Reproduced with permission from International Tax Monitor, 188 [itm-bul] (Sep. 28, 2016). Copyright 2016 by The Bureau of National Affairs, Inc. (800-372-1033) <https://www.bna.com>

By Jan Stojaspal

Sept. 27 — Companies can expect more scrutiny, more administrative work and possibly cash flow problems as a result of sweeping changes proposed in Poland to fight value-added tax fraud.

Released by the Polish finance ministry for consultation Sept. 23 and expected to take effect Jan. 1, the proposals would tighten registrations, introduce security deposits and require monthly reporting in the government's quest to close an estimated 38.9 billion zloty ($10 billion) tax gap.

While the changes spell some good news for honest taxpayers— the VAT registration threshold is proposed to increase from 150,000 zloty ($39,000) to 200,000 zloty ($52,000) per year, for example—the proposed changes primarily are designed to bite.

For instance, they would make tax advisors liable for their clients' outstanding tax liabilities incurred within the first six month of their VAT registration.

"This is not the moment where the government likes to provide some benefits or to make life easier," Tomasz Wagner, a manager at the indirect tax division of Ernst & Young Tax Advisory in Warsaw, told Bloomberg BNA Sept. 27. "These changes are aimed at fighting with the grey zone, fighting with carousel frauds, to make sure that more and more money is coming to the budget. The changes are not that horrible, but they are not making life easier for sure."

Krzysztof Ugolik, indirect tax manager at PricewaterhouseCoopers in Poland, told Bloomberg BNA Sept. 27 that fighting VAT fraud is "one of the biggest, major points the Polish government is focused on."

The tax gap the government seeks to close comes from the Center for Social and Economic Research in Warsaw, which estimates that Poland should've collected an estimated 38.9 billion zloty more in VAT in 2014.

A Dozen Major Changes

All in all, the anti-fraud package includes nearly a dozen major changes in three separate pieces of legislation. They include:

fines amounting to 30 percent of misreported VAT and 100 percent of VAT on blank invoices that have no underlying economic activity;

• denying VAT registration to companies that can't be contacted either by phone or electronically despite documented attempts;

• the possibility of requiring future VAT liability of newly registered VAT payers, which are deemed risky, with a deposit in the 20,000 zloty to 200,000 zloty range;

• expanding the domestic reverse charge to supplies of gold, silver and other precious metals, microprocessors and construction services (applicable to subcontractors only);

• canceling tax exemptions on auxiliary services to the financial and insurance sectors;

• guaranteed VAT refunds within 25 days on claims of up to 15,000 zloty if they are backed by proper documentation, but opening the door for extending the refund period past 60 days, now standard, on larger claims;

• mandatory monthly reporting of VAT for everyone other than established small businesses with annual turnover not exceeding 1.2 million Euro ($1.34 million);

• limited liability for tax advisors—capped at 10 times the average monthly salary in Poland, or some 10,000 euro—for outstanding liabilities that occurred within six months of a client receiving a VAT registration, and

• no lowering of Poland's top VAT rate of 23 percent by one percentage point as was originally anticipated. The 23 percent rate is to remain in place until the end of 2018.

More scrutiny and more administrative work for companies go hand-in-hand, Przemyslaw Powierza, a tax partner and tax advisor at RSM Poland, told Bloomberg BNA Sept. 27.

"You will need to answer a lot of questions, which normally you don't need to do, or you do it only in the case of having a specific problem with your own specific VAT settlement," he said. "Now before you do something, you will need to check it very carefully to [be able to] say this is not fraud."

Powierza said he thought the regulation will be used "to check all possible businesses and to search for any possible additional amounts to be locked on account of the government."

Further adding to the administrative burden is a degree of vagueness many of the proposed changes entail, such as the applicability of fines on misreported VAT amounts and the discretion the tax authorities have in imposing them.

They say that "this mechanism should not be used to penalize, let's say, the good tax payers," Marcin Brzezin, manager of tax at KPMG Tax in Warsaw, told Bloomberg BNA Sept. 27. "For example, if you make a mistake, they shouldn't use this sanction. It should be used and applied only in the case of fraud. But you know it's hard to distinguish, hard to say, how they can know, for example, that the mistake is the result of fraud or a bad calculation."

Cash Flow Issues

When it comes to cash flow problems, they may come from several different directions, the practitioners said.

VAT refunds may take longer, for example, and authorities will have an easier time justifying this, Powierza said.

"Normally, a delay of a refund requires a formal detailed explanation of what is being inspected, investigated," he said. "Now the new regulation allows them to do it in this way: We just start with our tax inspection and as long as it lasts we do not need to reimburse anything."

The switch from quarterly to monthly VAT reconciliations may also have an impact, particularly for companies subject to pronounced seasonable effects, such as retailers.

"In a quarterly reconciliation period, higher input from one month could be set off against higher output from the second month," Ugolik said. Such cash flow management will not be possible on a monthly schedule, however, he added.

Exactly how successful the proposed changes will be in fighting against VAT fraud was a matter of opinion.

"We don't have to be happy because of the changes, but basically they are effective," Brzezin said. "Of course, it's pain if you are a good taxpayer and you do not have a problem with tax authorities, because you have some more administrative obligations and probably you will be afraid of the sanctions."

Powierza was more skeptical, calling the proposed changes "an attempt and not really a good one, to show we will fight with VAT fraud."

He called the proposal to introduce obligatory monthly reconciliations "a good one."

But he added that a system that reports "each and every outgoing invoice in electronic way to the authority" was what was really needed.

"They need to have the information as fast as possible [about] who and how and what issued such an invoice," he said. "That should enable the tax authorities to fight effectively with fraud. All the other things I am not really convinced."

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

To contact the editor on this story: Rita McWilliams at rmcwilliams@bna.com

For More Information

The government announcement is at https://legislacja.gov.pl/projekt/12290205

The draft legislation is at https://legislacja.gov.pl/docs//2/12290205/12380440/12380441/dokument246211.pdf