In this issue: Employees' Capital Pension Schemes (ECPS) soon to be universal. Revised bill has been referred by Ministry of Finance for public consulation and…
In this edition:
- Changes from 1 June 2017 in the Administrative Court Procedure Law.
- Playing for time? Settling losses from prior years.
- Poland signs the Multilateral Instrument.
- New forms for transactions between related entities.
- New legislation in Hungary relating to residential service providers.
CHANGES FROM 1 JUNE 2017 IN THE ADMINISTRATIVE COURT PROCEDURE LAW
The Act of 9 April 2015 Amending the Administrative Court Procedure Law entered into force in Poland on 1 June 2017.
The amendment covers three areas:
- No need to summon administrative authority to cure legal violations.
- Expanded application of the simplified procedure before the administrative courts.
- Mediation during proceedings before the administrative courts.
The most important part of the amended law is elimination of the requirement to summon an administrative authority to cure a violation of law. This change is designed to streamline the procedure of appealing to the administrative court.
This means that in the case of challenges to individual tax interpretations, hedging opinions or refusals to issue a hedging opinion, the taxpayer will no longer have to call on the tax authority to cure its alleged violation of law.
This change should be regarded as advantageous to taxpayers for several reasons. The main advantage is simplification of the procedure for filing a complaint in an administrative court proceeding and shortening the duration of the case. In the past, there were discrepancies in the case law of the administrative courts on the nature of the institution of a summons to cure a violation of law. This issue was decided by a resolution of a 7-judge panel of the Supreme Administrative Court on 27 June 2016 (Case I FPS 1/16) in which it was held that after filing a summons to cure a violation of law, the party did not have to wait for the response by the administrative authority, but could immediately file a complaint with the administrative court. This ruling effectively reduced this step to a mere formality.
Another change in administrative court procedure is expansion of the availability of simplified proceedings. Under the amended law, simplified proceedings can be conducted in cases that were considered under the simplified track under the Administrative Procedure Code. The fundamental difference between the regular track and the simplified track is that in the simplified track the case is decided in closed session, without holding a hearing, while in the regular track a hearing is held. This change should expedite the consideration of cases by the administrative courts.
The amendment has also changed the rules under which mediation is held in proceedings before the administrative courts. Before the change, the mediator was a judge or assistant judge. After the change, mediation will be conducted by a mediator who is unaffiliated with the court and will not participate in the decision of the case (even indirectly) if the mediation fails.
PLAYING FOR TIME? SETTLING LOSSES FROM PRIOR YEARS
Under Art. 7(5) of Poland’s Corporate Income Tax Act, a loss incurred in a tax year may be carried forward and applied against income over the next five tax years, but no more than 50% of the carryforward can be taken in any one of those years.
Limitations under Art. 7(4) of the CIT Act exclude the possibility of applying past losses by entities which have undergone a reorganization of corporate form, merger or division, except for a company that has been converted into another type of company. This does not change the business reality that the ability to apply loss carryforwards by companies undergoing reorganization is often regarded as a part of the taxpayers’ economic strategy.
It seems that years of practice and case law have developed a method for functioning of this provision under Polish tax law. Nonetheless, we have observed recently that in some situations tax offices scrutinize CIT 8/O declarations more closely, particularly in situations where the settlement of losses results in a claim for refund of an overpayment of income tax. Without disputing the amount of the losses or the correctness of their deduction, the tax offices demand an amended return for the tax year for which the loss is settled.
The regulations governing the tax year permit taxpayers to take as their tax year 12 consecutive months not coinciding with the calendar year. They also indicate a number of other situations, such as taking up activity for the first time or a change in tax year, permitting the tax year to be extended (in certain circumstances) to as long as 23 successive calendar months. In a situation where the tax year in which the loss was incurred did not coincide with the calendar year, or exceeded 12 calendar months, the taxpayer faces a dilemma: which year to enter as the year when the loss was incurred? The regulations do not address this issue, and a literal interpretation does not help develop a uniform and consistent position.
It seems logical in filing the CIT–8 declaration for the year that began, e.g., in 2011 and ended in 2012, to show the loss for 2012. It seems to defy this logic for the tax office to issue a summons to correct the CIT–8/O declaration to indicate the year when the loss was incurred as 2011 rather than 2012. This may seem trivial, but the settlement of the loss may lead to a refund of amounts big enough to impact the economic situation of the business, and the refund will be postponed by the time necessary to file the correction.
Without entering into a detailed analysis of the reasons why tax offices demand such corrections, in situations where the taxpayer is carrying forward losses from tax years that did not coincide with the calendar year, we recommend contacting the tax office in question to determine which method of indicating the tax year is preferred at that tax office.
POLAND SIGNS BEPS MULTILATERAL INSTRUMENT
On 7 June 2017 in Paris, representatives of 68 countries, including Poland, signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, developed by the OECD during its BEPS project. Another 8 countries have expressed their intention of signing the convention in the near future.
Signing of the Multilateral Instrument, as it is known, is a milestone in implementation of the OECD’s international project to combat base erosion and profit shifting (BEPS). It is designed to counter aggressive tax planning artificially reducing the basis for taxation and shifting of profits to countries where income is taxed at low rates or not at all. At a conference in February 2015 the OECD member states underlined the need to develop mechanisms to tighten the many treaties on avoidance of double taxation in force between countries. The result is the Multilateral Instrument, developed through years of negotiations at the international level involving over a hundred countries. The aim of the solution is to enable modification of hundreds of tax treaties without exhaustive negotiations between the specific parties to each treaty.
According to OECD Secretary-General Ángel Gurría, over 1,100 bilateral treaties declared as of the date of signing of the Multilateral Instrument (known as “Covered Tax Agreements”) will be revised. Poland has notified 78 treaties for coverage by the convention, 47 of which will require modification. The convention does not replace any tax treaties but only modifies their application.
Countries joining the convention are required to introduce certain minimum changes, including an anti-avoidance rule known as the “principal purpose test.” Under this rule, a taxpayer can be denied the benefit of a tax treaty when obtaining treaty benefits was one of the principal purposes of the transaction.
Poland has decided to introduce changes concerning such items as hybrid structures, transfer of dividends, and capital gains on the sale of real estate companies.
The Multilateral Instrument must still be ratified by the signatory countries. It is expected that the first changes will enter into force at the beginning of 2018. Taxpayers conducting cross-border transactions should review the solutions they use to identify risks arising as a result of these new international tax regulations.
NEW FORMS FOR TRANSACTIONS BETWEEN AFFILIATES
A draft regulation of Poland’s Minister of Development and Finance establishing a simplified transfer pricing reporting form for corporate income tax purposes was published on the website of the Government Legislative Centre on 9 June 2017.
Under Art. 27(5) of the Corporate Income Tax Act, CIT filers whose revenue or costs within the meaning of accounting regulations exceeded the equivalent of EUR 10 million in the tax year shall enclose with their annual tax return a simplified report on transactions or other events occurring with related entities or connected with payments of amounts due directly or indirectly to an entity with residence, registered office or management in a territory or country applying harmful tax competition.
Under the draft regulation, the report will include the following parts:
- Identification of the taxpayer.
- Identification of the taxpayer’s affiliations.
- Number of related entities.
- Presentation of the main activity of the taxpayer and its operating profile (manufacturing, distribution, R&D, finance, services).
- Information about restructuring activities (change in structure or legal form, mergers, divisions, change in allocation of functions, risks and involved assets).
- Information about types, volume and percentage share in the taxpayer’s revenue of transactions with related entities.
The regulation will probably enter into force in the 3rd quarter of 2017.
Consequently, taxpayers required under Art. 9a of the CIT Act to prepare transfer pricing information whose revenue or costs (within the meaning of accounting regulations) exceed EUR 10 million in 2017 will be required to enclose with their CIT 8 return for 2017 a report as presented above using form CIT/TP.
If you are interested in services involving preparation of transfer pricing documentation, at the local level or as a master file, please feel free to contact us.
NEW LEGISLATION IN HUNGARY RELATING TO RESIDENTIAL SERVICE PROVIDERS
This month the Hungarian Ministry of Justice issued the 7/2017. (VI. 1.) Decree, which sets new requirements for residential service providers in Hungary, effective from 1st July 2017 (from 1st September for running agreements).
Residential service can only be rendered in a property,
- which is either in their exclusive ownership;
- or their right of use of the property has to be registered on the property deed of the real estate concerned.
A service agreement qualifies as a residential service agreement,
- if it ensures the registered seat to the service recipient entity,
- but if it does not effectively use the property,
- and the legal requirements related to the registered seat are not satisfied by the representative or the employee of the service recipient entity.
As vast majority of the residential service providers lease the properties involved in their activity, this legislation might cause major changes in this sector in Hungary.
No official justification has been attached by the Legislator, but this legislation is an integral part of the legislative steps taken by the Hungarian government in recent years to make the provision of residential services more difficult in the country.