ZPP Newsletter
Warsaw, 7th June 2021
The Polish “New Deal” should make the country’s tax system more attractive;
CIT Payers Forum on fiscal policy in Poland
How can the Polish economy compete with European tax havens? What should the Polish tax system look like to become a magnet attracting new companies? What fiscal instruments can help the Ministry of Finance effectively enforce corporate tax obligations? These are just some of the questions answered by the participants of the “CIT Payers Forum” organised by the Union of Entrepreneurs and Employers and attended by representatives of the Ministry of Finance, largest CIT payers in major industries, as well as experts on economy and taxes.
Ministry of Finance: good regulations do not exist without dialogue with business
The Ministry of Finance has for ages openly been admitting that it is not possible to shape tax regulations without having a dialogue with the market, the world of business, and the consultancy industry. During the “CIT Payers Forum” (“Forum Płatników CIT”), representatives of the Ministry assured they would further pursue the policy of a close dialogue with business, seeing it as an opportunity to draw on the experience of companies in the area of legislation.
“The views of entrepreneurs are like a compass allowing us to navigate perilous reefs during the journey the Polish economy is on following the changing pandemic reality. The fact that it relatively well survived three subsequent waves of the epidemic and three lockdowns is the result of the short distance between business and the economic regulator and tax authorities. It is the result of constant mutual trust building and co-created solutions, the result of us talking. Now is the time we should plan scenarios for the reboot of the Polish economy. I strongly believe that in the second half of the year we will see a rebound that will mark the beginning of post-pandemic recovery. We want to implement a number of tax projects aimed at supporting Polish business, for example through pro-investment reliefs which would be available to companies as early as January next year,” said Jan Sarnowski, Undersecretary of State at the Ministry of Finance.
The Ministry of Finance emphasises that without such cooperation it would not be possible to implement the financial shield or introduce tax amendments favourable for entrepreneurs. Within the latter group, the Ministry names, among others, the extension of the scope of application of the 9% CIT rate or changes in the area of lump sum on recorded revenues by increasing 8-fold the income limit entitling to take advantage of this solution.
Representatives of the Ministry also assure that further legislative solutions aimed at strengthening and rebuilding entrepreneurship in Poland are waiting to be implemented this year. The assumptions of the “New Deal” provide, i.a. over a dozen tax breaks, including those for robotisation and production automation, encouraging Polish workers to return to the country or stimulating employment growth in various sectors of the economy. They also include the second SLIM VAT 2 simplification package, as well as provisions encouraging companies to continue investing in Poland, which would allow them to responsibly plan such investments for years to come.
In the third quarter of 2020, the Ministry of Finance will also start implementing the EU e-commerce package, that is, facilitating online trade with other European countries. In the fourth quarter, the national e-invoice system is to be implemented.
Tightening CIT collection as a priority of fiscal policy
Participants of the “CIT Payers Forum” devoted a lot of time to the discussion about the role of the corporate income tax in generating budget revenues. The Ministry of Finance recalled that measures to tighten the CIT collection system had brought considerable growth results in recent years.
“Recent years have been a period of substantial success in increasing CIT revenues. While in 2014-2015, income from CIT amounted to PLN 30-odd billion, in 2019 it was already at the level of PLN 50 billion. The revenues also increased in relation to the GDP. According to the estimates of the Polish Economic Institute (PEI), the closure of the so-called “CIT gaps” contributed to this effect. According to PEI, this CIT gap decreased by 1% GDP in the years 2014-1018. However, we are still below the EU average, which in 2019 equalled 6%. Poland ranks around 5.5% in relation to the income of the entire public finance sector. According to PEI, the CIT gap in Poland decreased from 2% GDP in 2014 to 1% GDP in 2018, that is up to PLN 20-odd billion. Certainly, we would have managed to obtain a dozen or so additional billion zloty if we had better tightened the system in terms of the CIT gap,” argued Łukasz Czernicki, Chief Economist at the Ministry of Finance.
Maciej Żukowski, tax advisor and former Director of the Income Tax Department at the Ministry of Finance, clarified which tightening measures were, in his opinion, discussed.
“Certainly, the amendments to the CIT had a direct impact on its collection. Highly specific regulations, regulations tightening the system or introducing BEPS (base erosion and profit shifting) and ATAD (the Anti-Tax Avoidance Directive) as well as those regarding transfer pricing contributed to this. It seems to me that the increase in CIT revenues is not influenced by the MDRs (mandatory disclosure regimes), because they are compliance regulations to a higher degree rather than a tightening measures, but in a sense they “crown” the whole idea for an income tax reform. In particular, the provisions on the separation of capital gains from operating profits improved CIT collection in 2018-2019, as 2020 is not a representative year to draw conclusions from. At least 12% from PLN 50 billion from CIT could still be received from taxpayers without raising taxes,” noticed Maciej Żukowski.
Andrzej Sadowski, President of the Adam Smith Centre, compared CIT to a fee paid by businesses for access to the Polish market.
“The disproportionate collection of CIT is noticeable. CIT, like the RTV subscription, is a “voluntary” tax. In both cases, we see an almost 50% share of non-payers. Can the Polish state, for providing access to its territory, the market, consumers, and infrastructure, afford what no office tenant would allow to happen? Companies pay their landlords every month, whereas they do not pay for the services of the Polish state,” said Andrzej Sadowski, economist, President of the Adam Smith Centre.
In the public debate, CIT itself is often considered in terms of economic patriotism. Meanwhile, in the opinion of the largest payers of this tax in Poland, its essence lies elsewhere.
“We do business in Poland and the prosperity of our country affects the prosperity of our company. According to the data published by the Ministry of Finance, Philip Morris has paid over PLN 1.2 billion in CIT since 2012,” said Wojciech Niewierko, Member of the Management Board for External Relations at Philip Morris for Poland and the Baltic States.
Representatives of the banking sector, on the other hand, raised the need for greater predictability and transparency of the legal and fiscal environment, including further strengthening of cooperation between entrepreneurs and the government. They also emphasised that the banking sector remains one of the largest CIT payers in the country.
“Banks dominate the list of the largest CIT payers. We would like to draw attention to the fact that our regulatory operating costs, such as contributions to the Bank Guarantee Fund and the borrower support fund or the bank tax, do not constitute tax deductible costs. Minister Sarnowski used the word “simplification” numerous times to mention planned initiatives in the area of taxes. As a sector, we are pleased with the announcement of such simplifications, but we can see that in practice, due to insufficient consultations with business, initiatives aimed at simplification rather cause difficulties,” said Łukasz Szczygieł, Director of the Tax Department at ING Bank Śląski.
Representatives of the fuel sector stressed the need for further simplification of the tax system and consistent removal of its irregularities. In their opinion, the complexity of some tax regulations may create a barrier for some companies willing to pay taxes diligently.
“The complexity of tax law means that some payers are unable to properly fulfil their obligations. And there is an increasing number of obligations to be taken care of. Many of them have a positive effect, but especially the smaller entities may not keep up with them. On the other hand, in large corporations, the complexity of business operations is a problem. A correct implementation of solutions in such large organisations requires a lot of preparation. This brings us to the conclusion that the law should be prepared well in advance. At the end of the day, we would all expect those who pay taxes correctly to be efficiently and effectively verified by the authorities. This brings us to the postulate of removing complexity in tax law. The institution in charge of tax explanations certainly makes life easier for taxpayers,” said Krzysztof Berliński, Director of the Tax Office at PKN Orlen.
The fight against aggressive tax optimisation
Participants of the “CIT Payers Forum” were also asked about solutions that should be implemented to improve tax collection. Maciej Żukowski drew attention in this context to the important role that, in his opinion, the National Revenue Administration (Krajowa Administracja Skarbowa) has to play in this area.
“Dishonest taxpayers constitute an area for the National Revenue Administration to prove themselves. To force the NRA to create a so-called “level playing field” is the role of KAS, which should effectively enforce such regulations,” – described Maciej Żukowski, tax advisor and former Director of the Income Tax Department at the Ministry of Finance.
The disproportions in the amount of CIT paid by companies was pointed out by the Polish Economic Society (Polskie Towarzystwo Gospodarcze) in their report covering the study for 2012-2019.
“The structure of CIT assumes the possibility of reducing the income by tax costs. If there is such a possibility, it is also possible to transfer profits: transfer pricing, fees for trademarks, interest on loans, etc. If the regulations make it possible, unless we make a revolution, as long as we continue to operate in this system, it all comes down to the camera of the National Revenue Administration. However, it is not allowed to pass judgment that the one who does not pay CIT is a fraud right away. If someone carries out extensive investment activities, especially in the same location where they pay tax, it is understandable that their tax base is reduced. More reliable controls are needed. Wherever there is activity, it is appropriate to contribute to the state treasury,” said Krzysztof Rutkowski, Partner at the law offices Kancelaria Doradztwa Celnego i Podatkowego Rutkowski i Wspólnicy and co-author of the “CIT and EBIT comparative analysis of representatives of selected sectors based on the data of the Ministry of Finance for the years 2012-2019”.
An attractive tax system is a simple one
A study by the Union of Entrepreneurs and Employers (ZPP) based on data from the Ministry of Finance from 2017 showed that out of 509 thousand CIT payers less than 345 thousand showed taxable income. After the deductions, the final number of taxpayers reporting CIT due was only 194,000. It is easy to calculate that only approximately 38% of taxpayers pay CIT. In the opinion of ZPP, one of the reasons for this state of affairs may be the complexity of the regulations.
“Can we become like Estonia or Ireland in fiscal terms? The most important features of those two systems are their simplicity and transparency. The data of the World Bank show that the average time necessary to complete tax returns in Poland is approximately 334 hours per year, in Estonia – about 80 hours, and in Ireland – circa 50 hours. Simple tax regulations are the key to the development of entrepreneurship and to the improvement of the tax system at a state level. It is worth leaning towards the changing philosophy and introducing the revenue tax replacing CIT. Of course, we see a challenge related to the need to establish an adequate rate of such a tax, but ultimately – regardless of the industry – all entities would include the cost of this burden in the prices of their products or services. Our recommendation is therefore to consider the revenue tax, which would be impossible to avoid, as well as easy to calculate and collect,” said Kamila Sotomska, Deputy Director of the Law and Legislation Department at the Union of Entrepreneurs and Employers.
The Polish Chamber of Commerce has been drawing attention to the need to reduce the complexity of the tax system for many years as well. However, the PCC notes that tightening the provisions of the law often does not keep up with the new tools utilised by companies that use tax optimisation.
“CIT is a tax that companies should pay. If they don’t, they should at least show investment costs as a reason why they don’t. Then such an income tax exemption would be justified, because those companies would be creating added value for the economy of a given country. However, if such activities are not carried out, then something is obviously wrong. The regulations are there, now we need the right analytical tools. Furthermore, it is important to reward reliable tax accounting,” noted Agnieszka Durlik, an expert of the Polish Chamber of Commerce.
Poland as an investment paradise – how to increase the attractiveness of the Polish tax system?
Can the Polish tax system compete with the systems of such countries as Belgium, Cyprus, Ireland or Luxembourg? Can we oppose practices that encourage transfers of profits from Poland? In the opinion of Professor Konrad Raczkowski, director of the Institute of Economics of the Social Academy of Sciences, Poland can compete with European tax havens by becoming an investment haven for entrepreneurs.
“In March 2019, the European Parliament recognised Luxembourg, Malta, Cyprus, Ireland and the Netherlands by an overwhelming majority as tax havens that facilitate aggressive tax planning. So we have a formal confirmation that these countries are tax havens. Some of them have been running tax haven policies since the 1970s. What can we, as the Republic of Poland, do to win additional tax revenues, but not necessarily at the expense of “squeezing” the tax base we have? We have two options. If we had large expenses, because of the pandemic, an increase in our deficit, debt – quite a significant one like in other countries – will we then decide to tax the existing tax base? The base will not grow, because if the taxation is too high, companies and corporations can then easily change jurisdiction. The average John Smith has it worse. But we can take a different path: broaden the tax base. This can be done by drawing in foreign companies and attracting investments that are not yet here. And this can be done by implementing changes to the Polish tax system that will make it attractive for companies. Changes which will make Poland a good tax destination. When it comes to the competitiveness of our tax system, out of 36 countries OECD countries, we rank 34th. One has to transform one’s thinking and try to think about attracting companies from those countries that have high dynamics of generating new investments,” stated Professor Konrad Raczkowski, Ph.D., director of the Economic Institute of the Social Academy of Sciences in Warsaw.
Maciej Żukowski agreed with him, adding that unlike by increasing the base itself, it would be impossible to achieve higher levels of taxation by imposing greater burdens on the current CIT taxpayer base.
Ministry of Finance: legal predictability and business consultations are our priorities
In response to the appeals of Polish business for more predictability in tax regulations and the need to improve consultations with companies, Minister Piotr Patkowski took the floor.
“We all would like private investments in Poland to be as grand as possible. The main barrier, apart from the issue of the pandemic, is, among others, the instability of tax law. That is why we discuss at the Social Dialogue Council, among other things, the introduction of an absolutely mandatory rule of vacatio legis for all tax regulations. We want them not to enter into force overnight or next month, but always on a specific date: 1st January or 1st July. We will want to implement a proper vacatio legis for all new provisions, so that they are processed and announced in advance. The second absolute rule that we want to follow is a minimum of 21 or 30 days for public consultations and inter-ministerial arrangements so that all interested parties can familiarise themselves with the regulations, submit their remarks and proposals, and the government can respond to them,” said Piotr Patkowski, Undersecretary of State in the Ministry of Finance, Chief Spokesman of the Public Finance Discipline.
The Ministry also mentioned a programme of extended cooperation between the tax authorities and the world of business. Its aim is to improve the entrepreneurs’ comfort in terms of settlements with tax offices.
“We have at our disposal some non-imperative forms of influencing CIT payers, for instance a pilot cooperative-compliance programme that is being implemented by the National Revenue Administration. Taxpayers, in exchange for greater tax certainty and security and the possibility of cooperation with the tax administration, fully disclose their tax settlement mechanisms to the tax authorities. It is an optional programme, but there is a lot of interest from taxpayers. Certainly, there is also a need for the tax administration to create more effective selection tools for tax audits,” said Jakub Jankowski from the Income Tax Department at the Ministry of Finance.
Tax postulates for the “New Deal”
The Union of Entrepreneurs and Employers has been running an extensive tax agenda for many years. Some of the Union’s postulates could successfully be included in the “New Deal”, and some of them were supported by experts during the “CIT Payers Forum”. Among the supported activities postulated by the Union, there are the following:
- creating a competitive tax system that supports the development of Polish companies and attracts foreign entities, thus reinforcing economic growth;
- ensuring regulatory stability in the field of tax legislation, e.g. by introducing a minimum vacatio legis for acts regulating the economy and taxes, as well as by introducing the principle that all kinds of amendments in economic and tax law enter into force only once a year (e.g. on 1st January);
- continuing the dialogue between the Ministry of Finance and Polish business in order to develop the best possible tax solutions;
- improving the process of public consultation regarding proposed tax solutions, including in the scope of the time to submit comments or the stage at which individual ideas are subject to consultation with business (pre-consultations, consultations regarding assumptions for draft acts).
Furthermore, the Union of Entrepreneurs and Employers maintains its regular postulate to replace CIT, which – as statistics show – remains a de facto voluntary tax, with a revenue tax that would be much more difficult to avoid and, at the same time, easy to collect and settle.
