Tax Consultant at RSM Poland
The last blog entry (available here: LINK) concerning research and development relief (hereinafter: R&D relief) we ended with the conclusion that despite the liberal approach of the tax authorities, which allow the relief to be used by a large group of taxpayers, the effective implementation of the relief requires an in-depth analysis of the regulations that govern it – especially in the context of the specific nature of a given taxpayer's business activity.
I assume that no one will be especially surprised that the implementation of the R&D relief creates new tax risk areas for taxpayers. One way to reduce the risk is to petition for a tax ruling. Obviously, it is not a remedy for every problem, and the procedure of interpretation itself has often become a nuisance to taxpayers and has given their advisors headaches (more on this bumpy road can be found here: LINK). However, our experience proves that it is possible to obtain a positive response to such an application, and it is strongly recommended for entities interested in the R&D relief to file such a petition.
First of all, an effective application for a tax ruling requires the applicant to identify the areas in which there is a clash between the interests of a taxpayer and the interest of the tax authorities. Those areas primarily determine the range of questions that should be asked in the application. The most contentious issues mostly arise when the regulations governing a given matter are so vague that it is possible to understand them in two or sometimes even more ways. Areas of risk also arise when the tax authorities are not able to work out a unified position as far as the interpretation of such provisions is concerned. With some (small) dose of sarcasm, it can be stated that in the case of the R&D relief, the legislators did their best not to disappoint us, and the confusion has been made even greater by the authorities that attempted to interpret the provisions in response to numerous inquiries from taxpayers.
To illustrate this mess, let us use the example concerning the possibility of including in the so-called "eligible costs" (i.e. the costs that are the basis for calculating the R&D relief) the expenditure for employees' salaries and contributions. Namely, the legislator decided that the eligible costs include the receivables referred to in Article 12 Paragraph 1 of the Personal Income Tax Act, and contributions in respect of those receivables, in the part financed by the contributions' payer, if those receivables and contributions apply to employees employed in order to carry out research and development activities.
It arises directly from the provision quoted above that if one wants to have the employees' salaries and contributions included in eligible costs, those salaries and contributions must apply to employees employed in order to carry out research and development activities. The legislator, however, forgot to provide the guidelines on how to understand this key requirement.
Until recently, the prevailing position of the tax authorities was that employing a person to deal with research and development each time needs to be supported by respective provisions in the employment contract. In other words, the authorities demanded that the employees had written in their employment contracts that they had been hired to carry out research and development activities – as if a properly formulated contractual provision could have executive power resulting in the employee's actually carrying out such tasks.
At first glance, you can already see that such an approach is too restrictive, especially that it leads to absurd conclusions that secondary and only formal aspects would be of greater importance than the actual scope of activities performed by the employee (one would want to say: form over substance). What is neglected in such an approach is the fact that employees are not – in principle – employed in the positions referred as e.g., Research and Development Specialists, but in the positions referred to using such names that already exist and have been established in the market. What is also problematic in this approach is the fact that some employees could have been employed in order to conduct research and development activities even before the introduction of the R&D relief, i.e. before the quoted provision came into force at all.
Concerning the above, we encourage you to review the employment contracts you have concluded with your employees. Is it possible, solely on the basis of the data contained in such contacts (e.g. the mere job titles), to determine exactly what a given employee is involved in (e.g. which research or development projects undertaken by your company the employee is dealing with)? In such a case, can the salary of the employees, even if they actually carry out research and development activities, not constitute the basis for calculating the relief due to the provisions of the employment contract?
As already mentioned, in the case of R&D relief the practice of tax authorities is of importance. With a small dose of optimism it can be noted that recently signs of liberalization in the tax authorities' approach have been observed as far as the interpretation of the requirement of employing an employee "in order to" carry out research and development activities is concerned. Such an approach allows the employee to become involved in such activities not only on the basis of the provisions contained in the employment contract, provided that the fact of carrying out such activity arises from other evidence. This approach is correct, since the R&D relief concerns the expense actually related to research and development activities, and not expense which is associated with the employment contract merely on the basis of the formal provisions in this contract. The key element of such documentation should be employee's working time record. This allows you – as long as it is kept in a fair manner – to verify what the employee actually does.
Such observation – as often happens in our tax world – brings us obviously to another issue. If the records indicate that the employee spends only part of his or her working time on research and development activities, should all, some or none expenses incurred in relation to the employee's salary and contributions be treated as eligible costs? We will try to answer this question on our blog soon ...