In this edition:
- Reverse charge and the right to deduct VAT. VAT Act vs. VAT Directive.
- Purchaser’s right to deduct input tax arising from a VAT invoice issued by an inactive entity.
- Tax on the value of shares acquired in exchange for contribution in.
- Regulatory changes in 2018: Revenue sources in Corporate Income Tax.
REVERSE CHARGE AND THE RIGHT TO DEDUCT VAT. VAT ACT VS. VAT DIRECTIVE
On 29 September 2017 the Cracow Voivodship Administrative Court passed the first instance judgment (I SA/Kr 709/17) according to which Polish regulations on curtailing the right to deduct VAT for transactions involving taxable recipients do not comply with the VAT Directive.
Pursuant to Article 86, Paragraph 10b, Subparagraph 2b and Paragraph 3 of the Act on Goods and Services Tax, the right to reduce the output tax amount by the input tax amount for transactions involving a taxable recipient arises provided that the taxable person takes account of the amount of the tax due on the transactions in the tax return in which he is obliged to account for said tax, no later than within three months of the lapse of the month in which the obligation to pay tax on the acquired goods arose. Otherwise, the taxpayer can make an appropriate increase in the amount of input tax in the settlement for the settlement period for which the due date for submitting the tax return has not passed (Article 86, Paragraph 10i of the VAT Act), i.e. ‘on an ongoing basis.
|Date of chargeable event||07.04.2017||07.04.2017||07.04.2017|
|Date of preparing corrective VAT-7 return for April 2017||17.07.2017||15.10.2017||26.10.2017|
|Month of recognizing output VAT||04.2017||04.2017||04.2017|
|Month of recognizing input VAT||04.2017||09.2017||10.2017|
In providing grounds for the abovementioned judgment, the Voivodship Administrative Court in Cracow put particular emphasis on two issues that have apparently been ignored by the Polish lawmakers, i.e.:
- the principle of neutrality – taxpayers cannot actually bear the economic burden of VAT by pursuing the right to deduct input tax,
- the principle of proportionality – measures employed to pursue a given purpose must be adequate and should restrict exercising taxpayers’ rights to the smallest possible degree, and should be limited to what is absolutely necessary.
Considering the above, in their judgment the VAC stated that “the regulations of Polish VAT Act on the provisions applicable in this case, particularly Article 86, Subparagraphs 10b and 10i, should be deemed non-compliant with the principles of the European Union legislation and its generally accepted interpretation’ as ‘they postpone the deduction right which gives rise to the obligation to pay penalty interest on purely formal grounds, regardless of a given transaction bearing no risk of tax fraud or deliberate abuse of the law.’
To sum up, in case of:
- intracommunity acquisition of goods (hereinafter IAG)
- importation of goods
- delivery with assembly
- other domestic purchases, wherein the purchaser is the taxable person, e.g. construction services
taxpayers should be eligible for the same right to deduct VAT, as it was the case in the periods preceding the introduction of the rules in question (1 January 2017). The above position should hold true not only in relation to repealing the time limit for adjusting tax returns but also with reference to the obligation to hold an invoice indicating the supply of goods constituting intra-Community acquisition of goods within three months from the lapse of the month in which the obligation to pay tax arose with regard to goods acquired.
KR Group actively supports its clients in preparing motions to issue rulings on the above issues. Additionally, we offer competent assistance in drawing up complaints and professional representation before the court. Our team of seasoned professionals will be happy to share their expertise should a problem of similar nature arise over the course of your business.
PURCHASER’S RIGHT TO DEDUCT INPUT TAX ARISING FROM A VAT INVOICE ISSUED BY AN INACTIVE ENTITY
On 19 October 2017 the European Court of Justice (hereinafter ‘ECJ’) passed an interesting judgment that might also bear relevance for Polish taxpayers. Case no. C-101/16 referred to the request for a preliminary ruling made by Romanian Court of Appeal, which centered on the issue of whether national rules under which a taxable person is denied the right to deduct VAT paid on the purchase of goods and services from a declared ‘inactive’ conform to European law.
The judgment of the Court deemed the regulations applicable in Romania since 2007 to contravene the basic principles underlying VAT, in particular the principles of neutrality and proportionality. On the other hand, the ECJ underscored the fact that member states are obliged to introduce regulations that facilitate the functioning of the VAT system, and that by using a publicly accessible website and requesting taxpayers to abide by the date posted therein, the government has fulfilled that obligation. The national regulation that ultimately denied the Purchaser the right to input tax (even if the contractor has subsequently been struck from the list of inactive entities) served as the basis for the Court’s ruling. The ECJ pointed out the fact that pursuant to Romanian law an entity conducting legitimate business has no means of proving that a transaction it has concluded has not resulted in diminishing public funds and is not of fraudulent nature. The Court’s judgement also emphasized the fact that tax authorities cannot expect taxpayers to subject their suppliers to comprehensive scrutiny. Taxpayers’’ actions should be limited to reasonable measures whose aim is to ensure that the transaction performed is not carried out with the aim of committing tax fraud. As far as the right to input tax is concerned, substantive requirements must receive priority (i.e. if a given transaction has actually taken place), while the matter of meeting formal requirements cannot serve to deny the right.
The ECJ’s judgment should be of particular interest to the Polish Ministry of Finance which is currently preparing new regulations concerning purchasers’ due diligence, particularly with reference to the right to deduct input tax arising from a VAT invoice issued by an entity struck from the registry of active taxpayers. At present, tax authorities tend to hold the opinion that purchasers do not have the right to deduct input tax arising from a VAT invoice issued by an inactive entity. There are also doubts concerning the right to claim input VAT following the issuers’ reinstatement t the registry of active taxpayers as well as some uncertainty about when the abovementioned right arises.
When considering the implications of the ECJ’s judgment one needs to remember that it was passed with reference to Romanian national law and does not have to have an instant bearing on Polish VAT law. However, it is undoubtedly true that the ruling can serve to confirm the fundamental principles of VAT, i.e. neutrality of the tax for the entity using the purchased services for their own taxable activities, and the principle of proportionality of measures introduced to improve the VAT collection system.
TAX ON THE VALUE OF SHARES ACQUIRED IN EXCHANGE FOR CONTRIBUTION IN CASH (intentional or erroneous?)
Pursuant to Article 12, Paragraph 1, Subparagraph 7 of the CIT Act, if a non-cash contribution other than an enterprise or an organized part thereof has been made, its value stipulated in the Company’s Articles of Association, Memorandum of Association or in another document of similar nature, is considered to be the contributor’s revenue. If the value is lower than the market value or has not been set out in the Company’s Articles of Association, Memorandum of Association or another document of similar nature, the market value of such a contribution, determined as of the date of transferring the ownership rights to the object of contribution is deemed to constitute revenue. Article 15, Paragraph 15, Subparagraph 1 of the CIT Act stipulates what expenses can be considered tax deductible when making an in-kind contribution, i.e. a non-cash contribution other than an enter-prise or an organized form of an enterprise as on the day of the acquisition of those shares.
Beginning in January 2018, ‘the value of the contribution stipulated in in the Company’s Articles of Association, Memorandum of Association, or in in their absence set out in another document of similar nature’ will become treated as revenue. Therefore, regardless of the fact whether the contribution is acquired in exchange for a non-cash contribution or cash, revenue will be recognized pursuant to the same principles.
Tax advisors are of the opinion that the amendment to Article 12, Paragraph 1, Subparagraph 7 of the CIT Act is a blatant mistake made by the legislators as it provides for taxing all contributions to companies. Unlike today, not only will the provisions apply to non-cash contributions, but also to contributions in cash.
In the wake of introducing such regulations, it will be necessary to recognize:
- acquisition of shares in exchange of a cash contribution (transactions that involve issue value equal to the acquisition price are tax neutral), and
- potential disposal of shares where only revenue is recognized, without tax deductible expenses.
Additionally, considering the phrasing of Article 12 of the CIT Act, it can be expected that in case of disposal of shares acquired in exchange for a cash contribution tax authorities will seek to treat the price set out in the sales contract as revenue. As a result, the same revenue can be subject to double taxation (when shares are acquired, and when they are disposed of).
The amended Act, which is currently awaiting The President’s signature, has raised a number of doubts among tax advisors. These concerns have not been alleviated by the explanations provided by the Ministry of Finance, which claims that revenue arises only if a contribution to a company or co-operative society is not made in cash. However, in light of the literal construction of the amended provisions, the reservations concerning the Ministry’s position on the issue are far from being put to rest.
REGULATORY CHANGES IN 2018: REVENUE SOURCES IN CORPORATE INCOME TAX
Further to the previously discussed changes to income tax law that are to enter into force with the beginning of 2018, we feel that particular emphasis should be placed on the newly introduced division of revenue sources that will apply to entities liable to pay CIT. So far taxpayers submitting CIT-8 returns have aggregated all revenue earned over a given year and all tad deductible expenses regardless of whether these referred to operating, financial or investment activities.
The amended CIT Act provides for two separate revenue sources:
- capital gains
- other revenue
Capital gains are to include:
- revenue earned from participating in profits made by a legal person (dividends, revenue from investment funds, revenue from remitted shares, shareholder’s withdrawal, the value of post-liquidation assets, interest on participation loans, the value of retained earnings)
- revenue earned from making an in-kind contribution to a company subject to CIT
- revenue from the disposal of shares and exchange of shares
- revenue from the disposal of all rights and obligations in an unincorporated partnership
- revenue from the disposal of receivables, resulting from revenue classified as capital gains
- revenue from property rights (licenses), except for revenue directly related to operating revenues
- revenue from securities and financial instruments (except for financial instruments serving to hedge transactions relating to operating activities)
It is necessary to note that introducing two separate revenue sources will entail the need to assign tax deductible expenses to operations generating capital gains or other types of operations.
However, should there be expenses that cannot be assigned to any of the abovementioned categories, taxpayer will be required to use the so called ‘revenue based cost allocation key.’ As a result, if an expense proves to be impossible to be assigned to one of the two revenue sources directly, it will be classified as a tax cost based on the proportion in which revenues from a given source relate to the total amount of revenue.
It is also worth noting that the amended act introduces a ban on setting off tax losses using different revenue sources. For example, if a taxpayer has earned capital gains while incurring a loss on operating activities, they will be required to pay capital gains tax irrespective of the tax loss sustained in the same year.
Similarly, it will be possible to account for losses incurred within a particular revenue source within five subsequent years. However, it will only be permitted within the confines of the same revenue source.
Legislative phase: The act is awaiting for a publication.