The Slim VAT 2 package, the next amendment to the VAT Act, enters into force on 1 October 2021 (although some of the provisions are already in force, as discussed at the end of this article). According to the Ministry of Finance, the aim of the new package is to simplify settlement of VAT by taxpayers and to adjust the Polish regulations to reflect the UK’s departure from the EU.
The amendment is also intended to implement the judgments of the Court of Justice of the European Union in C-335/19, E. Sp. z o.o. Sp. k. v Minister Finansów, and C-895/19, A. v Dyrektor Krajowej Informacji Skarbowej.
Key changes introduced by Slim VAT 2:
1. Introduction of a regulation defining the supply to which a dispatch or transport should be assigned when the organizer of the transport is the first supplier or last acquirer, in the case of export of goods or intra-Community supply of goods:
a) When the organizer of the transport is the first supplier, the organizer’s supply will be a movable supply enjoying a 0% VAT rate, upon fulfilment of additional conditions
b) When the organizer of the transport is the last acquirer, the supply to that acquirer will be a movable supply enjoying the aforementioned preference.
However, when the first supplier or the last acquirer carries out the dispatch or transport of the goods to another entity in the chain, this newly introduced provision will not apply.
2. Abandoning the provision conditioning deduction of input VAT in the same period in which output VAT was recognized on recognition of input VAT within three months after the end of the month in which the tax obligation arose, involving intra-Community acquisition of goods and import of services (implementation into the Polish legal system of the judgment by the Court in C-895/19, A. v Dyrektor Krajowej Informacji Skarbowej)
3. Enabling correction of a tax declaration, directly within a declaration, for a taxpayer settling tax on the import of goods, in a situation in which the taxpayer did not settle the correct amount of the tax in the original declaration. The taxpayer will be able to file the relevant correction of the declaration within 4 months after the month in which it should have settled the tax on import of goods.
4. Introduction of changes in the relief for bad debts:
a) Abandoning the condition enabling correction of output VAT on supply of goods or services to a VAT payer, registered as an active VAT payer, not in the course of restructuring or bankruptcy proceedings or in the course of liquidation.
Unlike now, these conditions will not have to be met as of the day preceding the date of filing of the tax declaration in which the correction of output VAT is made.
b) Extending to 3 years the period for making a correction. This period is calculated from the end of the year in which the invoice documenting the claim was issued.
c) Introduction of the possibility of such a correction with respect to debtors other than those registered as active VAT payers, on the condition that:
i. The claim was confirmed by a legally final judgment and directed to enforcement proceedings
ii. The claim was entered in a register of debts maintained at the national level, or
iii. A consumer bankruptcy was declared with respect to the debtor.
d) Elimination of the duty to make a correction of input VAT by the buyer in a situation where, as of the last day of the month in which the 90th day after the payment deadline falls, the debtor is in the course of a restructuring or bankruptcy proceeding or in the course of liquidation.
5. Modification of the definition of “member state” and “territory of the European Union,” so that the territory of Northern Ireland is deemed to be EU territory.
6. Extension of the period for submitting information about incurring the first expenditure on a motor vehicle used exclusively for the taxpayer’s economic activity (form VAT-26). To date, this period has been 7 days from the date in which the first expenditure was incurred in connection with the vehicle. The new period will be the 25th day of the month following the month in which the first expenditure connected with the vehicle is incurred, but no later than the date of transmission of the SAF-T (JPK) record.
7. Expansion of the number of settlement periods in which a taxpayer can take a deduction through correction of a declaration. It is indicated that in the case of import of services or supply of goods for which the reverse-charge mechanism is applicable, and for intra-Community supply of goods, corrections downward are to be made in the settlement for the period in which the reason for the correction arose, on the side of both output VAT and input VAT.
Moreover, in a case where the period for “current” recognition of a purchase invoice is exceeded, the taxpayer will be able to correct the tax declaration:
a) For the period in which the right to reduce the amount of output VAT arose, or
b) For one of the three following settlement periods, or in the case of a taxpayer settling on a quarterly basis, in one of the two following settlement periods, immediately after the settlement period in which the right to reduce the amount of output VAT arose
- but no later than 5 years after the start of the year in which that right arose.
8. Admitting the possibility of filing a mutual declaration within a notarial deed by the supplier and the acquirer on election of taxation of the sale of real estate.
9. Regulation of the issue of release of funds transferred from a closed VAT account to a so-called technical account.
10. Introduction of the possibility of issuing consent to release of funds from a VAT account if the taxpayer’s tax arrears have been deferred or scheduled for payment in instalments.
11. Admitting the possibility of transferring funds between VAT accounts operated by different banks. So far this possibility has applied only to funds in VAT accounts operated by the same bank.
12. From 1 January 2022, the possibility of charging a VAT account will be expanded to include transactions for payment of amounts due for farmers’ social insurance or health insurance contributions.
13. Change in item 60 in Annex 15 to the VAT Act (computers and other machines, as well as parts for them).
The amending act enters into force on 1 October 2021, except for:
1) Art. 1(5) and (7)(a)–(c) (changes involving import of goods and settlement of input VAT on transactions subject to the reverse-charge mechanism, and intra-Community acquisition of goods), which entered into force on 7 September 2021
2) Art. 2(1)(b), first bullet point, involving expansion of the scope of charging VAT accounts, which will enter into force on 1 January 2022.
The text of the amending act is available at this link.
Below we summarize the most relevant issues in the area of corporate income tax deductible costs on account of depreciation in real estate companies. It should be emphasized that on 8 September 2021 the whole draft of changes resulting from the Polish Deal was submitted to the Parliment and was referred for the first reading. This means that a stage of parliamentary work on the draft has begun. Therefore, it is difficult to predict what the final shape of the changes will be. The new regulations are to take effect as of January 1, 2022.
Proposed amendment to the provisions
According to the new Article 15 section 6, deductible costs are to be write-offs on account of wear and tear of fixed and intangible assets (depreciation write-offs), but in the case of real estate companies, write-offs connected with fixed assets classified under group 1 of the Classification of Fixed Assets (covering buildings and premises located therein, co-operative ownership right to residential premises, co-operative right to commercial premises) cannot be higher in a fiscal year than depreciation or amortization write-offs on account of wear and tear of fixed assets made according to the accounting regulations, charged in that fiscal year to the financial result of the entity.
Reason for amending the provisions
In the explanatory memorandum to the proposed amendments, the Ministry of Finance indicates two main reasons for introducing the above change.
First of all, the change is dictated by the need to reduce the differences between the value of taxable income reported by real estate companies in a tax year and the value of gross profit reported for the same period. The Ministry emphasises that the rules for determining the depreciation period and the annual depreciation rate specified in the Accounting Act are of a more individualised nature, based on the economic useful life of a given fixed asset. When determining them, one should consider, among others, the number of shifts during which the fixed asset works, the pace of technical and economic progress, the efficiency of the fixed asset measured by the number of working hours or the number of manufactured products or another appropriate measure, as well as legal or other limitations on the time of using the fixed asset. Therefore, if a taxpayer, as a result of considering the aforementioned premises, deems it appropriate to apply a certain depreciation rate for accounting purposes, in the Ministry's opinion, there is no justification for applying a different rate for tax purposes. Of course, this is based on a belief that the rates used for accounting purposes will be lower than those currently in force for tax purposes.
At this point one might wonder why the Ministry did not decide to change the determination of depreciation write-offs according to the accounting regulations for all entities and all types of fixed assets? This question is answered by an additional argument in favour of the introduction of the said change, which, according to the Ministry, is the fact that in many cases real estate companies are entities whose revenues are derived from real estate they own, situated in attractive locations (e.g., in the centres of large cities). As time goes by the market value of such real properties increases rather than decreases, and the current rules of recognising depreciation write-offs on their value as deductible costs indicated its systematic decrease, which was contrary to the economic reality of the operation of such entities. The fact that depreciation write-offs constitute a significant cost item in real estate companies is probably also significant.
In our opinion, the Ministry of Finance completely ignored the fact that while the value of land as such increases systematically (which is reflected in the principle that land is not subject to depreciation), the value of buildings or structures decreases over time due to their physical wear and tear, i.e., it is a natural process of ageing.
Consequences of the amendment
Real estate companies that currently apply depreciation rates on Group 1 property for accounting purposes lower than those used for tax purposes must expect a reduction in deductible costs in this respect from 1 January 2022, which will increase the tax base.
In this situation, it seems that taxpayers who are real estate companies should immediately commence analyses aimed at reliable verification of the depreciation rates used for accounting purposes. It must be remembered that, according to the Accounting Act, the correctness of the applied depreciation periods and rates should be periodically verified by each entity (in principle at least once a year), and the effect of such verification should be an appropriate (downward or upward) adjustment of the write-downs made in subsequent financial years. For this purpose, the aforementioned premises concerning the remaining period for which the fixed asset will be used should be analysed each time, i.e., whether the output of the fixed asset has changed, the number of shifts during which the fixed asset works, etc.
As a result of such periodic verification, depreciation periods and rates can be changed from the beginning of the next financial year - such a change cannot be made during the financial year. In addition, it should be remembered that accounting regulations permit a change in the period and rate of depreciation, but it is not possible to change the depreciation method adopted at the date of putting a fixed asset into use (for example, a change from the straight-line method to the declining balance method).
Another interesting issue is the impact of the amendment on real estate companies which recognise property held for accounting purposes as investment assets, i.e., assets held by the entity for the purpose of generating economic benefits from them. This type of real estate can be valued either according to the rules envisaged for fixed assets (and thus depreciated) or valued to market price or otherwise stated fair value (in this case depreciation write-offs are not made, but only changes in the market/general value are reflected in the books).
Unfortunately, the proposed amendment to the provisions of the Corporate Income Tax Act does not in any way refer to entities recognising real property as investments at the market/fair value, which leads us to assume that such entities will lose the right to depreciate their real property for tax purposes as of 1 January 2022.
Therefore, also in this case, taxpayers should consider both the correctness of the classification of real estate held as investment property (the provisions of the Accounting Act provide for the possibility of reclassification of real estate from investment property to property used for own purposes and vice versa) as well as the valuation model adopted for investment properties (the provisions of the Accounting Act provide for the possibility of changing the applied accounting policy concerning the valuation model for investment properties).
When it comes to the reclassification of properties from investment to own properties, this may happen, in principle, only if there is a change in the manner of using the property. As mentioned above, investment properties include real properties constructed and held for the purpose of deriving economic benefits from them, other than using them in operating activities (production, supply of goods, rendering of services, administrative activities). Thus, in fact, only the commencement of the use of a real property for the purposes of one's own business operations justifies its reclassification.
When an entity has designated a property as investment property and has decided to measure the property at the market value or at some other fair value, the entity may change its measurement model. However, it should be remembered that the change involves a change in the accounting policy and cannot be made entirely arbitrarily. Pursuant to the information contained in National Accounting Standard No. 7 "Changes in accounting principles (policy), estimated values, correction of errors, events after the balance sheet date - recognition and presentation", an entity may, in justified cases, depart from the continuous application of the adopted accounting principles (policy) and change them by making a retrospective restatement of comparative data if it considers that this is necessary for a clearer presentation of its property and financial situation and financial result. The new policy is always applied from the first day of the financial year (depending on the decision made by the entity's manager, it is the first day of the current or the next financial year). Such a change may be caused, among others, by an individual decision of the entity dictated by a change of the subject of its activity, an increase or decrease in its scope, the need to adjust to the solutions in force in the capital group which the entity entered or in the industry in which the entity started operating, the use of simplifications possibilities, the implementation of audit or financial review recommendations. A change in the adopted principles of measurement results in a need to change the presentation of such assets in the financial statements, also retrospectively (i.e., comparative data should also be restated).
The internal inconsistency of the proposed changes and the grounds for them is also worth noting, as the grounds for the bill indicates that the change will not apply to:
- the right to accelerated tax depreciation of brand-new fixed assets purchased by the taxpayer (Article 16k section 14 of the CIT Act), and
- one-off depreciation of fixed assets, addressed to small taxpayers and taxpayers commencing their business operations (Article 16k section 8 of the CIT Act).
However, these exceptions refer to other groups of fixed assets (groups 3-6 and 8 of the FAC), whereas the proposed changes are to concern group 1 of FAC. In addition, these exceptions described in the grounds for the bill have not been included in the bill itself.
Protection of pending interests
It seems that without introducing any transitional provisions the above-described change of regulations under the Polish Deal may violate the principle of protection of pending interests. A similar issue was resolved by the Constitutional Tribunal, which in its judgment of 10.02.2015 (Case No. P 10/11) referred to the possibility of depreciation of intangible assets, such as the right to use a share in a real property, in the light of changes in corporate income tax depriving taxpayers of the possibility to depreciate this right, entered into the register of fixed assets and intangible assets before 1 January 1999.
The Tribunal pointed out that the principle of protection of pending interests is an element of the broader principle of citizen's trust in the state, imposing an obligation on the legislator to formulate new regulations governing economic activity, while at the same time ensuring stability of its rules. According to this principle, if a provision of law ensures that certain rules will be in force for a certain period of time, and a citizen, guided by this assurance, commences certain activities, then such rules cannot be changed later to the disadvantage of the citizen. In practice this means, according to the Tribunal, that the legislator is obliged to take account, in appropriate transitional provisions, of the situation of taxpayers who, while conducting business, used the right granted to them to make depreciation deductions on account of ownership of the right to use a share in a real property and other intangible and legal assets.
The change in corporate income tax regulations resulting from the Polish Deal described here will have a significant impact on the amount of tax liabilities of real estate companies and, consequently, on the effectiveness of their business. It must not be forgotten that this business is often connected with high investment outlays (frequently financed with loans), the profitability of which will suddenly and significantly deteriorate in this situation. Therefore, as indicated by the Constitutional Tribunal, it seems appropriate that the proposed regulation should not only enter into force on 1 January 2022 but should also apply to properties placed in service after that date.
The regulations have not entered into force yet and parliamentary work on the project is currently underway, so it is impossible to say what the final shape of the proposed changes in this respect will be. Perhaps the Members of Parliament will also eliminate internal inconsistencies in the proposed amendments to the CIT Act. Nevertheless, it is already worth considering whether there are possibilities of avoiding the negative tax consequences of the planned changes. The KR Group offers full support in the analysis of both the depreciation rates adopted by taxpayers and the classification of properties as investment or own property, as well as the principles of their valuation, in view of the changes to be introduced.
In the event that there are positions and further proposals we will keep an eye on the situation and inform you of the developments.
These changes pertain to a number of acts, i.e. the PIT Act, the CIT Act, the Tax Ordinance, the Fiscal Penal Code. The table below presents a summary of the most important changes in transfer pricing under the "Polish Deal".
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Key changes in transfer pricing area under the "Polish Deal" tax project |
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Transaction value |
If VAT is not neutral to the taxpayer, the amount of VAT resulting from the audited transaction will be included in the value of the transaction connected with the documentation threshold. |
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Deadline for preparation of local documentation |
Change from the current deadline of 9 months to 10 months after the end of the fiscal year.. |
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TPR submission deadline |
Change from the current deadline of 9 months to 11 months after the end of the fiscal year. |
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Deadline for preparation of group documentation |
According to the assumptions, the deadline is 12 months after the end of the fiscal year |
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Deadline for submission of the transfer pricing documentation to tax authorities in case of audit |
Change from the current deadline from 7 days to 14 days. |
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Statement |
No obligation to make a separate statement on preparation of the transfer pricing documentation and conclusion of arm's length terms of related party transactions. The content of the statement is to be included within the TPR form. |
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TPR submission |
Filed with the tax offices competent for filing the taxpayer's annual income tax return. Presently it is submitted to the Head of the National Tax Administration. |
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TPR and non-corporate entities |
According to the project non-corporate entities will be obligated to file a TPR form to the head of the tax office connected with jurisdiction over the entity's registered office or place of business. Now, TPR form is filed by the designated general partner to the head of the National Tax Administration. |
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Benchmarking analysis |
A number of exemptions from the obligation to prepare analyses are proposed, i.e. for transactions concluded by related entities which are micro or small enterprises: in the safe harbour mechanism, which constitute low-value services, and certain transactions with entities from tax havens. |
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Transfer pricing adjustments |
There are proposals for simplifications for in-minus adjustments and the presentation of adjustment information in the annual tax return. |
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Exemptions from the obligation to prepare the transfer pricing documentation |
There are proposals for exemptions from the obligation to prepare the transfer pricing documentation, i.e. in case of transactions: covered by the safe harbour mechanism, specified with a foreign permanent establishment, covered by a tax or investment agreement, re-invoicing meeting certain conditions. |
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Penalties in the Fiscal Penal Code for failure to prepare the transfer pricing documentation or the TPR form |
According to the proposed legislation increase up to 720 daily rates. |
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Penalties in the Fiscal Penal Code for late preparation of the transfer pricing documentation or TPR form |
According to the proposed legislation increase up to 240 daily rates. |
In the following entries we will explain in more detail the individual changes in transfer pricing
According to the grounds provided by the Ministry of Finance, this solution is dictated by the unsatisfactory tax amounts declared so far by large taxpayers (according to 2019 data, a share of income in revenues not exceeding 1% was achieved by only 22% of these taxpayers). Unfortunately, the introduced regulations do not include any criteria showing that they are directed at large taxpayers, meaning that potentially all taxpayers will be subject to the changes (with a few exceptions discussed below, which do not have any relation to the scale of a business).
It should be emphasised that on 8 September 2021 the whole draft of changes resulting from the Polish Deal was submitted to the Sejm and was referred for the first reading. This means that a stage of parliamentary work on the draft has begun.
Taxable entity and rate of taxation
The minimum tax rate has been set at 10% and the new regulations are to apply to taxpayers and tax capital groups which:
1) suffered a loss from a source of revenues other than capital gains, whereby the loss does not take into account:
The costs of acquisition or improvement of fixed assets recognised as deductible costs in the tax year, including depreciation write-offs,
Income and costs related to transactions within which the price or method of its determination results from statutory provisions or normative acts issued on their basis, and the taxpayer has incurred a loss, from a source of revenue other than capital gains, from such a transaction, or obtained an income share in revenue from such a transaction which does not exceed 1% in a given tax year, while the loss and the share of income in revenues are calculated separately for the same kinds of transactions.
2) have achieved a low operating income ratio resulting in no tax payable, meaning a share of income from a source of income other than capital gains in income other than capital gains of no more than 1%.
The alternative income tax will not apply to taxpayers:
1) in the year of commencement of business and in two consecutive tax years immediately following this tax year, except for taxpayers formed as a result of transformations and mergers (including transformation of a sole trader and a company not being a legal person, but excluding transformation of a company into another company), as well as taxpayers, upon the formation of which - both at the time of formation and in the following year - a previously existing enterprise, its organised part or assets of the enterprise were contributed to the capital, or in-kind contributions were made in the form obtained from liquidation of other taxpayers,
2) being financial undertakings,
3) if in the tax year they reported revenues lower by at least 30% in comparison with the revenues obtained in the tax year immediately preceding this tax year,
4) those operating in a simple organisational and legal structure, i.e. those whose shareholders, stockholders or partners are exclusively natural persons and if the taxpayer does not hold shares in the capital of another company, titles of participation in an investment fund or in a joint investment institution, the entirety of rights and obligations in a company that is not a legal person, and other property rights connected with the right to receive a benefit as a founder or beneficiary of a foundation, trust or another entity or legal relationship of a fiduciary nature.
The new regulations on the alternative minimum tax are also to apply to taxpayers who conduct their business through a foreign permanent establishment situated in the territory of the Republic of Poland.
Tax base
The tax base will be the sum of:
- 4% of the value of revenues from a source of revenues other than capital gains,
- debt financing costs incurred for the benefit of related parties, if they exceed the amount of the limit determined on the basis of the formula (the limit is 30% of revenues without taking into account interest income, less costs without taking into account their reduction by the excess over and above the debt financing limit and depreciation write-offs),
- deferred income tax resulting in an increase in gross profit/decrease in net loss,
- as well as the part of the costs incurred for the benefit of related parties or entities from a country applying harmful tax competition of the costs of acquisition of certain services or intangible rights above a certain limit.
At the same time, the proposed regulation indicates that the tax base is to be reduced by:
- any deductions having an impact on the reduction of the tax base under Article 18 (e.g., donations), excluding, however, deductions under Article 18f (relief for bad debts), subject to the rule that if the taxpayer made deductions from income and subsequently received a refund of the amounts deducted, in his tax return for the tax year in which he received the refund he must add the amounts previously deducted accordingly,
- income included in the calculation of the tax-exempt income under the provisions concerning the Polish Investment Zone.
Payment of tax
The minimum income tax is to be calculated annually. The minimum income tax paid for a given tax year may be deducted from the basic tax for the following years. The deduction is to be made in the return for 3 consecutive tax years immediately following the year in which the taxpayer paid the minimum income tax. According to the grounds presented by the Ministry of Finance, the reason for this solution is that the minimum income tax and the basic income tax may to some extent encumber the same income and, consequently, lead to double taxation. The introduction of the deduction mechanism is intended to eliminate this situation.
Changes to the limit on intangible services from related parties
As a consequence of the above change, the existing Article 15e regulating the limitation of classifying as tax deductible costs certain services and intangible rights acquired from related parties and from countries applying harmful tax competition will be repealed. However, this regulation does not disappear altogether - according to the planned changes it will be appropriately included in the provisions defining the alternative minimum income tax and will become one of the elements of the tax base.
As mentioned before, the tax base of the alternative minimum tax will include the part of costs of services or intangible rights incurred for the benefit of related entities. Thus, the tax base will be increased by these costs in the part in which in the tax year they exceed by PLN 3,000,000 in total the amount calculated according to the formula of calculation of 5% EBITDA (however, for simplicity reasons, there is a proposal to replace the existing descriptive method of calculation with a formula). Thus, the amount of costs which, pursuant to the previously binding Article 15e, was excluded from costs, will under the new regulation of Article 24ca become the basis for taxation with the alternative minimum tax. However, the taxable base in this respect will not include re-invoiced services, as well as insurance services and guarantees and sureties provided by certain financial companies (e.g., banks, SKOK, insurance companies).
It should also be noted that Art. 60 of the Act introducing changes related to the Polish Deal contains a transitional rule according to which CIT taxpayers who, before the end of the tax year started before 1 January 2022, acquired the right to deduct the costs on the basis of Art. 15e, retain the right to deduct them after 31 December 2021 within the scope and under the rules set out in this provision. Thus, despite the repeal of Article 15e, the amount of costs of intangible services from related parties not deducted by the end of 2021 still will continue to be deductible in the subsequent 5 tax years.
Since tax amnesty is of an exceptional nature and is valid for a specific period of time, the provisions regulating this issue are not provisions introduced to the CIT or PIT act; they constitute a separate chapter 2 of the act introducing changes resulting from the Polish Deal, entitled "Episodic provisions".
This solution is addressed to entities wishing to disclose to the tax authorities their previously untaxed income, but also to entities wishing to withdraw from tax optimisation measures undertaken earlier, including cross-border measures. The Ministry of Finance - probably encouraged by the effects of such regulations in other countries - plans to obtain additional budget revenues in this way. The use of this form of taxation is to be voluntary and additionally connected with the possibility to obtain an anonymous security opinion in the scope of disclosure and the possibility to take advantage of tax relief connected with investing capital from disclosed income in Poland or in the EU.
Taxpayer
Individuals, legal persons and other organizational units without legal personality, regardless of their place of residence, registered office, management or registration, who are taxpayers or tax remitters of income tax may use the transitional flat-rate tax on income. The only restriction in the application of these regulations is that these entities may not, as at the date of submitting an application for transitional taxation, be subject to tax proceedings, tax inspection or customs and fiscal inspection whose subject matter is undisclosed income.
Subject of taxation
1) failure to disclose them in whole or in part,
2) failure to disclose, in whole or in part, the source of their generation,
3) transfer or holding of capital in any form outside the territory of the Republic of Poland, including in a foreign entity,
4) application of the provisions of double taxation conventions in a manner inconsistent with the context of application of the provisions of these conventions, with their aim and intentions of the states parties to these conventions
5) non-actual tax residence,
6) achievement of a tax advantage other than that specified in items 1-5 above in the form specified in the Tax Ordinance Act.
The taxpayer or tax remitter as part of the disclosure should include all events affecting the transitional flat-rate sum, both direct and indirect in nature.
1) income that arose as a result of the commission of a crime,
2) income which has arisen as a result of committing a fiscal offence or fiscal misdemeanor, unless the entity or the perpetrator of the fiscal offence or fiscal misdemeanor acting on behalf of the entity notifies the competent head of the tax office of the commission of that offence simultaneously with the submission of an application for taxation of such income with the transitional flat-rate sum on income.
Tax base
The basis for taxation with the transitional flat-rate sum is the income earned up to the date of filing the application for taxation with this flat-rate sum, representing:
1) the amount of income that would be determined by the taxpayer on the basis of the provisions of the CIT or PIT Acts, reduced by the expenses incurred directly in order to obtain it, if such expenses were not deducted when determining the income tax liability in any form, and the evidence presented by the entity of the incurrence of such expenses does not raise any doubts, or
2) the amount of revenue that would be determined by the taxpayer or the payer on the basis of the provisions of the CIT or PIT Act and taking into account the provisions of the relevant double tax treaty, if the tax obligation was executed in a manner consistent with the subject and purpose of this treaty, or
3) the amount of income from the capital transferred or held outside the Republic of Poland, including in connection with a change of tax residence, reduced by expenses incurred directly in order to obtain this income, if these expenses were not deducted when determining the liability for income tax in any form, and the evidence presented by the entity to incur these expenses does not raise any doubts, or
4) 25% of the value of capital transferred or held outside the territory of the Republic of Poland, including in connection with a change of tax residence, or
5) the value of a tax benefit, within the meaning of the Tax Ordinance Act, other than those listed in items 1-3 above.
In the case of earning the income referred to in items 3 and 4 above, the taxpayer is required to choose one of the indicated sources of taxation.
As part of the disclosure of the tax base, you must also indicate the source of the income, how the income was earned, and the amount of the income, which must be determined in the manner most appropriate to the facts and circumstances of its generation (taking into account the costs of its generation).
Tax rate
The transitional income tax rate is 8% of the tax base.
Transitional flat-rate sum taxation procedure
The application for transitional flat-rate taxation is to be submitted in an electronic form. The application will be addressed to the head of the tax office with jurisdiction over income tax, and in the absence of such jurisdiction for income tax purposes - to the head of the tax office with jurisdiction over the taxpayer's/tax remitter's registered office. Together with the application it will be necessary to submit a statement of compliance with the factual and legal situation and that there are no circumstances excluding the subject of taxation from taxation in the form of transitional flat-rate sum.
The application is subject to a fee of 1% of the taxable income, not less than PLN 1,000 and not more than PLN 30,000. If for any reason the income reported in the application is increased, it will be necessary to supplement the fee to the amount resulting from the increased income. Proof of payment of the fee must be attached to the application (if the fee is increased no later than on the 7th day following the date of the increase of income reported earlier, a proof of payment must be attached to the application). Unpaid applications will not be considered.
If the application does not meet all the requirements and the taxpayer/tax remitter does not remedy the deficiencies within 14 days after being summoned by the authority, the application will be considered ineffective and the fees paid will not be refundable.
The taxpayer/payer may submit separate applications for different incomes.
A properly completed, paid and filed application will be treated the same as a filed return of income and the interim flat-rate sum paid on the income will become tax payable on the declared income, no later than the 1st day of the third month following the month in which the application is filed.
Deadlines
The template for the transitional flat-rate sum tax application will be determined by August 31, 2022. However, the applications themselves will be able to be submitted from 1 October 2022 to 31 March 2023. The filing of the application interrupts the running of the limitation period of the right to determine or establish the tax liability in CIT or PIT, on the income reported for taxation with the transitional flat-rate sum on income. Once the limitation period is interrupted, it runs anew from the day following the date of filing the application.
As an exception, an application may be filed after December 31, 2022 if the taxpayer/tax remitter has previously requested an opinion as to the March of the flat-rate tax to the Capital Repatriation Board (vide the "Protective Opinion" section below). If an opinion is received, the request may also be made within 30 days of receipt of that opinion, notwithstanding the March 31, 2022 deadline.
Thus, taxpayers and tax remitters in the second half of 2022 will have the opportunity to evaluate their past tax returns and voluntarily elect to disclose income that has not yet been taxed in whole or in part in Poland.
The transitional flat-rate sum on income disclosed in the application is payable within 30 days following the date of the application.
Protective Opinion
The taxpayer/tax remitter, before submitting an application for transitional flat-rate sum taxation, may apply to the Capital Repatriation Board for an opinion as to the tax consequences in the transitional flat-rate sum on income, in his/her individual case.
Any entity may submit the request on its own or by acting through an attorney who is a tax advisor (in the latter case, it is possible to submit the request anonymously without disclosing the details of the principal).
The Council is a new independent body appointed by the Minister of Finance and composed of persons indicated by him, judges of the Supreme Administrative Court, persons from scientific and research circles dealing with taxes and tax advisors. The Council will operate until the date of issuance of all opinions, but no longer than until 30 September 2023.
An application for an opinion is subject to a fee of PLN 50,000 and the Board issues its opinion no later than within 2 months of receipt of the application. In the event of deficiencies in the application, if they are not remedied by the party within the time limit set by the Council, the Council will refuse to issue the opinion and the fee will not be refundable.
Applying to the Council for an opinion is not tantamount to the necessity of a subsequent application for taxation of income with the transitional flat-rate sum. Despite obtaining it, the taxpayer/tax remitter may decide not to file an application for taxation.
Other issues
An entity or a perpetrator of a fiscal offence or a fiscal misdemeanour acting on behalf of an entity that has submitted an application for taxation of income with the transitional flat-rate sum and has paid the transitional flat-rate sum on income in full on the income reported in the application is not subject to punishment for a fiscal offence or a fiscal misdemeanour with respect to the income reported in the application, if the disclosure of this prohibited act has been made solely on the basis of a notice of commission of a prohibited act submitted by this entity or this perpetrator.
Payment of the transitional flt-rate sum on the income reported in the application results in the exemption of such income from personal income tax, lump sum personal income tax and corporate income tax.
Relief for investment of capital from disclosed income
If after the date of income declaration and payment of the transitional flat-rate tax on this income the taxpayer/tax remitter makes the following acquisitions of property components or makes the following contributions or surcharges, he/she will be able to reduce his/her tax liability in CIT or PIT obtained from these property components, including from their rental or sale, from the activity in which these components were used and from participation in a company having legal personality seated in Poland or within the EEA, by an amount equal to 30% of the transitional flat-rate tax on income.
The relief applies to making, within a period not exceeding 1 calendar year counting from the day of filing the application for taxation in the form of transitional fla-rate sum:
1) investments in the form of the acquisition of tangible or intangible assets, with a value corresponding to at least the value of the reported income for taxation in the form of a transitional flat-rate sum, from entities with their registered office in Poland or within the EEA,
2) Investments in the form of acquisition of shares or stocks in companies having legal personality or other securities, from entities with seat in Poland or in the EEA area,
3) Investments in the form of cash contributions or additional payments to the capital of companies with legal personality.
An additional condition to take advantage of the deduction is the prohibition to dispose of the aforementioned assets and to withdraw the contributions and additional payments from the company for a period of at least 12 months from the moment of its execution (completion).
The deduction can be made for the tax year in which the investment was made and for the following 2 tax years. The return on income earned in the tax year in which the deduction is made must be accompanied by evidence that the investment was made, as well as a copy of the application for a transitional flat-rate sum taxation.
So far, the due diligence assessment has taken into account the nature and scale of the activities carried out by the remitter. From 2022 due diligence will also be assessed through the prism of the relationship between the remitter and the taxpayer. This means that in the case of payments of receivables between related entities, a higher standard of due diligence will be expected, as entities within capital groups have greater access to specific information regarding other entities in the group.
Changing the definition of “beneficial owner”
For WHT due diligence, it is also important to determine the beneficial owner of receivables. According to the proposed changes, the definition of “beneficial owner” will change. Thus an entity that is an intermediary obliged to transfer all or part of the receivables to another entity would not be regarded as the beneficial owner. The current version is narrower, as it indicates that the obligation to transfer all or part of the receivables to another entity should be legal or factual.
Pay-and-refund mechanism
Under the bill, the pay-and-refund mechanism would not be applied to all income earned in Poland by non-residents subject to withholding tax. The catalogue would be narrowed to revenue:
In addition, the pay-and-refund mechanism would apply to the above revenue only when such receivables are paid to a related entity.
It should be noted under the proposed new Art. 26(2ec) of the CIT Act, the pay-and-refund mechanism would also be applied to receivables that, without justified economic reasons, were not classified as receivables covered by this mechanism.
If the total amount of receivables paid on the foregoing basis exceeded PLN 2 million in the tax year for the same taxpayer, the remitter would be obliged to collect WHT according to the tax rate resulting from the CIT Act on the surplus over PLN 2 million.
Opinion on application of exemption = Opinion on application of preferences
Opinions on application of an exemption are to be replaced by opinions on application of preferences, due to the extended scope of these opinions. Both the remitter and the taxpayer would be able to apply for an opinion.
Even if the receivables were covered by the pay-and-refund mechanism, based on an opinion on application of preferences it would be possible to:
Remitter’s declaration for use of relief at source
Under the proposed changes, the pay-and-refund mechanism would not apply if the remitter submits a declaration that:
Such declaration is to be made by the head of the entity within the meaning of the Accounting Act, stating the function performed by the declarant. According to the provisions, if an entity is managed by a multi-person body, the declaration is to be made by one or more authorized representatives. An attorney will not be entitled to submit the declaration.
Increased limits in R&D relief
The first major change applies to taxpayers with the status of research and development centres, which are (currently) allowed to deduct 150% of certain tax-deductible expenses. Under the modified R&D tax relief, those entities could deduct 200% of eligible costs, including eligible costs for obtaining and maintaining a patent.
Taxpayers without the status of R&D centres would also benefit from extension of the relief, as they would be able to deduct 200% of costs in the form of salaries of employees involved in R&D activities (instead of 100%).
Prototype relief
The prototype relief, which will be complementary to the R&D relief, will allow taxpayers to deduct from the tax base an additional 30% of costs of trial production of new products or launching new products on the market.
This new relief is aimed at taxpayers that have created new product as a result of their R&D work, if the product has not yet functioned on the market and is distinguished for its technical efficiency, usability and functionality.
As with R&D relief, such costs would be claimed in the annual tax return for the tax year in which the costs were incurred. The other option would be to deduct the costs in the next two years following the year in which they were incurred. The value of the deduction could not exceed 30% of costs incurred or 10% of income from non-agricultural business activity.
Robotics tax relief
Another proposed solution is robotics relief. Robotics relief would allow taxpayers conducting industrial (or manufacturing) activities to deduct eligible costs, previously included in tax-deductible costs, from the tax base. However, the relief could not exceed deduction of 50% of eligible investment costs from the tax base.
Introduction of robotics relief is intended to encourage taxpayers to invest in industrial robots, machines or peripheral devices increasing the level of robotization and automation of Polish enterprises.
Simultaneous use of IP Box and R&D tax relief
So far, it has not been possible to apply R&D tax relief and the preferential IP Box tax rate to the same income at the same time. The Polish Deal would introduce a regulation enabling taxpayers earning income from qualified intellectual property rights to tax that income at the preferential 5% tax rate and also claim R&D tax relief at the same time. Applying both forms of relief simultaneously would deliver many benefits for innovative taxpayers.
Therefore, from 2022, taxpayer commercalizing the results of research and development, who obtains qualified income from them within the meaning of the IP Box provisions, will not be obligated to choose between the two reliefs.
The bill introduces definitions of “holding company” and “subsidiary.”
According to the bill, a holding company is a limited-liability company or joint-stock company that is a taxpayer referred to in Art. 3(1) of the Corporate Income Tax Act, meeting all the following conditions:
a) It has held, continuously for a period of at least one year, directly on the basis of ownership, at least 10% of the shares in the capital of a subsidiary.
b) It is not part of a tax capital group.
c) It does not benefit from tax exemptions connected with operating in a special economic zone, or statutory exemptions for interest or dividends.
d) It carries out actual business activity.
e) Shares in the company are not held, directly or indirectly, by a shareholder with its registered office, management board, registration or location in a jurisdiction which:
A subsidiary is defined in the bill as a company that meets all the following conditions:
a) At least 10% of the company’s shares have been held directly by the holding company on the basis of ownership continuously for a period of at least one year.
b) It does not own more than 5% of the shares of another company.
c) It does not hold shares in an investment fund or collective investment institution, or all the rights and obligations in a partnership that is not a legal person, or rights of the founder or beneficiary to benefit from a foundation, trust or other entity or legal relationship of a fiduciary nature, or similar rights.
d) It is not part of a tax capital group.
e) It does not benefit from tax exemptions connected with operating in a special economic zone.
The bill includes two solutions profitable for taxpayers:
Exemption for dividends
The new dividend exemption would exempt from income tax 95% of dividends obtained by the holding company from a domestic or foreign subsidiary.
The remaining portion of the dividend, not covered by the proposed exemption (5% of the dividend amount), would be subject to CIT under the general rules for taxation of dividends, at the 19% tax rate.
A positive aspect of the proposed new dividend exemption is the possibility to apply the new exemption to dividends received by a holding company from a subsidiary registered outside the European Union and the European Economic Area (the current dividend exemption applies only to entities from the EU or EEA).
Exemption for capital gains
The bill includes the right to completely exempt from CIT the income obtained by a holding company from the sale of shares in a subsidiary. This exemption would only apply if all the following conditions are met:
The Polish Deal have introduced an amendment to the Enterprise Law Act lowering the upper threshold of cash settlements to PLN 8 000 (previously it was PLN 15 000), above which a consumer, concluding a transaction with an entrepreneur, will be obliged to use non-cash forms of payment. Additionally, the Polish Deal have introduced regulations regarding the necessity for entrepreneurs using fiscal cash registers to accept payments using payment instruments. Entrepreneurs are also obliged to ensure cooperation between cash register and payment terminal.
Deduction from the tax base
• Large and medium-sized taxpayers
Large and medium-sized taxpayers with revenues other than capital gains will be able to deduct from the tax base the expenses for purchasing a payment terminal and the expenses for handling payment transactions using the terminal incurred in the tax year in which they started accepting payments using the terminal, and in the following year, up to:
1) PLN 2,500 in the tax year, in the case of taxpayers exempt from the obligation to maintain records of sales to natural persons not conducting business activity and “lump-sum” farmers using cash registers, in accordance with the VAT regulations
2) PLN 1,000 in the tax year, in the case of other taxpayers.
• Small taxpayers
Separate rules are provided for small taxpayers obtaining revenue other than capital gains, who are entitled (under the VAT Act) to a refund of the excess of input VAT over output VAT within an accelerated period of 15 days (there are also new VAT regulations for “non-cash” taxpayers who settle most of their turnover in this way) for at least seven months (in the case of taxpayers with monthly settlements) or two quarters (in the case of taxpayers with quarterly settlements). They will be able to deduct an amount equal to 200% of the expenses incurred, but not more than PLN 2,000 in the tax year, with the deduction being recognized in each tax year in which the taxpayer incurred the expenses. There will be a right to a deduction in this case both when the taxpayer is entitled to a refund of the difference in VAT at an earlier date, and when the refund is made to a partnership (not a legal person) in which the taxpayer is a partner. However, small taxpayers may choose not to use the tax relief method provided for them and choose instead the method provided for large and medium-sized taxpayers.
Conditions for claiming the deduction
The amount of the deduction in the tax year may not exceed the taxpayer’s income from sources other than capital gains.
• Taxpayers already benefiting from financing programmes
A taxpayer who has ensured the possibility of accepting payments using a payment terminal using programmes financing the reimbursement of expenses related to the handling of payment transactions (mainly the Cashless Poland programme, under which the costs of installing the payment terminal and operating costs for the terminal are reimbursed for the first 12 months after installation) will be entitled to a deduction of expenses in the tax year in which the taxpayer ceased applying such programmes and in the following year. However, this rule will not apply to the tax relief for small taxpayers.
• Taxpayers previously accepting payments using a payment terminal
Taxpayers who accepted payments using a payment terminal within the 12 months immediately preceding the month in which they again started accepting payments using a payment terminal will not be entitled to the relief. For example, if the taxpayer stopped operating on 31 December 2022, and then started other activities on 1 March 2023, again ensuring the acceptance of non-cash payments using a payment terminal, then in the settlement for 2023 the taxpayer could not claim the tax relief because it accepted payments using the terminal during the 12 months immediately preceding the month in which it resumed accepting payments using the terminal. But again, this rule would not apply to the tax relief for small taxpayers.
How are expenses for handling of payment transactions defined?
Expenses related to handling of payment transactions using a payment terminal are understood to mean interchange fees, the merchant’s service charge, the system fee, as well as fees for use of a payment terminal under a rental, lease or similar agreement. A payment terminal is understood as a device enabling cashless payments using a payment card or other payment instrument.
The deductible amount of the expense is the amount of the expense together with VAT, unless the VAT has been deducted under the VAT Act (in which case the deduction will be net of VAT).
As in the case of other allowances, these costs will be deductible if they have not been refunded to the taxpayer in any form and have not been deducted from the income tax base.
Timing of the deduction
The deduction is made in the return for the tax year in which the expenses were incurred, but if the amount of the deduction is not covered by the taxpayer’s annual income, it may be deducted in the returns for the following three tax years.
Claiming of this deduction will not be treated as a reduction in the value of fixed assets or intangible assets as a result of a deduction from the income tax base, having an impact on the amount of depreciation (CIT Act Art. 16 (1) (48)). Therefore, taxpayers taking the deduction need not be afraid that it will affect the amount of the deduction.
The Ministry of Finance believes such practices are often used to artificially inflate tax-deductible costs, sometimes even bearing the hallmarks of acting to the company’s detriment. The ministry also admits that one purpose of introducing these regulations is to force businesses to contribute assets, especially in the form of real estate, to the company’s capital. Critics see the proposal as a manifestation of the state’s aggressive fiscal policy, interfering too much in how owners dispose of their property.
Tax-deductible cost
Pursuant to the proposed new subparagraph, Art. 16(1)(15b) of the CIT Act, costs for benefits paid directly or indirectly to a shareholder or to an entity directly or indirectly related to the taxpayer or that shareholder would not be considered deductible costs if:
This would open up an additional avenue for the tax authorities to challenge the inclusion in tax-deductible costs of expenditures benefitting shareholders or entities related to them which burden the taxpayer in an artificial and unjustified manner. Such transactions would primarily include transactions concluded on non-market terms, transactions regarding assets previously sold to shareholders, payments unrelated to the taxpayer’s business operations, or transactions causing the taxpayer to become excessively indebted to related entities from the capital group.
Controversy surrounding the planned changes
This proposal is surprising, as it seems that the current regulations already provide tax authorities with sufficient oversight of benefits paid to shareholder (after all, oversight of intangible benefits has a long and rich history), not to mention Poland’s broad and indefinite general anti‑avoidance rule. Thus, additional reinforcement of the regulations combating hidden dividends may signal that starting from 2022, transactions of this type will become the subject of special interest of the tax authorities.
The new relief would make it easier for companies to raise financing via the stock exchange and encourage companies to list their shares. Considering the revival of the IPO market on the Warsaw Stock Exchange observed from the second half of 2020, it seems that a number of companies may be interested in this relief.
What will be the amount of relief?
The tax base, after deducting the amounts of R&D relief, prototype relief, sales growth relief, and consolidation relief (the last three are also new incentives under the Polish Deal, a description of which we will present shortly), may be reduced by an amount equal to:
1) 150% of the expenses for preparation of the prospectus, notary fees, court fees, stamp duty, and stock exchange fees, and preparation and publication of announcements required by law
2) 50% of expenses, excluding VAT, on legal services, including tax advisory services and financial advisory services, but not more than PLN 50,000
provided that the above expenses were incurred by the taxpayer directly for making an initial public offering of shares with the intention to apply for admission to trading on a regulated market or in an alternative trading system (e.g. NewConnect).
Deduction rules and deadlines
The deduction is to be taken in the return for the tax year in which the taxpayer first introduced its shares into trading on a regulated share market or in an alternative trading system.
Expenses incurred directly for making an initial public offering of shares are defined as expenses directly and exclusively related to the offering and incurred during the tax year in which the initial public offering of shares occurs or the preceding year, not later than the date of the IPO.
As in the case of other forms of tax relief, these costs will be deductible if they have not been reimbursed to the taxpayer in any form and have not been deducted from the income tax base.
Considering the high interest of companies in supporting these activities, it is estimated that the new deduction will become very popular among taxpayers and increase the amount of support offered by companies. The deduction is planned to come into force on 1 January 2022.
What are deductible costs?
Taxpayers who earn income other than capital gains would be able to deduct from their tax base an amount equal to 50% of their tax-deductible expenses incurred for the following activities:
1) Sporting activities, in the form of costs incurred for the financing of a sports club for achieving its objectives indicated in Art. 28(2) of the Sports Act of 25 June 2010 (e.g. purchase of sports equipment, covering the costs of organizing or participating in sports competitions, or covering the costs of using facilities for sports training), sports scholarships (understood as a unilateral, non-refundable cash benefit awarded for achieving a specific sports result or making it possible to prepare for a sports event), or financing a sports event other than a mass sports event
2) Cultural activity within the meaning of the Act on Organization and Conduct of Cultural Activity of 25 October 1991 (generally understood as creating, disseminating and protecting culture), in the form of costs incurred for financing cultural institutions entered in the register and cultural activity carried out by artistic universities and public artistic schools
3) Supporting higher education and science in the form of costs incurred for financing:
a) Scholarships for academic or sports performance and research scholarships for doctoral students, as defined in the Higher Education and Science Law of 20 July 2018
b) Employment by the taxpayer, fees for postgraduate education, specialized education or education in other forms, as specified in an agreement between the educational institution and the person undertaking the education
c) Remuneration, including related fees, of students taking part in internships and apprenticeships provided for in the curriculum
d) Dual studies, in a particular faculty of study, including costs of traineeships
e) Remuneration paid within six months of the date of hiring, by a taxpayer organizing an apprenticeship for students of a given higher education institution, to a graduate of that institution hired through an academic career office.
Conditions for the deduction
The deduction of the costs referred to in points 3(c)–(e) would be available provided that they are incurred on the basis of an agreement by the taxpayer with a university, an institute of the Polish Academy of Sciences, an international scientific institute, a postgraduate medical education centre, or a research institute.
However, a taxpayer that is the founder of a non-public higher education institution would not be entitled to deduct expenses incurred for activities supporting higher education and science.
Additionally, it should be remembered that the amount of the deduction cannot exceed the amount of income received in the tax year. As in the case of other forms of tax relief, the costs mentioned above will be deductible if they have not been reimbursed to the taxpayer in any form and have not been deducted from the income tax base.
Deduction rules and deadlines
The deduction is to be taken in the return for the tax year in which the costs were incurred, and the taxpayer taking the deduction will be required to show the deductible costs incurred in the return.
Claiming this deduction is not treated as a decrease in the value of tangible or intangible assets as a result of deduction from the income tax base, affecting the amount of depreciation write-offs (Art. 16(1)(48) of the CIT Act does not apply in this case). Therefore, taxpayers taking the deduction need not be concerned that it will affect their depreciation expenses.
According to the latest information, at the beginning of 2022 the legal form of Estonian CIT will be revised. The bill to amend Polish tax laws to implement the package known as the “Polish Deal” includes some changes that would make Estonian CIT slightly more accessible for taxpayers.
It is suspected that the overly complicated form and numerous formalities associated with Estonian CIT in its current form led the government to decide to revise the regulations.
Extending the list of taxpayers
The first major change would be to extend the list of taxpayers eligible for Estonian CIT. The government intends to remove the revenue limit, currently set at PLN 100 million. Therefore, any company would be able to choose this form of taxation, and limited partnerships and joint-stock limited partnerships could also benefit from the flat rate taxation of income.
Changing the conditions and making deadlines more flexible
The modifications would also involve:
The changes would ease the conditions for applying Estonian CIT and simplify the structure of this form of taxation for taxpayers.
If you have any questions about the Polish Deal and how it may affect your business, you are welcome to contact the experts at KR Group.
I. Changes in income tax for individuals not conducting business activity:
II. Changes in income tax for individuals conducting business activity
III. Changes for corporate income tax payers:
IV. Changes in VAT
V. Changes in tax procedure regulations:
Second part of our discussion where we investigated the import One Stop Shop (IOSS) further.
Intro Welcome to the home of VAT. You are listening to KR Group Value Added Mornings, podcasts that answer all of your questions and make your VAT life easier. Nice to have you here. Grab a coffee, stretch your legs and enjoy.
Kacper Kosowicz Hello, everyone, welcome to the second part of our discussion about the VAT e-commerce package. This time around, we will investigate the Import One Stop Shop further. On top of this, we will talk through the reasons why these changes might be deemed as a revolution for a marketplaces. I'm pleased to have with me today again, Kateřina Ševčíková from KR group.
Kateřina Ševčíková Hi.
KK And Robert-Jan Brethouwer, Grant Thornton Netherlands.
Robert-Jan Brethouwer Hi, thanks for your invite.
KK I'm Kacper Kosowicz, and I will be your host for today. So let's imagine that I am again a non-EU distance seller in this case, without a fixed establishment in the EU, and I sell low value goods to end individual customers in the EU via my own online shop. What does the e-commerce package change for me? For this group?
RB The whole reason why they introduce this e-commerce package is mainly to focus on these types of sales, because at this time, so as until the 1st July, we had a different value to low value goods, then as of the 1st of July. So at this moment, if you, as a non-EU seller, let's say, a Chinese company, making sales to a Polish private individual, if someone orders those type of products and the value of those products is less than 22 Euros, no import VAT and no customs duties, are on those type of products, meaning that a Chinese company can sell those products without any custom duties, without any VAT, to European based private individuals. And that's of course a little bit in contradiction, with if the same product, would be ordered from an EU based company, then VAT has to be charged. Of course no duties, because it's still in the European Union, but it's a totally different way. And the way, the reason why they want to change this is to make the same situation applicable for non-EU sellers as for EU sellers. So, as of the 1st July, a 22 euro threshold will be fully removed and it's going to become a 150 euro threshold. Not meaning that you don't have to pay any VAT, but only for 150 euros you don't have to pay any import VAT or customs duties, but you have to pay VAT still of the country of arrival of the goods. Meaning that also in this situation, the Chinese company needs to, of course not needs to, but they can opt for the One Stop Shop, the Import One Stop Shop, in order to make the life easier for them to remit the VAT, because if they don't do that they need to be registered in all those EU member states to report the VAT in those countries. So, more or less a level playing field is introduced as of the 1st of July for these type of sales.
KK Yeah and a big hassle to report in all the countries, right, the VAT. So it's sometimes better to opt for the IOSS. But is there any threshold to register in the IOSS, and who can use the Import One Stop Shop? Is there any kind of factors or requirements that you need to meet to duly register in IOSS?
RB Of course, it was explained a little bit earlier that there is threshold of up to 150 euros, meaning that IOSS can only be used.
KK So just low value products, up to 150 euros. And then, if you don't want to pay the import VAT and not be registered in all countries where you are sending your goods, that's the solution for you. That's what you're saying, Robert-Jan.
RB Yeah, that's correct, yeah. And it doesn't mind whether you are really EU based or non-EU based. Also, if you are EU based, but are shipping those products out of the European Union, to private individuals in the European Union, you still can opt for the Import One Stop Shop of course.
KK OK, is there also, you mentioned earlier the all or nothing principle. Is that also applicable into IOSS?
RB Yeah.
KK Ok, and another question that I received a couple of days ago. Who is issuing the IOSS ID number and how could I use it? That was the question. So looking from the practice of the business, who is issuing the IOSS ID number?
KS So you will receive the IOSS ID number right after the registration to IOSS platform, and this ID number is used to form all procedures regarding the import.
KK So, is that a seller who can obtain the IOSS ID number or the procedure, how does the procedure look like?
RB If you want to be registered as a non-EU established company who needs the Import One Stop Shop you need to appoint a VAT intermediary. And that's the company, or a person who will register, or have to register the company for the Import One Stop Shop. So also the IOSS number will be provided by them, because they performed a registration on behalf of the selling company. And yeah, of course as VAT intermediary they can be held liable for all the VAT debts of the online company. So, they they will run some risk of course. So, it can be maybe a little more difficult to find a VAT intermediary. So that's a strange thing which they introduced. I completely understand that the European Union wants to make life easier for them, if VAT is lost, they can go to one company to assess all that non-reported VAT, but the risk for those kind of VAT intermediaries is quite substantial. And they will learn how many situations will happen that the VAT intermediary will really be assessed, but it’s...
KK Who would pay first Robert-Jan, the seller, the taxpayer, the non-EU seller, or the intermediary?
RB At the end it's of course an obligation to pay by the VAT intermediary. So the VAT intermediary, they need to find a way to reduce the risk for them, in order that they already have the money at hand before they are going to have to make the IOSS payment. So, perferably it would be best that the VAT part of a sale is already obtained and received by the VAT intermediary on the moment of the sale of course, not at a later stage. So it's something which should be discussed and agreed upon between the VAT intermediary and the company for which you are dealing.
KK I don't know whether we mentioned that but the goods at the moment of sales, right, would need to be outside of the European Union? Yeah, that that's correct. And just to summarize what you said. When I'd like to take advantage of IOSS, firstly, I need to find an entity that would be my intermediary, and then I need to make sure that this company, this entity is duly registered in IOSS. And this company will file my registration files to IOSS and receive the IOSS ID number for me. Is the IOSS ID number a VAT number? That's the very frequent question.
RB No, it's not a VAT number. It's really an Import One Stop Shop number of course, but some member states, they will use the same format, for example, or even the same number as your VAT number. But in a situation, if we're really talking about non-EU established company, which was never registered for VAT in European Union, then they will get really an IOSS number, which is not a VAT number. But it can happen that if some company will register for a different reason, let's say, in the county where they are also appointed the VAT intermediary, at the end they will receive the same number as the IOSS number. But officially, the number is not a VAT number. It's two different things.
KK And when as a non-EU seller you would use this for the IOSS number. You said a few words about that, Kateřina, so far, that custom clearance or custom agent. Could you please elaborate a bit on this, because it's also quite important for our listeners, I believe.
KS Because, even if goods still hold the threshold of 150 euro, basically they don't have to pay customs from these goods, but still it has to go through customs office. So, this was my point that it will easily, that this stock should easily go through this custom process.
KK Yeah, but is there a connection between the database of IOSS system and the custom agents systems?
KS Yeah, it is connected based on the information that we have. It's all connected. It is.
RB Definitely, yeah. What's going to happen is all the European member states, they will create a sort of portal environment in which they need to provide all kind of customs declaration information to each other. So, that all the member states are aware that those type of sales are made. So, there will definitely be a database with all those kind of import transactions. And what would make our life easier if we would have access to the system or at least have the possibility to make an export from that system. But unfortunately, it's only available for customs enduring.
KK So, it seems that in the center of the interest of everyone is this 150 euro value of the goods. How to calculate that intrinsic value of the goods to determine whether it's below or above this threshold? I think it's a game changer for everyone. So also when it comes to your liability, IOSS, et cetera, et cetera. So intrinsic value, low value consignment below 150 euros, it is filled when you can easily cheat, or easily say that your goods are still below the threshold. That's my understanding, or is it a common understanding. What are your thoughts about that? How to calculate intrinsic value?
RB Yeah, of course you will not lose the possibility that orders are under-valued for customs purposes, of course. But the European Union hopes that by the fact that you need to go through customs agents, that this step will be a little less applicable for those sales. Also, the value, of course, is a little bit higher but you will never lose the way that if the order is, in fact, 160 euros, that it is possible that the value will be accured 150 in order to make use of the import laws, that's still a possibility, of course, that we expect it will be less than in this moment. Especially for the value of those goods. And in respect of how to calculate that intrinsic value, it's more or less the export value, or the customs value, or usually the sales price of the goods. And it depends whether, for example, transportation costs will be added in that 150 value, yes or no. And it depends on whether you are seperately showing it on your invoice, or that you are asking a separate fee for the transportation. So, if you sell an item for 150 euros, including shipping, it will fall under the scope of the IOSS. If you sell a product for 150 euros, when you add 10 euros for shipping to it, it's still 150 euros because you are showing it separately on the invoice. If you're selling an item for all of 160 euros, including shipping. Yeah, then you cannot use to the One Stop Shop. Even the fact that you know, that maybe 10 euros of the 160 is attributed to the transportation costs, your price, which you are asking for the product is 160 euros, so it does not fall under the scope of the Import One Stop Shop.
KK Ok, so you're saying above the threshold, what are the consequences? You need to register in the country where the sales is actually made? That's, that's what you are saying?
RB So, it's officially, if you exceed the 150 euro threshold, only if you have one sale, you have to be registered in the country of the arrival of the goods, to report the VAT and even to report the importation depending on the country of importation. But of course, there are also ways to avoid that because, you know, if you are making sales above 150 euro, you don't have an import exemption so you have to pay custom duties, if those are applicable on your type of products. So, why not choose to import all those products in one country, register for VAT in that country, and then make use of the One Stop Shop, which we discussed before? So, there are ways to still make use of the new simplifications, even if you are making sales higher than normal amount of 150 euros.
KK But there are also situations when a non-EU seller might opt out for the IOSS. They can say, ok, I don't want to use IOSS.
RB Yeah, if they don't use the IOSS it means that you don't have any exemptions so you need to pay import VAT in the country where the importation takes place. And then you also are having to pay the VAT of the country of arrival of goods, or in the country where the goods are in the end shipped to. So, it's not beneficial at all to opt out from the Import One Stop Shop in this situation, because you'll have quite some VAT registrations and you have to pay quite some import VAT, which is not easy to get back in the member states without an actual registration.
KK Before we can move on, I think we missed one important question regarding the intermediary. We couple of times used this term. We even explained what kind of role the intermediary will play in the whole concept. But we didn't explain who the intermediary can be, or what kind of entities we can appoint as other intermediary. Are there any set of requirements for the company to act as an intermediary?
RB The only thing is that the VAT intermediary needs to be established in the country where you want to register customers for the One Stop Shop. So if you want to have non-EU businesses, be able to register for the Import One Stop Shop let's say in the Netherlands, you need to appoint a Dutch established VAT intermediary, it's not possible to appoint a VAT intermediary established in a different EU member state. What you see is that quite some VAT intermediary service providers, they set up a company in multiple European countries in order to be able to act as a VAT intermediary in those member states. But they don't do it in all the member states. They will choose the countries in which many companies will want to be registered, so it can be that the local tax authorities are known for their practical approach, or the system to register for the Import One Stop Shop is rather easy and efficient. So, yeah, it depends.
KK Kateřina, how does that look like in Czech Republic?
KS I absolutely agree. And basically the main term, what intermediary has to have is that the company has to be settled, incorporated in the European Union.
KK So in Poland it's more sophisticated, I need to tell you, because now we just copy and paste the provisions regarding the fiscal representative, and there are a set of rules and set of requirements, like a number of years being in the operations, et cetera, et cetera. So it looks a bit different in Poland.
RB We are almost glad that it is not in that situation, because we are afraid that in the Netherlands we'd have the same situation. They would say, ok, we are going to use the VAT intermediary principle, and it's exactly the same fiscal representative, it is kind of guarantee amount et cetera. And I'm really glad that they decided to not do it. It's not very decisive. So, what they say today in our government is that they will wait and see what will happen, and if they will notice that misuse is made from system, they always can change the law and enforce different rules, but for the moment, it's rather easy to act as VAT intermediary in the Netherlands.
KK But in the notion of the directive, the non-EU seller is not only the company established in the third country. There are some implications for the EU-based sellers as well. And let's imagine another business case. I'm the Polish based seller purchasing goods outside the EU, and holding a stock in non-EU country. When goods are bought by the customers from Spain or Germany, they are dispatched from the non-EU warehouse directly. What are the things I should pay attention to after July the 1st? Would I be treated as a non-EU seller? How would I need to cope with new regulations, after the 1st of July? I have my warehouse outside of EU, selling directly to my clients from non-EU warehouse.
RB I would say in this situation still the Import One Stop Shop, can be applied, or will have to be applied if you want to make use of the simplification, even that you are officially already based in the European member states, because the goods are, at the end delivered from a non-EU country to an EU country. So that means that you fall under the scope of that regulation and you want to avoid probably to pay import fees. So the Import One Stop Shop would then still be applicable. But if you are already established in the European Union, there are of course also ways to think, to structure in different way and do not qualify it as a really an export from a non-EU member state into an EU member state, which, you would see it as more or less import in one EU member state, than a subsequence intra-comunity distance sales of goods. So that you don't fall on the scope of the Import One Stop Shop, but opt for the One Stop Shop, and also lose the requirement to appoint a VAT intermediary. So it's much easier in this situation to remove the obligation, or the option to register for the Import One Stop Shop, and decide to use the One Stop Shop instead, then of course, for non EU-based companies.
KK You know that there are many, many even large scale sellers from EU, from Poland, for instance, they are sourcing their goods from China and reselling the goods in the European Union, right? So sometimes they are storing that in their own warehouse in non-EU country. Sometimes they are doing it as you just said, they are just importing that to Poland, storing it inside and dispatch all goods to individual end clients in the respective country.
RB Yeah, in drop shipping indeed, they only are acting in the middle, to purchase something and sell it and then send directly to the final customer.
KK They are calling themselves as an e-commerce business, right? So they are adding the markup and reselling them.
RB Yes. It's a very, very beneficial business model.
KK I believe so, yes. So, Katarina, would you like to add something?
KS I agree, and I believe that for this type of business IOSS is fully applicable.
KK OK, let's let's move to marketplace's as VAT collectors. This idea, this is the third pillar of the revolution, right? And I guess the majority of the distance sellers are operating either as marketplaces, or they are selling via marketplaces. And most of our listeners most likely have already had a bunch of terms like deemed supplier, electronic interface, affection and transaction created for the VAT purposes. In this context, what are the new rules and obligations set for the marketplaces in this e-commerce package that is going to be in place in July?
RB So, if I can explain it in a little detail, is that this is the whole reason, also one of the big reasons, of course, for this big change is that European Union wants to make it easier for them also to get the correct VAT amounts, so that no VAT is lost. And which party are you able to contact first for those type or sales? Of course, platforms, they know almost everything because they keep track of all the orders. They are usually involved in receiving the payments, and maybe even in providing the fulfillment services of shipping the orders out of their wharehouse to the customers. So they are a great party to contact, to make liable for the VAT in that situation, instead of a non-EU based entity which can be established in China, or maybe even further away, which are quite difficult to get a hold on if the VAT is not paid. So, what will happen as of the 1st July, in some situations is they introduce the VAT platform fictionaly, or the electronic interface fiction, meaning that in some situations the platform can be held liable for paying VAT on the inter-community distance sale, because they will be qualified as deemed supplier of the goods. So, even based on the fact that a company selling the products using the platform, officially has to pay and remit the VAT, they are going to shift that obligation for paying the VAT to the platform, instead of a seller. Meaning that the platform will have, sort of buy/resell for VAT purposes, so they purchased the products from the seller, and resell it to the final customer, where the transaction between the seller and the platform will be outside of scope of VAT. No VAT consequences are applicable in this transaction, and the platform has to remit the VAT on the sale to the final customer, instead of the seller. So that's quite some change for the platforms. And to be honest, I really don't think that most of the platforms are ready for that. And even that there are many more platforms which can fall on the scope of this new legislation than the platforms we all are thinking about, like the Amazon.
KK But the platform, that electronic interface is the entity that is facilitating the sales. So sometimes it's the easy example, like mentioned Amazon or eBay, but sometimes it's not that obvious.
KS In Czech Republic, the company, it's considered to be an electronic marketplace and the terms of meaning, or that companies have to meet one of the conditions. There are three conditions. Their first condition is participation on the payment, or set up the terms of delivery, or participation of delivery of the goods. If the company meets with one of these conditions, they are automatically considered as an electronical market based provider.
KK We received such a question from a payment facilitator for non-EU sellers, and the question was about whether then, if they are receiving the money before the marketplace, who would be a deemed supplier?
RB This is really a subject which is very unclear, because no one really knows exactly what will happen with these kind of electronic interfaces. And I'm sure that even companies like Amazon, they don't want to access the platform. They don't want to pay the VAT probably for the customs. So they will still remain, their customer, the seller liable to pay the VAT, even if the legalation will not be correctly applied. What we not must forget is also that that platform fiction is not applicable in all situations. It's only applicable really in two situations. So, for the so-called IOSS transaction, so the transactions which are shipped out of the European Union, valued less than 150 euros, or for situations where products are shipped out of the European Union member states, but where the seller is non-EU established. So it would not be applicable for EU established company selling products, and supplying the products from the European Union. So, it's also very limited in some situations that platform fiction will be applicable. But if it can be applicable, then you really need to explain and investigate the conditions in order to discuss for certain whether it's applicable for you or not.
KK I read the statement of one of the largest marketplaces in the CEE region regarding IOSS, and they clearly said that they would not opt for IOSS and that would be only in discretion of the seller, if the seller would like to take advantage of the IOSS system. That's what I received from one marketplace. It was funny because it's really, I now think it's quite unclear also for the sellers, how they should cope with such answer, like, ok, voluntarily, you can do whatever you like, you can opt for IOSS, but it's up to you. We would follow the regular procedure, if we are deemed supplier, ok, but we will not facilitate that to the extent that it's needed.
RB Of course, in fact, it's their obligation to follow that rule. So, that makes it clear that there is quite some uncertainty even now a few days before the 1st of July. And I really hope that someone is at the end paying the VAT, and not that the platform is not paying it and also the seller is not paying it, because then we have one big problem in the European Union.
KK That's a very good thing that you just brought up, because I was wondering whether there is room for mistakes, and for how many months we would see a great understanding showed by our tax authorities in Europe, by mistakes made in IOSS, OSS, the VAT that is not properly calculated and paid by the deemed supplier, et cetera, et cetera. Is there a room for any mistakes?
RB Of course I cannot believe it will go fully correctly as of the 1st July. There will be mistakes made, quite some big mistakes probably and at the end of course, all of our mistakes we will find out, but all those tax authorities are so not yet fully, are not aware or ready for this change. And it's more or less my feeling, that I would say that the first couple of months, or maybe the first year, yeah, everyone will do something with their best knowledge and thinking that they are following the rules. And maybe not fully correct, but they are doing their best instances and quite a correction will be left to be made maybe, after a period of time. It can be rather messy, but it's also what we expected with Brexit and at the end we're now on our way and it is only six months later and it goes quite well. So, at the end we will survive, what I expect.
KK But I believe the intermediary needs to keep the records for 10 years.
RB Yes, 10 years quite..
KK I think it will be quite a time. So, I believe their liability will be also quite significant in this term so whatever is incorrect, or incorrectly stated, it might chase the intermediary. But we will see, as you say. Well the time will tell, and we have to wait for the practice of using the law in pan-European scale. Thank you so much, Kateřina, thank you, Robert-Jan, and for sharing your thoughts and expertise with us today.
RB No problem.
KK I think we all agree that the coming weeks will be intense and tough. That's going to be a spectacular time for the VAT experts, hopefully for taxpayers as well. And we will comprehend the VAT rules rather quicker than later. Thank you. Thank you all for joining us for today's episode, and stay tuned. Thank you, Kateřina. Thank you, Robert-Jan.
RB Yes, bye.
KS My pleasure, bye bye.
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Kacper Kosowicz talked to Robert-Jan Brethouwer, Partner at Grant Thornton Netherlands and Kateřina Ševčíková, Country Manager at KR GROUP LTD. in order to gain insight, clarity, and perspective on frequently asked questions by e-commerce sellers:
Intro Welcome to the home of VAT. You are listening to KR Group Value Added Mornings, podcasts that answer all of your questions and make your VAT life easier. Nice to have you here. Grab a coffee, stretch your legs and enjoy.
Kacper Kosowicz Hello, everyone. Welcome to the show. From the first of July the new regulation called VAT package for e-commerce goes into effect. E-commerce boom, fueled by the coronavirus pandemic is undebatable. In this unprecedented moment for the industry, we are going to be witness of the massive changes and pan-European VAT harmonization for cross-border e-sellers. What is this buzz about? Who is going to benefit the most? How should the individual distance seller get prepared for the new VAT reality? What is held in the new EU VAT framework for the marketplaces? In this episode, we will touch upon the practical aspects of the upcoming changes and their impact on the day to day operations of EU and non-EU distance sellers delivering their goods to customers in the European Union. I'm thrilled to have today with me Kateřina Ševčíková from KR Group and Robert-Jan Brethouwern, Grant Thornton Netherlands. I'm Kacper Kosowicz and I will be your host for today. Kateřina, Robert-Jan, for the benefit of our listeners, could you both give us a little introduction of yourself?
Kateřina Ševčíková Hi, everyone. My name is Kateřina. I work for KR Group as a branch manager. We are dealing with VAT compliance for our clients.
KK Robert?
Robert-Jan Brethouwern My name is Robert-Jan Brethouwern. I'm a VAT partner in Grant Thornton, Netherlands. I worked for the company for a little bit more than 12 years and I am heading a VAT advisory and VAT compliance team of 19 people from the Netherlands. And we have a lot of clients which have to deal with this new regulation.
KK Excellent. Thank you so much. So imagining us sitting in the NASA mission control, that would be like 'EU e-commerce package. You are go for launch,' and that would be 10 seconds to go, three, two, one, and lift-off of the VAT revolution. Is that an actual revolution? What are your thoughts about that?
RB To start, it's really a revolution. We were already waiting for it for quite a long time. I remember that maybe four or five years ago I went and gave presentations when I was visiting clients in the US about these upcoming changes, and you always think it takes quite some time before it will be introduced. Now we are finally here at a stage that's the first of July these regulations will change. And then also to remember, of course, initially it was said it will be introduced first of January 2021. So, I'm honestly very glad that we are going live now as the first of July, or else we had to deal with it together with Brexit six months ago. So, it is definitely a big change for many companies. And it makes life easier for doing business in the European Union and selling all kinds of products and services to customers across the European Union.
KK Kateřina, same question. Is there a revolution, evolution? What do you think about that?
KS I believe that this is a revolution, definitely, and a very good step to the future, not only for us as a VAT compliance provider, but even for our clients, because business will be much more easier for a lot of them.
KK And assuming that I'm a distance seller established in the Czech Republic, or the Netherlands, I'm selling exclusively via my online shop and dispatching goods sold from my country of establishment directly to individual clients. I'm not reaching current thresholds of VAT registration. But in Portugal my regular sales amount to nine thousand euros, in Belgium three thousand euros, and in Poland, five thousand euros. What is going to change for me after the 1st of July?
RB Before the 1st July, each type of sales qualified as distance sales of goods to private individuals, which are shipped from one EU member state to another EU member state. Those are currently still taxable, in principle, in the country of departure of the goods. And only if a certain distance selling threshold will be exceeded, those sales are taxable in the country of arrival of the goods. Normally, that would mean that you need to be registered for VAT purposes in all those different EU member states. So we are now with 27 EU member states. That is, and was always an administrative nightmare to deal with all kinds of registrations and VAT compliance in all those different countries. It was very time and costs inefficient to do that. And what is going to change as of the 1st of July 2021, is that all those sales, all those intra-community supply of distance sales, so B2C sales, those are taxable in the country of arrival of the goods. And the only exception which will apply is that there will be EU-wide threshold of ten thousand euros, so that only really the micro companies, which only occasionally sell some items cross-border to private individuals, will not be applicable based on this new legislation. But I think that ninety nine percent of all the companies doing e-commerce business will have to follow this new legislation, meaning that they have to charge the VAT of the country of arrival of the goods, instead of the country of departure of the goods. If a company, in your example, making distance sales to these countries, they can simply register for the One Stop Shop in, let's say, the Czech Republic or the Netherlands based on the country where they are established, of course. And report those sales in One Stop Shop return and they can stock, and they can redraw their VAT registraiton if they would have them in the country of arrival.
KK Well, you mentioned the threshold of ten thousand euros limit for the VAT registration. So in my example, even though under current circumstances I wouldn't have to be registered for VAT in the mentioned countries, after the 1st of July, I would need to do it right, after meeting the threshold. How can the distance seller actually register for OSS?
KS If I can speak for the Czech Republic point of view, it's very easy, administrational step, because you can fill in an application via our local tax office and it's very easy and user friendly. And they also have a hotline in case of some technical issues, or if you just simply don't know what to do.
RB In that respect, they need to be registered for the One Stop Shop, because this is where the 10,000 euro threshold has been exceeded. In the Netherlands, it's actually a little bit more, strangely enough, difficult. It depends on whether you are a Dutch established company or whether you're non-Dutch established company, and a different way to register for the One Stop Shop. The first for whether they are registered or now established in the Netherlands, yes or no. They, strange enough, have used this moment to introduce a complete new electronic filing portal with Dutch tax authorities, which made it a little bit more difficult for, especially Dutch established companies, to register for the One Stop Shop. But it works quite well. It's a little bit more time consuming than expected. But the first registrations are already issued. So, right on time.
KK Really? So, you are much better than we are because we are still waiting for the confirmation where all the registrations with a file from the 1st of April will be granted just after 1st of July. I don't know. We still didn't get the clear answer from the Ministry of Finance of Poland. Let's continue that part, the registration one. When I'm selling goods to multiple countries, on what premises I can choose the country where I want to be registered in OSS?
RB At first it depends on the country of establishment of the company. So, if you are established in the European Union, that means that if you want to opt for the One Stop Shop, you need to register at the tax authorities of the country of the establishment of the company. So, if you are a Czech Republic company, you need to register in the Czech Republic; if you are a Dutch company, you need to register in the Netherlands. If you are, of course, not established in the European Union, but you still have inventory in the European Union selling and making distance sales, then you can choose which country you want to be registered in. But, if you have only one country of departure, so only one warehouse in the European Union, from where you are going to supply your shipments, orders, then you need to be registered for the One Stop Shop in the country where you have the warehouse. And if you have multiple warehouses, you can choose the country where you want to register for the One Stop Shop.
KK The warehouses and third party logistic services will make the things a bit more complicated, right? Again, we have a Czech company having the warehouse in both, the Czech Republic and the Netherlands. They are selling the goods to Spain, Portugal, France, from the warehouse from the Netherlands. And they are serving Polish clients, Hungarian clients, Romanian from the one from the Czech Republic. Would they need to deregister in the Netherlands or how would that work?
RB I know they need to remain here in the Netherlands because the One Stop Shop, of course, can only be used for distance sales of goods, and for so-called TP issuers, so telecommunications, broadcasting, electronic services. Meaning that if you ship inventory between warehouses, for example, if you are going to import those products directly into the Netherlands and then fulfill those orders from the Dutch warehouse, you still need to be really VAT registered in the Netherlands in order to import the importation and the transfer of goods between warehouses for example. So in this example, it is not possible to deregister the Czech company for Dutch VAT purposes due to the fact that they have a warehouse in that country. So that's applicable for all situations, so if you have a warehouse in a particular EU member state, you cannot be deregistered for VAT purposes in that country, because you would have to report other transactions than solely distance sales in that particular country.
KS In general, it's good to keep in mind that this new platform is presented for B2C. So if you also work in business to business scheme, it still means that you have to watch carefully the terms in the country where you are operating.
RB Yeah, that's of course, if you are supplying to business customers from particular EU member state because you have a warehouse over there. You still perform a intra-community supply of goods which has to be reported in the country of departure of the goods and not only in the VAT return, but also in the sales listing and maybe even in an interest of obligation.
KK In assuming that kind of case, the company that is selling both B2C, B2B clients, storing the goods locally in the foreign country, would OSS be beneficial? Would that company be a good case, a good example for OSS, or would you advise against of using OSS?
RB It depends on whether they have warehouses in all those member states. If you, I mean, I would assume that if a certain company would have maybe two or three warehouses across the European Union in order to fullfill those orders in a timely manner, depending, of course, on the county where the order comes from. Well, in that situation, it would be definitely beneficial to still opt for the One Stop Shop. If you don't do that, for example, that means that if you get an order from a country in which you are not registered for VAT purposes, and even if it's only one order, the company becomes required to be VAT registered for that only sale. And you can avoid that by still opting for the One Stop Shop, even if you also have many B2B sales of goods. So, if you only have a few countries which you have warehouse and from where you are fulfilling orders, but you are selling to all the European member states, or at least you give customers the opportunity to make those orders, then it would be definitely beneficial to still opt for the One Stop Shop. If you want to avoid that, of course, you can simply say, ok, I'm going to close my website, my sales channel for orders from particular countries. Avoiding that, you are making sales to those countries, and then you also don't have to be afraid, of course, that you still have to be registered for VAT purposes in that country.
KK So, it may occur to the company to report both in OSS and locally right, to Hungarian authorities or Czech authorities, B2B sales and the other type of transactions that would not be subject to OSS. In this case, it's quite often, to be honest, the question about that, would that be efficient for us to keep two different records? Should we adjust our ERP system for then having double work, or reporting our VAT obligations and fulfilling it?
RB I never experienced these kinds of problems. I don't see that there would be a problem there is those situations because the One Stop Shop has so many positive aspects, far more than the negative aspects. So if the sole reason is that I'm going to respect that I have to do more VAT complaince than before, yeah, maybe that's correct, because you at least get one additional One Stop Shop return. But it's going to be a very simple return in which you need to report a turnover, the tax amount, or VAT rate of that EU country. And then you're ready. It makes life much easier instead of performing or registering in a particular country for VAT. Only in a situation where a company is already registered in all the EU member states, and they cannot deregister in any of those member states due to other type of transaction they are creating or having, then, of course, only in that situation I would say, ok, why choose for the One Stop Shop if you have to be registered in all those member states still, then you've got to also report those sales. A very important remark, is if you ask for the One Stop Shop, it means that you are obliged to report all the B2C sales of goods, so all the B2C distance sales of goods in the One Stop Shop return, as well, of course, as to B2C TP issuers. You don't have an option that I'm going to report some in VAT return, because you are still registered over there, and the other countries in the One Stop Shop return. It's all or nothing, in that respect.
KK You mentioned that you can gain a lot thanks to OSS but in practice, what are the benefits of using OSS for taxpayers? If we can single out like two, three things, what would that be?
KS It's definitely a cost reduction for VAT compliance, less of administration, and from my point of view, time effectivity.
RB I completely agree. It saves a lot of time, a lot of hassle, a lot of registrations, a lot of dealing with all kinds of different service providers, maybe. It's a really efficient solution. It will, of course, lose our kind of companies quite some work. But at the end, it's very good for our clients.
KK But, you know, all revolutions take its toll, right? And there are some costs attached to that. And I believe there to be compliance to make sure that you are complying, you need to also make some efforts. Are there any particular things that sellers would need to do, or some changes they need to introduce, updates, features in their ERP systems, and the process flow to make sure they are compliant with the new regulations, potentially?
RB The most important one is going to be, of course, VAT rates. So, many companies who are making at this moment distance sales, but they are still below the necessary threshold per EU member states, they are used to charging the domestic VAT at the country of depatrue of the goods. As of the 1st of July, if it's a possibility of course, the VAT should be applied at the country of arrival, and it means that all companies need to assess which VAT rate is applicable to their type of products, and those VAT rates need to be included in their ERP system, but also in the server central if they are using Amazon, for example, so that the correct VAT rate is applied on the sale of the products. Another aspect, as well, is that the One Stop Shop return needs to be submitted in euros. Even, if you are based in the country which doesn't have the euro as their main currency, you still need to report all those transactions in Euro. You're still obliged, of course, to issue your invoices in any other currency, as long as you exactly know which amount in euros you are going to charge to your customer, because you have to report that as well in your One Stop Shop return.
KK But do you believe that the exchange rate risk would increase due to the frequency of the reporting, which is right now quarterly, or will be quarterly? Is that the case? Sometimes clients are raising this question. And is there a simple answer to that?
RB I don't think it will change anything, because also, before you have to apply the daily exchange rate, officially, at least in most countries, you have to apply the daily exchange rate to calculate the correct VAT amount. So, if you make a sale to a Polish company and it was taxable in Poland, and you invoice them in euros, the Polish zloty amount had to be stated on the invoice as well. And you also in that situation, have to apply officially the daily exchange rates in Poland even the day before the invoice date. So, it will remain the same at this stage, of course. And a very important change, of course, is that if you opt for the One Stop Shop, you are officially not obliged anymore to issue any invoices. So, that's a really big difference instead of what the current regulation is, because at this stage, sales to individuals are normally exempted from the obligation to issue a VAT invoice. But there is an exception for that, for distance sales, and now, as of 1st July, if you opt for the One Stop Shop, you are not obliged to issue any VAT invoices to your customers at all. So it's a really big change in that situation. What I noticed in practice is that many clients will then say, ok, but I'm not obliged to issue an invoice, but I'm going to do it anyway, but because I don't have a requirement, it can be form free. And that's incorrect, because the explanatory notes of the European Commission clearly states that you don't have the requirement to issue a VAT invoice, but if you do, you need to comply with the in-force requirements of the member state of identification, meaning the member states in which you are registered for the One Stop Shop.
KK Only a certain group of sellers will be benefiting from the single pan-European VAT return. Who are those who would not be eligible?
KS Typically, it could be companies who provide business to business services, or selling goods in the country of establishment. So, it means that they are not providing the services, or maybe not services, but are selling goods to another European country. Or, typically in Czech Republic, we have a lot of small family businesses, and a lot of freelancers.
KK Robert-Jan, would you like to add something?
RB The companies which are not benefiting from the One Stop Shop regime are indeed companies making mostly B2B sales, but they didn't have and also will not have real requirements to be registered in the country of arrival of the goods, because in that situation, the 0% VAT rate for the goods supplied would be applicable. Another example is you need the companies, which already have quite some warehouses across the European Union. If you are going to sell and ship from different locations, you cannot remove or deregister in those countries. So, in those situations the One Stop Shop will not be fully beneficial, but it can still be beneficial depending on the amount of countries in which you have a warehouse location.
KK We know that there are sellers that are using their own online shop, but most of the e-sellers are selling via some marketplaces like eBay, Amazon, Zalando. And if we can just take one step back and focus on their situation, how would the EU VAT reform affect its business, or this group that is selling exclusively volume marketplaces?
RB In this situation, there will be no changes to the legislation or the marketplace fiction because it's only applicable in different situations. But if you are based in the European Union, and you are selling and transporting the goods from only European Union, the fact that you are making sales using the platform will not change VAT legislation for you. Meaning that as the seller of the products who sells goods, you are still responsible for remitting the correct VAT to the various tax authorities. Or, if you choose to opt for the One Stop Shop that you report that turnover and pay the VAT to the government.
KK So again, if a marketplace is moving your goods from one place to another, then you have to be registered in all countries for VAT purposes.
RB Yeah, that's, of course, due to the transfer of goods that you still need to to be registered, but it will not have any consequences for the platform.
KK Yeah, yeah, for the platform itself no. Now, here we are now focusing just on the case of the individual sellers selling the goods via marketplaces.
RB Yeah, and that's, of course, what happens with these kind of platforms. They can move your products even probably without your knowing, between the various warehouses of the fulfillment partner. This is really a big problem for the last couple of years, that many companies using that fulfillment program, were not aware of all those registration requirements in the various countries. And they will remain as long as you opt in to allow those platforms to transfer your own inventory between warehouses in order to reduce delivery times, you still need to be registered in those countries. That's fully correct, Kacper.
KK So thank you, Kateřina, thank you, Robert-Jan, that was indeed very interesting. And it is something that we even don't have the full picture of, and I believe that in coming weeks we're going to clarify some points, and our clients and taxpayers, will also know more. Thank you for your time. It was a pleasure talking to you.
RB Oh, no problem, I'm here to help.
KS Thank you. Have a lovely day.
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Whitelist
The deadline for taxpayers to submit a notice of payment to an account other than one indicated in the whitelist (ZAW-NR) will be extended from three to seven days. However, during the period of the threat of epidemic or the period of epidemic announced in connection with COVID-19, the deadline for submitting the notification will be 14 days from the date of the transfer order.
The authority to which the notification should be submitted has also changed. Until now, the notification had to be submitted to the head of the tax office competent for the invoice issuer. Under the new regulations, it is the head of the tax office competent for the taxpayer who made the payment.
PIT and CIT taxpayers will be able to include in tax-deductible costs expenses paid into accounts other than those on the whitelist of VAT taxpayers if they pay using the split-payment mechanism. Thus taxpayers who decide to make a payment using the split-payment mechanism will not have to check whether the seller’s account is on the white list.
Quick fixes
Under the amendments to the VAT Act, from 1 July 2020 changes will be introduced implementing Directive 2018/1910 involving the supply of goods in chain transactions.
As a result of the changes, the settlement of VAT under such transactions is to be unified throughout the EU.
In addition, Art. 45a of Implementing Regulation 2018/1912 introduces rebuttable presumptions regarding the evidence required to apply the 0% rate for intra-Community supply of goods.
Failure to meet the conditions introduced by the regulation does not mean that the 0% rate will not apply. In this situation, the supplier will have to prove in some other way, in accordance with the existing provisions of the VAT Act, that the conditions for applying the 0% rate have been met. This situation will not change after entry into force of the act implementing EU law. The amendment to the VAT Act does not introduce any changes in the documentation of ICS, and thus meeting the requirements set out in the act will give the right to apply the 0% rate for ICS.
Schedule of VAT rates
On 1 July 2020, the rules for inclusion of goods and services under specific VAT rates will change. The new system will be based on the Combined Nomenclature for goods and the Polish classification (PKWiU 2015) for services.
The Combined Nomenclature (CN) is a structured list allowing for classification of goods for purposes of international trade.
These changes are aimed at ensuring simplicity, transparency and user-friendliness in application of the regulations, for example by applying a single rate to entire sections of the CN whenever possible. This means a significant reduction in the number of items in the new annexes to the VAT Act, Annex 3 (from the current 187 items to 73) and Annex 10 (from 35 items to 24), which contain lists of goods and services taxed at 8% and 5%, respectively, and as a consequence a change in rates for certain goods and services.
Covering entire CN sections with one VAT rate has resulted in:
Postponement of deadline for implementing JPK_V7
The deadline for implementing the JPK_V7 structure (part of the SAF-T scheme for VAT) has been postponed from 1 July to 1 October 2020.
Why the delay?
According to press reports, the next postponement of the new rules is dictated by a desire to allow taxpayers to become better prepared to correctly perform their new obligations, including adaptation of their IT systems. Undoubtedly, the planned changes are also affected by the limitations resulting from the COVID-19 pandemic, as well as the failure so far to adopt final new regulations governing WHT collection, on which work is still ongoing. Therefore, it should be expected that the WHT regulations that come into force at the end of this year will differ from those currently published.
What will change in the regulations?
The new rules for collecting WHT were originally supposed to come into force on 1 January 2019, but this date was moved many times, most recently to 1 July 2021. Such a long grace period, and the repeated reports on amendment of the regulations, presented a certain picture of the direction the Ministry of Finance is heading. As we discussed in our previous alert, the ministry is planning, among other things, to:
The additional time given to taxpayers, along with the subsequent postponement of entry into force of the new regulations, can be used to review WHT transactions and the procedures applied in this respect in light of the new regulations.
Changes effective from 2019
At the same time, we should remind readers that some of the regulations entered into force from the beginning of 2019. The regulations already in force concern:
The most important new requirement is WHT due diligence connected with verification of beneficial owners. The tax authorities confirm that examination of beneficial owner status is an indispensable element of the WHT due diligence standard.
Under the draft of the official WHT explanations issued by the Ministry of Finance, WHT due diligence can be ensured by a professional (tax adviser) conducting verification (certification) of transactions subject to withholding tax in Poland. The examination of beneficial owner status is intended to gather documentation as well as arguments confirming that the existing structure is not artificial and aimed solely at achieving a tax benefit. Lack of WHT due diligence or improper arrangements regarding beneficial owners may result in refusal to apply preferential WHT treatment in Poland.
Certification support
KR Group offers support in WHT certification, in the form of independent confirmation of WHT due diligence, and verification of counterparties and transactions for the purposes of applying the exemption from withholding tax. The result of the analysis is a report confirming compliance of the taxpayer’s rules and documents with the requirements of the CIT Act. KR Group is also ready to prepare a written WHT due diligence procedure taking into the account the industry specifics and additional client requirements.
The second sentence of Art. 26(1) of the Corporate Income Tax Act (similarly in Art. 41(4aa) of the Personal Income Tax Act) provides: “In verifying the conditions for application of a rate other than the one specified in Art. 21(1) or Art. 22(1), an exemption, or conditions for not collecting tax…, the remitter is required to maintain due diligence. The nature and scale of the activity pursued by the remitter shall be taken into account when assessing the exercise of due diligence.”
The duty rests on the remitter and always applies to the remitter
Essentially, the duty to maintain due diligence rests on a tax remitter who, when making a payment, does not deduct withholding tax pursuant to a tax treaty, or applies an exemption or reduced tax rate. Further, the duty to maintain due diligence always applies to the remitter, that is, regardless of the amount of the payments to a taxpayer during the tax year.
The notion of “due diligence”
With this in mind, the question arises, what is included in the notion of due diligence? According to published draft tax clarifications dated 19 June 2019 (to this day only a draft), to maintain due diligence, the following measures in particular should be carried out:
Fortunately, the Ministry of Finance indicates for us in great detail what exactly this verification for purposes of maintaining due diligence should consist of.
The remitter should:
Additionally, when maintaining due diligence between related entities, the remitter should:
When maintaining due diligence between unrelated entities, the obvious difficulty in obtaining comprehensive documentation must be taken into account, but nonetheless it is indicated that there is a duty to conduct a thorough verification of data concerning the recipient of payments (comparison of the tax residency certificate against documents in the remitter’s possession and publicly available data), to call the counterparty, to verify the nature of the counterparty’s address, and even to apply special expert tools and consult an opinion or report of an independent auditor or tax adviser.
What should be borne in mind?
It is important to analyse payments made to foreign recipients covered by the withholding tax regulations in terms of maintaining due diligence. The tax authorities will certainly examine whether the remitter used due diligence in verifying the conditions for applying a reduced withholding tax rate or exemption, or the conditions for refraining from collecting withholding tax. If you have any doubts concerning withholding tax, please contact us.
A new mechanism for collecting withholding tax, known as the pay-and-refund mechanism, will be used. Under this mechanism, a Polish entity making certain payments, including among other things payments of interest, dividends, licence fees, and fees for certain intangible services, to a foreign entity, in a total amount exceeding PLN 2 million (during a tax year), is required to collect withholding tax on the excess amount above PLN 2 million at the basic rate, e.g. 20% or 19%. Then, after the withholding tax is collected, the foreign entity can apply for refund of the withheld tax if it is entitled to a tax exemption or application of a lower tax rate.
As a rule, exceeding the threshold of PLN 2 million will make it necessary for the tax remitter to deduct and pay the withholding tax without the possibility of not collecting the tax based on the relevant tax treaty, or to apply exemptions or special rates arising out of specific regulations or a tax treaty.
NOTE!
Methods have also been introduced allowing withholding tax to be collected under the rules in force prior to introduction of the new pay-and-refund mechanism, i.e., methods for avoiding the obligation to collect the tax immediately:
In maintaining due diligence, measures must be taken relevant from the perspective of applying the given tax preference in the specific instance. In particular, this involves:
In assessing due diligence, the nature and scale of the business pursued by the tax remitter should be taken into account, as well as connections to the taxpayer and the actual ability to obtain the relevant information.
Considering that the tax authority has 6 months to issue an opinion on application of an exemption, and the postponed regulations will enter into force at the start of July 2021, it is worthwhile now to prepare for this new mechanism for collection of withholding tax.
It should also be pointed out that transactions resulting in payments to foreign entities may trigger reporting obligations under the Polish regulations on reporting of tax schemes (Mandatory Disclosure Rules). We recommend an analysis in each instance of whether a transaction resulting in a payment to a foreign entity constitutes a tax scheme. Failure to comply with the MDR regulations is subject to financial sanctions as well as fiscal criminal liability.
In order to encourage taxpayers to use new method of issuing invoices, the legislator proposes a number of incentives i.a. making it easier for taxpayers to make downward adjustments in invoices. Additionally, the planned solution would eliminate the need to submit SAF-T files for invoices (JPK_FA), as standardized invoices would be accessible to the tax office within the KSeF system.
KSeF is an IT system for issuance and receipt of structured invoices (e-invoices). In KSeF, e-invoices will be stored, designated with identification numbers assigned by the system, and verified for compliance with the template for this type of invoice. Additionally, the system will be used for analysis and control of data from structured invoices. The new solutions will also serve taxpayers as a source of information on issuance of e-invoices, or rejection and the inability to issue an e-invoice.
In the first phase, this solution is to be optional. According to the initial assumptions, it would become mandatory from 2023. Thanks to KSeF, taxpayers will be able to issue an invoice in their own accounting systems according to a template provided by the Ministry of Finance. Then the invoice will be transmitted to KSeF, from which the buyer can then download the invoice.
The use of e-invoices will require the acceptance of the recipient. Separate consent to the use of KSeF will be required (downloading an invoice from KSeF will be regarded as tacit consent). Before beginning to issue e-invoices in KSeF, the taxpayer will have to notify the tax office of the persons authorized to access the KSeF system (e.g. the taxpayer’s accountants).
But in KR Group’s opinion, the biggest advantage for many taxpayers may prove to be the elimination for e-invoices issued in KSeF of the additional documentation requirements introduced for correcting invoices by the SLIM VAT package.
The bill can be found at the following link:https://legislacja.rcl.gov.pl/projekt/12343202