of corporate income tax by the Issuer.”
With more than 25,000 employees and some 1,700 stores at home and abroad, LPP is one of the largest companies in Poland. It is listed on the Warsaw Stock Exchange, where it is part of the prestigious WIG20 index.
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