Reproduced with permission from International Tax Monitor, 100 ITM (May 25, 2017). Copyright 2017 by The Bureau of National Affairs, Inc. (800-372-1033) <https://www.bna.com>
By Jan Stojaspal
- Companies urged to review contracts, file corrective tax assessments if necessary
- Additional tax assessments in cases where tax wasn't collected can be avoided if foreign service providers provide documentation that they are tax residents of a country that has a double tax treaty with Poland
Polish companies procuring non-resident professional services face additional paperwork and possibly fresh tax liabilities after a court ruled their fees are subject to 20 percent withholding tax, regardless of the place of delivery or contract conclusion, tax practitioners say.
The wording of the Supreme Administrative Court's ruling opens the door for Polish authorities to go as far as five years back in subjecting such payments to the tax, Piotr Liss, a tax partner at RSM Poland in Poznan, told Bloomberg BNA in a May 23 telephone interview.
Taxation of payments for professional services—which include management fees charged by corporate headquarters as well as accounting, IT and advertising services, among others—has been subject to numerous legal disputes in Poland, as Polish law failed to explain until recently what constituted income generated on the territory of Poland, a precondition for withholding the tax.
Changes to Poland's corporate income tax act that went into effect Jan. 1 put those disputes to rest—when it comes to future applicability of the law—by explicitly stating that "there is an obligation to collect withholding tax regardless of where the service is provided," Liss said.
The problem is that the May 15 Supreme Administrative Court ruling also paves the way for what amounts to a retroactive application of the Jan. 1 changes by arguing that no clarification of what constituted income generated on the territory of Poland was in fact necessary, according to Liss.
"The ruling says there was always an obligation that a Polish entity has to collect the withholding tax when paying for services of a foreign company, regardless of where the services are really provided," he said.
As a result, companies that made payments to foreign entities before Jan. 1 and didn't withhold the 20 percent tax can now find themselves subject to additional tax assessments by Polish tax authorities.
And should disputes over these assessments end up in court, the authorities are much more likely to win as the May 15 ruling has the power to shape decision making of lower-level courts, according to Liss.
'A Wonderful Superpower'
"The biggest threat is that the tax authorities gained a wonderful superpower to challenge collection of withholding tax five years back/' Liss said, referring to a five-year statute of limitations that applies. "Normally if the tax authorities go to court, of course there is a risk, but they might lose. Now it's like 95 to five that they will win."
The May 15 ruling also means that "the tax authorities are now more likely to do the audits, inspections in order to find the breaches," Liss added.
To be sure, additional tax assessments in cases when withholding tax wasn't collected and paid to the state budget can be avoided if recipients of payment for professional services are tax residents of a country that has a double tax treaty with Poland and if they are willing to provide their Polish clients with a certificate of tax residence.
But additional tax assessments will be unavoidable in cases when foreign entities fail to provide the certificate, a process made more difficult by the fact that "the certificate of tax residence should cover the moment of a given transaction," Liss said.
Obtaining a certificate to cover payments within a multinational group may be easy enough, accroding to Liss, but it can prove almost impossible with international service providers, such as Google or Facebook, both companies that may have millions of clients in Poland alone.
To Pay or Not to Pay?
Additional tax liabilities will also be unavoidable in cases when Poland doesn't have a tax treaty with a given country, such as Hong Kong, and the withholding tax hadn't been collected and paid, Agata Oktawiec, a corporate income tax director at PwC Poland, told Bloomberg BNA in a May 23 telephone interview.
Opinions vary on how proactive companies should be in the payment of withholding taxes potentially owed.
"It is up for the companies to decide whether they wish to make the payment voluntarily, or wish to wait and see," Liss said. "Personally, I think that it's better to make the payment voluntarily. This way enables the companies to minimize potential interests for late payment and avoid the risk of fines."
Oktawiec said that companies are well advised to first review of any tax rulings that they might possess and that might cover their financial transactions with foreign entities.
"Some clients may have individual tax rulings that will protect them against the decision of the court, and I would say quite many clients may have such rulings because we always, as advisers, had certain doubts around how to define a source of income," she said.
Before making any payments, she would also advise companies to verify whether their transactions are in fact within the range of professional services that are subject to withholding tax.
According to Liss, the services that are subject to withholding tax are:
- services related to artistic, entertainment or sport-related activities conducted by legal persons having their registered office abroad, organized via natural persons or legal persons operating in the field of artistic, entertainment or sports events in the territory of the Republic of Poland;
- advisory services;
- accounting services;
- market research services;
- legal services;
- advertising services;
- management and control;
- data processing;
- personnel recruitment services;
- guarantees and sureties;
- other similar services; and
- transport of cargo and passengers from Polish ports by foreign commercial sea transport companies, except transit cargo and transit passengers.
The Second Battle
Companies may also get relief if it is determined that, contrary to current insistence of Polish tax authorities on having hard copies of certificates of tax residence, electronic copies are sufficient, Liss said.
But that will have to be decided by courts, he said, adding that there are are currently no court verdicts on the subject.
"The first battle is lost," he said. There will however "probably be a second battle on whether a company has to have an original hard copy of the tax residence certificate" Liss noted, adding this isn't possible "because companies like Google would have to go with sending millions of certificates of residence or if it's ok just have a copy or an electronic version."
"This is something which is still ahead of us," said Liss.
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