Poland Turns to Income Tax Changes After Regime Revamp

Trust Bloomberg Tax's Premier International Tax offering for the news and guidance to navigate the complex tax treaty networks and business regulations.

By Jan Stojaspal

When it comes to tax, Poland’s Deputy Finance Minister Pawel Gruza is clear, fair, and won’t mince his words: “invest, enjoy your tax incentives, make money, transfer them out or, preferably, reinvest.”

But equally, the ministry won’t put up with businesses engaging in contrived tax planning.

“What we really cannot stand as a fiscal authority is aggressive tax planning, totally fictitious structures,” Gruza told Bloomberg Tax in an exclusive interview May 9. And “we cannot stand aggressive transfer pricing, where we have bogus invoices flying around in the holding structure.”

The work and breakneck speed that has characterized Polish tax reforms over the last two years had to happen, but Gruza said this has now dissipated as newly adopted anti-fraud and anti-evasion measures produce results. Officials are now shifting their attention to simplifying the country’s tax laws.

“This phase of huge changes has ended, and we are now moving” to make tax laws “much more user-friendly,” Gruza said.

The reforms had to happen fast to produce results during this government’s four-year term in office, Gruza explained. But they also created uncertainty for Poland’s international companies that found themselves struggling to keep up.

Tackling the VAT Gap

Last year, value-added tax collections increased by 30.22 billion zloty ($8.43 billion) to reach 156.8 billion zloty, thanks to what Gruza called a “horizontal approach to the VAT gap.”

This was a barrage of complementary and sometimes overlapping anti-fraud measures that included the introduction of monthly reporting of VAT invoices, the merger of the tax administration with customs and tax control services, the introduction of prison terms of up to 25 years for the worst kinds of VAT fraud, collaboration with the banking sector in seeking out VAT fraudsters, and the adoption of a split-payment mechanism for collecting VAT that will come into force in July.

“The VAT gap had grown enormously” under the previous governments, “and we felt it’s not enough to use just one instrument,” Gruza said. “Basically, we needed to shoot from all available guns.”

Under Pressure

Corporate income tax collection also improved considerably last year, growing by 3.38 billion zloty to reach 29.76 billion.

Once again, a broad range of measures was required to ensure a quick result, Gruza said, including adoption of a general anti-avoidance rule, expanded transfer pricing documentation rules, and a series of official warnings issued by the ministry against such practices as treaty shopping, and using enterprise transformations for aggressive tax planning.

According to Gruza, a former business and tax consultant, the pressure to produce results was at times so intense that that it felt like being back at Arthur Andersen LLP, where he started as a 23-year-old in 2000 and where it was common to work 16-hour days.

Later, Gruza launched his own consulting company and worked as a business and public finance expert at Fundacja Republikanska, a right-leaning public policy think tank based in Warsaw.

Corporate Tax Focus

Now, with the major tax reforms out of the way, the ministry’s priority is a new corporate income tax law intended to replace—by 2020—a sprawling 25-year-old document that has been amended dozens of times and lost much of its clarity in the process, Gruza said in a wide-ranging interview.

Work on the corporate tax law started in February. The ministry aims to produce a leaner, clearer document and to explore the extent to which the bill can be built around terms and definitions that closely match international standards—accounting standards in particular.

“We will see if we can use the definitions and building blocks that are familiar to all accounting departments in all firms, so the language used to communicate between the tax office and companies will be the same,” Gruza said. “Now, as it stands, the corporate income tax law has nearly 100 percent definitions that are purely for the purpose of tax. The differences may be minute, but when you have thousands of them, they produce an unnecessary bureaucracy.”

When it comes to Poland’s attitudes towards large and multinational businesses, “the subjective view is that maybe the tendency is skewed against them,” Gruza said, insisting that isn’t the case. It is merely that Poland is extending the same treatment to companies of all sizes, he said.

“In reality, they are not losing their incentives, they can use the same special economic zones, even in more effective ways, we are giving them research and development incentives, they will use” the intellectual property box regime once it becomes available, he said.

Rate Trend

When it comes to corporate income tax rates, there are plans to reduce the 15 percent rate currently available for small taxpayers earning revenues of up to 1.2 million euros ($1.42 million) and for taxpayers starting a new business—to 9 percent as of 2019, according to Gruza.

But there is no immediate plan to lower the standard 19 percent rate because the budget doesn’t allow it, he said. “We are not planning moves on the standard rate,” he said. “We are obviously aware of the moves around us, and basically most of them are downward, or significantly downward.”

EU Digital Tax

According to Gruza, the European Commission’s March proposal for an interim tax on the revenue of international digital companies would not only help ensure that these companies start paying their fair share in taxes in Europe—it would also help Poland politically.

“The government’s position is that we support the commission in its efforts to build on this idea,” he said. The digital companies “are basically right in what they do in the legal sense, but it’s not right in the common view, and it’s very hard, particularly for a government like ours, to focus on, for example, the gray economy, little Polish entrepreneurs, when they say ‘why are you targeting us when these companies that advertise the wealthiest profits have no tax in Poland.’ So, it’s a political problem for us to solve as well.”

The EU proposal would impose a temporary 3 percent turnover tax on digital companies with global revenues of 750 million euros ($930 million) or more.

U.S., OECD Reforms

As far as the impact of the four-month-old U.S. tax reform on Poland’s ability to attract U.S. investments is concerned, Gruza said the Polish government is monitoring the situation but making no changes yet. The U.S. in December cut its corporate tax rate to 21 percent from 35 percent.

“Factors other than taxes play a role in U.S. investment in Poland, so any tax reform on their side, we feel, should not have a significant impact on investment decisions of U.S. companies in Poland,” he said. These factors, he said, include the country’s education levels, labor skills, size of the market, and geographical location.

And on the subject of the OECD’s efforts to fight tax avoidance on a global level, Gruza said the government believes “a huge amount of the work has been done by OECD, and we are very satisfied.” But “there is a concern, and this is my deep personal concern, that some of the instruments that OECD or EU are rightly proposing do not take into account the technical ability of a standard tax jurisdiction.”

A case in point is Exchange of Information on Request, which has been brought forward by OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes.

“If we allow jurisdictions to source information on beneficial owners, this is a great idea, but it is not realistic in the Polish economy, where you have several million businesses and investors, to mine data on what’s behind the fifth investment fund in some strange jurisdiction,” he said.

To contact the reporter on this story: Jan Stojaspal in Prague at correspondents@bloomberglaw.com

To contact the editor on this story: Penny Sukhraj at psukhraj@bloombergtax.com

Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.

Request International Tax