Audits Could Rise With Poland's New Corporate Income Tax Forms

By Jan Stojaspal

Snapschot

Companies with significant inter-company transactions face greater audit risk as a result
Overhaul in line with Poland's efforts for greater tax transparency

The risk of audits may grow for companies with significant debt financing costs or large charges for inter-company intangible services if proposed changes to Poland's corporate income tax return take effect, according to local tax practitioners.

The changes to the CIT-8 form introduce an obligation to disclose the value of debt financing costs excluded from tax deductible costs and an obligation to disclose the value of excluded intangible service fees and royalties paid to related parties, according to Rafal Sadowski, a partner at Deloitte Poland's tax advisory department.

However, these disclosures may act as “red flags” for the tax authorities, he told Bloomberg Tax May 14. “I think taxpayers who report significant non-deductible items may expect questions from the tax authorities. So the scrutiny might increase.”

In fact, the tax authorities may use the information as a
“targeting tool” when deciding where to conduct their next tax
audit, particularly “if someone reports significant amounts as non-deductible and they are paying taxes for 2018, while they were paying no taxes for 2017 and the years prior,” he added.

The proposed changes are part of an overhaul of more than a dozen tax forms and supplements that need to be updated to reflect Jan. 1 amendments to the country's corporate income tax law. A public consultation on changes to the various tax forms ends this week.

The proposed changes are also in line with Poland's efforts to increase tax transparency among companies.

The Changes
And if decreed as proposed, the changes will be obligatory for corporate tax years that started on or after Jan. 1, 2018, Piotr Liss, a tax partner at RSM Poland in Poznan, told Bloomberg Tax May 11.

The amendments to the country's corporate income tax law included the separate tracking of capital and operational incomes, tighter thin capitalization rules and a minimum tax for companies deriving income from commercial real estate.

Under current thin capitalization rules, companies must consider debt financing costs versus interest income, according to Iwona Patyk, a manager in the tax reporting and strategy team at PwC Poland.

Debt financing costs that don't exceed interest income by more than 3 million Polish zloty ($827,574) in a given tax year can be deducted in full, she told Bloomberg Tax May 11. But the deductibility of anything in excess is limited to 30 percent of tax-adjusted EBITDA (earnings before interest, tax depreciation and amortization).

When it comes to the tax deductibility of intangible service fees and royalties paid to related parties, they are typically limited at 5 percent of tax-adjusted EBITDA once they exceed 3 million zloty in a given tax year.

According to Patyk, the overhaul of the various tax forms may present a compliance challenge and administrative burden for companies. But it also highlights a trend toward greater transparency when it comes to corporate tax return filings, she added.

“There are countries where the returns are quite detailed,” she said. “In our case, they have been quite general, and we never listed the different non-tax deductible costs in the return itself. Now, for some sensitive topics like this thin capitalization and intangible services, the tax authorities want to have the information listed specifically.”

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