Warsaw, 18th April 2018
POSITION OF THE UNION OF ENTREPRENEURS AND EMPLOYERS ON “MORAWIECKI’S FIVE”
On April 14th, 2018, the Law and Justice program convention was held, during which Prime Minister Mateusz Morawiecki announced a number of activities, important from the socio-economic point of view. These promises were collectively named “Morawiecki’s Five” and from the perspective of micro, small and medium-sized enterprises, three of the proposed changes are of key importance: lowering the CIT rate for small taxpayers, lowering social security contributions for small businesses and supporting construction of local roads infrastructure. The Union of Entrepreneurs and Employers positively assesses the proposals presented during the convention.
The Prime Minister proposed lowering the CIT rate for small taxpayers by as much as 6%. It must be remembered that the basic rate is 19%, and since January 1st, 2017, a taxpayer starting his business, or one whose sales revenues did not exceed EUR 1.2 million in the previous year pays tax at a reduced rate of 15%. According to the proposal, the rate would be further reduced – to the level of 9%.
It is worth noting that there is no lower CIT tax rate anywhere in the European Union. Already with the previous reduction, we indicated that small business functions in Poland in general in the form of ordinary economic activities of natural persons – there are almost 3 million of them, while CIT taxpayers are less than half a million. Entrepreneurs therefore usually pay personal income tax, not corporate income tax. At the same time, we consider the current state of affairs to be disordered and generally inappropriate. We take the position that the economic activity of natural persons, due to their specificity, should in principle be a form reserved for persons performing activities for the maintenance of themselves and their families.
In our understanding, this is a kind of a substitute for a full-time job and a formula that should be used by small craftsmen, professionals, owners of small service establishments and small shops. However, it is not a desirable situation in which people running a business for profit, multiplying assets, employing many people, and aiming to develop their business, run it in the form of a sole proprietorship. Due to the security of economic turnover, as well as the possibilities resulting from the selection of such a form of running a business, we believe that such entrepreneurs should, in principle, set up commercial law companies. Some of them could choose, of course, partnerships, which are not taxpayers by themselves (income of partners are taxed), but due to the protection of personal property, a very advantageous formula seems to be even a limited liability company that is already a CIT taxpayer.
Some would probably take advantage of the interesting opportunity to set up a limited joint-stock partnership, which also nowadays is subject to this tax. It is possible that in the future, income from limited partnerships will also be CIT-taxed. Looking at the issue from this perspective, lowering the CIT rate for small taxpayers is interpreted as an incentive for entrepreneurs to choose precisely these forms of running a business – we recognise this direction of change as the right one, nevertheless, it seems that lowering the rate is not enough.
An important obstacle, which discourages many entrepreneurs from establishing companies, is the level of complexity of regulations and the multitude of formal obligations that are associated with this process. Enough to say that nowadays registration of a company in the Central Registration and Information on Business CEIDG is completely smooth and quick, while registration of a new entity in the National Court Register may extend up to 6 months (there are known cases of rejection due to the entry in the application form “city of Warsaw” instead of the proper “capital city of Warsaw”, which resulted in the need to re-submit the application and wait for a second quarter to register said entity).
For this very reason, we call for the creation of a truly separate and significantly simplified legal regime for micro, small and medium-sized enterprises – including those operating as commercial law companies. Lowering tax rates is definitely a step in the right direction, however insufficient – in day to day operations, entrepreneurs are mainly bothered by protracted procedures, excessive formalism, and an excess of duties. The promise of such a change was lacking in the Prime Minister’s speech, which is why we are appealing for it in this document.
Another important element of the PM’s speech was the promise of introducing reduced social security contributions for small business operations (from which revenues do not exceed two and a half times the minimum remuneration for work). The project called “small business – small Polish Social Insurance Institution ZUS” is not a novelty and had already appeared before in the announcements of both the Prime Minister and other politicians, including the minister of entrepreneurship and technology Jadwiga Emilewicz.
Above all, one ought to praise the Prime Minister’s persistence in the fight for this idea – prolonged works concerning this issue clearly show that in the government, as well as in discussions with state institutions, there is considerable resistance to implementing this solution. The fact that after such a long time the PM still maintains his desire to move away from the dogmatic so-called lump sum social security contributions, independent of the revenues earned, definitely deserves to be appreciated.
The data we have at our disposal suggest that at least 800,000 entrepreneurs in Poland would benefit from the discussed solution – it seems that this is a very important group, both in the sense of an “economic anthill” and in the sense of potential electorate that should be taken care of. Any and all arguments against reduced social security contributions with very small incomes are devoid of reason, and this is best demonstrated by the fact that they change regularly. At first, it was claimed that lower contributions would mean lower revenue to the Social Insurance Institution and, consequently, deterioration of its financial situation – it soon turned out that a large part of entities potentially interested in this solution, at the moment do not pay any premiums, because it would make their activities completely unprofitable.
And now we often hear that companies should grow – micro should become small, small should become medium, and medium should become large. We shall bear in mind, however, that in this case (it is worth recalling – we are talking about companies achieving monthly income not exceeding two and a half times the minimum wage), there is no question of activities conducted for profit and with the intention of significant development. This solution is to serve people who are self-employed and for whom it is a substitute for full-time employment – they do small services to earn a living for their households.
Claims that they should strive for regular growth and increased employment, sound bizarre – hairdressers, plumbers, or people giving private lessons simply want the state not to “rip the off” of a large part of their revenues as it presently does, rather than plan to establish international hairdressing or plumbing corporations. Therefore, we should allow those who want to develop, grow, and multiply their assets, do just that and create the best conditions for them, and those who do business, because they have to do it to earn a living, we should ensure them that after paying all public levies, they will have enough money to make their business profitable.
For this reason, once again, we express our warm support for the concept of small business. We call for, however, a return to the source and the original concept – one levy of about 20%, including income tax, social security contributions, and health insurance premium, with a flat rate. This way, the scale of the burdens of the smallest companies will indeed be directly proportional to the revenue achieved. Nonetheless, worrying are the recent reports that small businesses will become a de facto extension of the “runway” for companies that the government has already implemented under the Constitution for Business. The idea that the minimum premium would be exactly the same as the preferential premiums for an entrepreneur for two years after the end of the half-year period without any taxes, is inconsistent with the basic assumptions underlying the proposed solution.
Entrepreneurs have heard for many months that the amount of premiums will be proportional to their income – if ultimately the project of a small business is to take the shape we can read about in recent reports, they will feel cheated and rightly so. Therefore, thanking again for their stubbornness in firmly presenting this issue in the framework of political debate, we call for return to original solutions – a lot simpler and very beneficial for entrepreneurs.
In the end, the third proposal important for business is the concept of establishing a new local road construction fund with at least PLN 5 billion allocated in it. It is said for a good reason that the road system is the “blood circulation of an economy”. Adequate infrastructure is essential for the safe transport of goods or for transporting employees. Local roads (i.e. poviat and communal roads) constitute 88% of all public roads in Poland. We do appreciate the significant improvement in the area of national roads, but the actual condition of the infrastructure can be assessed only by looking at the local road network. And their quality, despite the programs carried out in previous years (the famous “schetynówki”), is still very bad. This was noticed by the Supreme Audit Office and described in its report that not only the local road network is poorly developed, but it is also of low quality. For this reason, it was recommended to introduce a special financial system for at least a dozen or so years of to support the maintenance of local roads from the state budget. We express deep hope that the program proposed by Prime Minister will provide an adequate response to the threats resulting from poorly developed and poor quality of local road network. The new fund should significantly contribute to the increase of road safety as well as to the improvement of the conditions for running a business, because in many places in Poland at this moment, infrastructure deficiencies constitute the biggest barrier.
All discussed points from the speech of Prime Minister Mateusz Morawiecki are very important for entrepreneurs from the SME sector. As indicated at the beginning – the Union of Entrepreneurs and Employers positively assesses these proposals. We do not oppose radically broad social programs, and some of them – such as “500+” – we support and recognise as necessary, but we must not forget that only a relatively prosperous state with a stable budgetary situation can afford to undertake them. These two conditions will exist only with efficient economic growth, which in turn only exists in a good climate for business. Therefore, we consider the proposed changes to be beneficial and we support them, although we appeal to go further than it would appear from the words of Prime Minister. As we often write in our studies – Poland cannot afford to be just “average”. We should strive for the best possible solutions and not resort to half measures. In addition to the reduced CIT rate for small taxpayers, we should therefore simplify regulations and streamline procedures for small companies. Small business activity is the best solution, but it should be close to the original concept – one simple, low tax directly proportional to income. We hope that our recommendations will be taken by key policy makers into consideration.
Union of Entrepreneurs and Employers
Fot. Ravi Roshan / na lic. Unsplash