ZPP Newsletter
Warsaw, 24th May 2019
POSITION OF THE UNION OF ENTREPRENEURS AND EMPLOYERS
ON THE NATIONAL LONG-TERM FINANCIAL PLAN
Considering the significance of legal changes of very significant economic importance that were presented in the National Financial Plan for 2019-2022, the Union of Entrepreneurs and Employers as a representative organisation of employers, expressing concern for the state of public finances, as well as the country’s stable economic growth, publishes the following position relating to key actions to be undertaken that were announced in the document.
- Introduction of the obligation to apply the split payment mechanism
Since 1st July 2018, there is a voluntary mechanism for split payments in Poland. From that moment on, all entrepreneurs have a special VAT sub-account in their bank, to which – should the customer decide to use this mechanism – they receive tax, whereas only the net amount from the invoice goes to the entrepreneurs’ main bank accounts.
Implementation of the voluntary split payment is, together with the improvement of the tax administration or the introduction of uniform control files and the reverse charge mechanism in some industries, an element of the fight against fraud in the field of VAT. There is no doubt that this fight should be considered largely as the government’s success. Over the years 2015-2018, the revenue from taxes on goods and services increased by as much as PLN 40 billion, and the gap in tax collection decreased from over 20% to – depending on the analytical centre – a dozen or even less than ten percent.
These are undoubtedly successes, which is why the announcement of the continuation of the policy of reducing the VAT gap is positive. The fact that the obligatory split payment is to be replaced with such solutions as the joint liability of taxpayers, also deserves approval because the tool caused considerable doubts. At the same time, we would like to draw attention to the issue of the impact of the split payment mechanism on the financial liquidity of entrepreneurs, especially from the SME sector. This is essential, taking into account that one of the industries covered by obligatory split payment is the construction industry, in which the share of micro and small Polish companies (especially on the part of subcontractors) is clearly high. Since the introduction of an optional mechanism, we have received signals from them that it has a negative impact on their liquidity. In our opinion, the introduction of the obligation to use split payment, without a certain correction of statutory regulations relating to the possibility of using funds available in the VAT account, may lead to the deepening of these problems.
Therefore, although we do not object strongly to the general direction of the changes proposed in the application of the split payment mechanism, we appeal that the risk of their negative impact on the financial situation of a number of Polish entrepreneurs be taken into account in the proposed changes. Especially considering the risk of negative impact on the situation of small companies from the construction industry, which have recently been seriously affected by the increase in the prices of construction materials, as well as the increase in labour costs. Among the potential changes that project’s authors could analyse from the above-mentioned point of view, one can distinguish the shortening of the maximum time in which the taxpayer receives a tax surplus in relation to the tax due to his normal account. At the moment, this is a total of 85 days (25 days for a refund to the VAT account and 60 for transferring funds to the taxpayer’s normal account). Representatives of the ministry emphasise that the transfer of funds to the current account takes on average no more than 21 days, henceforth we assume that the optimal maximum time for completing both of the above procedures would be a 40-day period. Approving the general direction of changes, we postulate for the introduction of adjustments ensuring that the obligatory split payment in specific industries will not seriously undermine the financial liquidity of entrepreneurs.
- Tightening the classification of revenue from “non-agricultural business activity” (“entrepreneur’s test”)
We look with particular concern at the postulate of tightening the classification of revenue from “non-agricultural business activity”. Already the government’s information policy alone must raise serious objection, in which the phrase “entrepreneur’s test” has been appearing, disappearing and reappearing so often that ultimately – although we know the exact contents of the document called the National Long-Term Financial Plan – even we are unable to determine what mode this tightening of regulations would take. Individual representatives of the government give statements to media and in certain publications saying that no legislative changes are planned, while in the Long-Term Plan on page 60, it is clearly written that a tool to achieve the objective described by the Ministry of Finance as “restricting the scale of unauthorised classification of revenues received by natural persons in terms of the source, non-agricultural business activity and, as a result, limitation of tax arbitration and labour market dualism”, is to amend the act on personal income tax and “other regulations” tightening the classification of revenue to the source “non-agricultural business activity”.
The Union of Entrepreneurs and Employers demands in the first place a clear message regarding the formula of the planned tightening. This is of key importance from the point of view of many entrepreneurs running a sole proprietorship, as all regulatory changes will naturally apply from the date of entry into force of the act (including vacatio legis), whereas a possible change in the interpretation of existing regulations may lead to undermining tax declarations submitted over the five-year-long period preceding the entry into force of the new regulations, and consequently the payment of tax arrears increased by interest by entrepreneurs who did not pass the “test”. Regardless of the formula, the “test” itself also creates serious risks in the field of labour law – undermining the legal relationship between two parties of a B2B contract and determining the existence of an employment relationship have serious consequences, for example, in terms of unused holidays or contract termination deadlines.
In the first place, we would like to ask the government to provide the Social Dialogue Council with information on the state of progress of works on the “test” and its potential formula.
We would also like to draw attention to the fact that the conditions necessary to meet, both in order to obtain the status of an entrepreneur and to be able to settle income tax within the framework of a flat tax provided for persons running a non-agricultural business activity, are already specified in the regulations in force. We believe that it is not possible to create a tool for determining whether a sole proprietorship is conducted only because of the desire to avoid a higher tax rate (32% on a tax scale). A tool that allows for a reliable and yet non-infringing on the principles of freedom of business operations, as well as a number of other principles contained, for example, in the Entrepreneurs’ Law (part of the Constitution for Business). We believe that the implementation of the “test” in any formula would be a very dangerous phenomenon and would constitute a battle against the effects of the problem, not against the problem itself. Running a business activity is an attractive alternative for full-time jobs due to the high non-wage costs of labour, which come up to approximately 40% of the total cost of employment. For this reason, to reduce the phenomenon of “pushing employees out” to self-employment, it would be necessary to reduce the tax wedge, not to increase the fiscal burden for a part of sole proprietorships.
The “entrepreneur’s test” can also potentially lead to a number of negative economic consequences. In addition to the possible slowdown in GDP growth, there might be such risks, among others, as Poland’s inferior position in the race for talent, especially in highly specialised areas (we are already losing this race now, and this gap between the demand for highly qualified staff and its supply will only increase), or incentives to create unnatural economic structures (issuing “empty invoices” within “trilateral schemes”, dividing of entities, or the potential expansion of the grey zone).
Considering the above, it is necessary to contemplate whether the assumed goal is worth carrying such a huge risk. We also draw attention to the fact that it is very uncertain how to obtain additional funds in the amount of PLN 1.2 billion due to the tightening of revenue classification in terms of the discussed source. The experiences of other countries, such as the United Kingdom, in which analogous regulations have been in force for many years, give us grounds to think that the actual inflows may turn out to be significantly (even several dozen times) lower than planned.
The Union of Entrepreneurs and Employers is ready for a substantive dialogue dedicated to the tax burden on labour and business activity and devoted to a possible redesign of the system in such a way that the labour market functions on a fair basis. However, we do not approve of unclear ideas of additional “verification” of entrepreneurs, as in our view the implementation of such solutions would be extremely dangerous.
- Taxation of digital enterprises
In the Long-Term Financial Plan, a declaration was made to tax the income of digital enterprises providing services on the territory of the Republic of Poland. The authors of the document rightly claim that the current international corporate taxation rules are completely unadjusted to the realities of the 21st century and the challenges arising from the digitisation of the economy, but they draw erroneous conclusions from this diagnosis. The Union of Entrepreneurs and Employers is opposed to a sectoral approach to the tax system. The scale of tax avoidance has become – due to the economy’s globalisation and digitisation – very severe for the budgets of European countries, including Poland, but the tool for solving the problem must not be to select industries and introduce separate levies for each and every one of them. We are therefore in favour of a debate on the model of taxation of legal entities conducting business activity, expecting as part of this debate the possibility of many alternative variants of systemic changes being presented. However, the sectoral approach is unacceptable and simply unjust, especially as the available studies show that a large proportion of digital enterprises pay a higher effective income tax rate in Europe than companies operating in “traditional” industries.
From the point of view of the impact of potential regulations on Polish economic entities, and consequently also on the entire economy, it seems to be of significance that there is no harmonisation of digital tax solutions in place at the level of the European Union, nor is there a common approach developed within the OECD. Thus, by introducing such a tribute, Poland will decrease the competitiveness of Polish entrepreneurs against entrepreneurs operating in countries that will decide not to introduce a digital tax. The implementation of separate regulations on taxation of the digital industry by individual EU member states also generates chaos, as these companies naturally operate in cross-border models and are not limited to the territory of the state in which they are located.
In spite of the fact that the new tribute is to be levied on “large” digital enterprises, there will also be losses for entrepreneurs from the SME sector who, since they’re cooperating with their larger partners, not only make use of their services (and by introducing a tax their prices will increase for both consumers as well as for business partners), but also establish deeper relationships, thanks to which they amass know-how among other things. Therefore, the introduction of a digital tax may affect the condition of micro-, small- and medium-sized companies in the digital industry, just as a ricochet would harm people in a fight.
ZPP therefore calls for a debate on the taxation of legal entities conducting economic activity and for the withdrawal by the government from a sectoral approach, including the proposal to introduce a digital tax.
- Indexation of the excise tax rate on alcoholic beverages, tobacco products, dried tobacco and novelty products
In the Long-Term Plan, the goal is included to index the excise tax rate on the abovementioned excise goods by 3%. The Union of Entrepreneurs and Employers would like to emphasise that the policy pursued so far towards excise goods, especially in the area of tobacco products, has enabled a significant reduction of the grey economy and the expansion of the legal market. This policy was conducted in two ways – both by increasing the efficiency in the field of excise goods of the crime fighting authorities, and by capping further increases in the tax rate. The results, which were achieved thanks to this combination of measures, are very good, but not yet entirely satisfactory – the grey zone of e.g. cigarettes decreased by 30%, but it still remains higher than the European Union average. Pursuant to the above, it is recommended to continue the current policy and introduce further reforms, especially in the area of the penal-fiscal code. An excise tax increase, due to its direct impact on the final price of the products sold, generates an unnecessary risk of recreating at least part of the informal economy instead of further reducing it.
As regards the possible increase in excise tax on alcoholic beverages, as far as we understand the postulate of raising it, because rates have not changed for a long time, we are strongly opposed to a uniform approach to all types of alcoholic beverages. We believe that due to changes in the alcohol-drinking culture (i.e. first and foremost, the decrease in consumption of beverages with a high alcohol content and strengthening of the segment of beverages with much lower alcohol content), the possible adjustment of excise rates should be differentiated and allocated on an individual basis to each type of alcoholic beverages. We disapprove of a scenario in which the excise tax on all drinks is raised an equal rate of 3%, but we would accept a solution under which the excise duty on alcoholic beverages would increase by 3% on average while being differentiated depending on its type. Such a mechanism should be based on a much higher increase in taxation of beverages with a high alcohol content, and lower in the case of beverages with low alcohol content. There are also options to consider in the context of which the excise duty rate for spirits would depend on their quality (e.g. a preferential rate for authentic “Polish vodka”), as well as the bottle capacity in which they are sold. The latter solution could be an alternative to the sale ban of popular “monkeys” (tiny bottles of strong alcohol) due to the disastrous effect that high ABV beverages sold in small capacities have on society (this is reflected in research and analysis results; very often those are young people who buy the smallest bottles) and its health, higher taxation thereof seems to be a reasonable solution.
Considering the above, the Union of Entrepreneurs and Employers calls for legislation to tighten the system in the field of excise crime, as well as for the continuation of a reasonable excise tax policy for tobacco products. As for excise duties on alcoholic beverages, the Union calls for activities such as those described above. With regard to tobacco products, it is noteworthy that regular excise duty increases in the years before 2015 brought counter-productive effects (expansion of grey economy, legal market shrinkage, lower budget revenues) and also raised rates to relatively high levels. Any increase in rates, and in particular the introduction of specific interest rates, according to which they should be increased, should be preceded by a thorough debate, for example within the framework of the Social Dialogue Council.
- Taxation of the liquid for electronic cigarettes and of novelty products
The amendment already in force, under the Act of 12th December 2017 amending the act on excise duty, is the taxation of electronic cigarettes and novelty products. In this respect, we would like to draw attention to the fact that it is expected that the proceeds from the excise duty on the aforementioned products will indeed be of marginal character. If only PLN 37 million is expected in the year 2020 with effective taxation of these products beginning on 1st July, it can be assumed that the expected annual income from this tax is not more than PLN 75 million. They literally constitute a permille of aggregated revenues from excise duty on all excise goods (PLN 73 billion planned for 2019). On a macro scale, in terms of budget revenues, their taxation will be virtually almost neutral. We also highlight the fact that the approved rates for liquids for electronic cigarettes and novelty products are high and may lead to the collapse of these – just emerging – markets that provide smoke addicts with a healthier (as proven by many studies) alternative to traditional tobacco products. In connection with the above, the Union of Entrepreneurs and Employers appeals for a discussion regarding the revision of excise duty rates in the given scope.
- Increase in tax deductible expenses, exemption from personal income tax of a part of young people, introduction of the third tax threshold
The Long-Term Financial Plan for the years 2019-2022 contains a number of ideas collectively defined as tools for “tax wedge limitation”. These include:
- exemption from personal income tax of employees under 26 years of age who earn up to PLN 42,764;
- more than doubling the flat-rate tax deductible expenses for employees;
- lowering the tax rate from 18% down to 17% for income up to PLN 42,774.
The Union of Entrepreneurs and Employers draws attention to the fact that none of thsee proposals is inherently systemic. The closest to this is certainly the proposal to raise the tax deductible expenses for employees, but it will not lead to a significant change in the financial standing of taxpayers. The potential tax benefit from this operation will be only a few dozen zlotys per month.
The other two changes are of a very specific character, consequently their scope will be small. In the opinion of Union, the proposal to exempt the income of taxpayers up to a certain age from taxation is not justified. All the more so if this proposal were to concern only employees (i.e. people working on the basis of an employment contract) earning no more than PLN 42,764. In our view, this is a change devoid of rational justification. Apart from our doubts whether this proposal complies with the Polish constitution, as it exempts from personal income tax only a specific (and yet further narrowed down) age group, it seems to be devoid of economic sense. Young people entering the labour market find themselves currently in the best situation in three decades, and their wages and salaries are regularly growing. A simple calculation also shows that the exemption from PIT will not lead to the fact that an employment contract becomes a form of employment more attractive than a civil law contract, which seems to be one of the intended goals to be achieved with this proposal.
Furthermore, lowering the tax rate for the lowest income will not lead to a significant improvement in the situation of the least affluent of taxpayers (a one percentage point reduction translates into a dozen up to several dozen zlotys per month).
The measures outlined above will not induce a significant reduction of the tax wedge, nor will they constitute noticeable support for taxpayers – even within those narrowed down groups that are to be covered by the new proposals.
At the same time, the proposed solutions turn out to be very costly at the national level – the cost of the reduction in budget revenues from PIT was estimated at over PLN 10 billion. This amount is not much lower than the potential cost of raising the tax-free amount by half – and this measure would be common and would apply to all taxpayers who settle their personal income tax in accordance with the tax scale in force.
The Union of Entrepreneurs and Employers recognises and has repeatedly emphasised the problem of the tax wedge being too high. However, we believe that actions such as those proposed in the Long-Term Financial Plan, i.e. “targeted” at specific groups, although they are very costly for the budget, will not bring the expected results and will not significantly improve the financial situation of employees. We therefore call for a debate on possible ways to reduce the tax wedge for all employees, not just select groups.
- Limiting the avoidance of paying premiums for pension and disability insurance
Among the activities “strengthening the system of social security contributions” planned for 2018-2020, limiting the avoidance of pension and disability insurance contributions takes a major place. Among the objectives of this undertaking, the following were indicated: “tightening the system of collecting social security contributions from junk contracts”, “limiting the avoidance of paying premiums resulting from entering into junk contracts instead of contracts of employment” or “expanding the income base from junk contracts, from which social security contributions are paid”.
First of all, the Union of Entrepreneurs and Employers would like to emphasise that in an official governmental document, colloquial terms should never appear, e.g. depreciating agreements concluded in accordance with applicable regulations, including the principle of freedom of contracting in a civic society, that is civil law agreements. Such phrasing as “junk contract” is more suited to a less substantive debate at a rally than to a serious document showcasing the financial policy of Poland for the coming years. Moreover, these terms are offensive to both parties concluding these types of contracts. We regret, therefore, that they were ultimately included in the contents of the Long-Term Financial Plan.
As for the subject matter – both the objectives and the tools related to the avoidance reduction of pension and disability insurance premium payments have been described so vaguely that it is difficult to diagnose what is actually planned to be done in the above-mentioned scope. “Expanding the revenue base from junk contracts, from which social security contributions are paid” can be understood in many ways. Similarly, the tool that is aimed at achieving the goal, i.e. “tightening the rules subjecting to pension and disability insurance under a junk contract”, is not specified. From the entirety of this fragment, it may result that the government plans to carry out both legislative activities (expanding the income base subject to premiums, and premiums coming from civil law contracts), and intensifying control activities (verification of concluded civil law contracts for possible undermining and finding the existence of a relationship based on employment).
It is difficult to blame the government for the willingness to fight the “dualism” on the labour market, but we point out the necessity to take into account at least two factors. The first is the need to maintain the proportionality of the measures applied, taking into account the scale of the problem. Out of approximately 17 million professionally active people, 2 million people are employed on the basis of a civil law contract according to the Polish Central Statistical Office. On the other hand, data of the National Labour Inspectorate show that out of all the contracts of this type, about 15% of them meet the criteria of an employment contract. It turns out that the problem concerns 300,000 people. In absolute numbers, this is a lot, but it is still just a small fraction of the entire labour market (less than 1.8%). Taking this into account, it must be stated that – focused exclusively on the examination of this small part of cases – the design of new regulations or tightening of controls poses the risk of using disproportionate measures, repressive to honest employers.
The Union of Entrepreneurs and Employers, therefore, calls for formulating provisions in such a manner that the proportionality of the measures applied is ensured, especially considering the real scale of the problem.
The second factor is to draw attention to the cause of the problem (whose nature is marginal and we emphasise this fact) of making use of civil law contracts in a way that is non-compliant with the provisions in force. It is, of course, the disproportionately high tax wedge in case of regular employment. In this place, one should return to one of the previous points contained in this position and appeal for a debate about the real cause of the various pathologies on the labour market. It seems that neither extending the base to be covered by the new regulations nor tightening the application of the current regulations will significantly contribute to the reduction of abuses in the scope of civil law contracts.
- Abolition of the limitation of the annual basis for calculating contributions to pensioner and retiree insurance
As part of the National Long-Term Financial Plan, the subject of lifting the limit of the annual basis for calculating social insurance and disability contributions within a calendar year has once again come back. In the current legal state, this basis must not exceed the amount corresponding to thirty times the projected remuneration in the national economy for a given calendar year. The idea of removing this limit appeared in the Act of 15th December 2017 amending the act on the social insurance system and some other acts. On the motion of the President of the Republic of Poland, the Constitutional Tribunal examined the compliance of the Act with the Constitution and ruled that it was unconstitutional due to the manner in which it was adopted.
Although the ruling of the Tribunal did not refer to the subject matter of the case, the Union would like to strongly emphasize that removing the 30-fold limit is a thoroughly irrational move – for two reasons.
The first is a simple observation that carrying out this action means striking a blow at the Polish middle class, which is still in its infancy. According to the Regulatory Impact Assessment attached to the draft law, the liquidation of the limit of the annual contribution assessment base would concern about 350,000 insured. Higher premiums for retirement and disability insurance mean that the remuneration of these people would decrease. According to the estimates presented by the project’s authors, it would be a loss of the order of just over PLN 1 billion a year. So much money would neither go to the real economy nor is truly intended for either consumption or savings. The funds would top up the budget of the Social Security Fund.
At this point, one can move on to the second reason why the proposed idea is a harmful one for the economy and for the Polish social security system. The elimination of the contribution base limit, even though at first, it would lead to a slight increase in inflows to the Social Insurance Fund (at the same time causing a significant drop in income of some households), in the long run would only be an additional burden for the Fund, which is already in a difficult situation. The limit of the basis of the dimension secures the Fund against the necessity of paying out huge pensions in the future. In other words, by setting a limit, the state at the same time allowed to leave more money in the pockets of the best-earning workers and outlined a certain maximum limit for the amount of a future pension. By eliminating this fuse, we are opening the gate to paying out several dozen thousand zlotys in the next decades – in a situation in which the Fund will face more and more problems resulting from the fatal demographic situation and the decreasing number of people in the productive age. According to official SSF forecasts, the Fund’s deficit in 2060 (in values discounted for 2014) may amount to over PLN 80 billion – and this option does not involve the abolition of the limit.
Given the above, the Union of Entrepreneurs and Employers – in a certain way repeating the arguments already used in the course of the proceedings abolishing the 30-fold limit – again calls for the withdrawal of this intention. It will be harmful to both the society whose strength in the future should be built by the middle class, and the social security system.
- Final remarks
The Union of Entrepreneurs and Employers is of the opinion that a significant part of the proposals included in the National Long-Term Financial Plan is harmful. The drafted economic policy project that can be found included in this document is completely inconsistent. The government is planning to spend in a “carefree” manner over PLN 10 billion on tax changes, which from the point of view of an average working person’s purse or wallet will be almost imperceptible, while proposing measures that are very aggressive, potentially repressive for entrepreneurs and whose fiscal effect will be rather meagre.
A plethora of information can be found in the document that might be rather interesting from the point of view of participants of public life (e.g. data with regard to the project on the long-term stability of public finances, assuming that spending on health care in the period up to the year 2070 [!] will be at the level of maximum 5.2% of the country’s GDP, which is astounding from the point of view of official declarations of spending at least 6% of GDP for this purpose). However, the most important from the point of view of entrepreneurs are the proposals regarding two systems: taxes and social security – and the Union of Entrepreneurs and Employers evaluates both, in principle, negatively.
We do nevertheless hope that the government will undertake discussion with representative social partners concerning all of the points listed above, and will be open to their arguments, as a result of which the proposals contained in the Plan will thoroughly be improved and corrected.
Fot. Alexas_Fotos / pixabay.com
