One tax revolution and much wishful thinking
Which tax-related events from January 2015 do you consider to be the most important ?
From my perspective, the most important changes were comprised in the coming into force of amendments to both the basic tax statutes concerning controlled foreign companies, or CFCs. The CFC is essentially an onerous legal fiction, and its introduction is bound to cause many problems in practice, particularly as regards interpretation. The introduction of the CFC is a bit of a tax law revolution, really, leading to taxation of de facto and de iure income not actually accruing to the given taxpayer (sic!), but merely posted by a foreign company controlled by such taxpayer. This is quite a curious solution – as is the position now adopted by the Polish legislation to the effect that a foreign company may be controlled by an entity holding a mere 25% of its share capital. The taxpayer may never actually receive these earnings – the company may, in the end, not disburse a dividend – but the tax will be due anyway; thus, the Polish tax authorities are imposing a tax on virtual income. These new rules are unlikely to precipitate any major inflow of funds collected by the tax authorities, but they are certain to increase the workload of tax advisors and of foreign providers of corporate services to foreign entities belonging to Polish shareholders. This is yet another example of the wishful thinking which, alas, is nothing unusual given the pro-fiscal attitude of the Polish Ministry of Finance and, consequently, of the legislature.
Is that the only example of wishful thinking in evidence in the recent spate of tax laws ?
Sadly, no. Another example is provided in the imposition – effective 1 January 2014 – of corporate income tax on partnerships limited by shares. We are now faced with a situation in which a personal partnership, as the partnerships limited by shares is, is subjected to a tax applicable to capital companies, i.e. entities with legal personality; this marks a radical departure from the basic principle whereunder the earnings of a personal partnership are taxed only at the level of its individual partners rather than of the partnership. It goes without saying that, in the wake of this change, tax optimisation structures employing partnerships limited by shares and closed-end investment funds benefiting from tax exemptions are no longer applied in Poland; given, however, that nature abhors a vacuum, this, if you will, niche has now been occupied by SCSp companies incorporated in Luxembourg; these entities have the same basic characteristics as Polish partnerships limited by shares, namely tax transparency and the capacity to issue shares.
The above concerns Polish tax regulations. What about foreign regulations ?
The most important – and, alas, negative – change is comprised in the pending implementation within the Polish legal system of the requirements arising from the American (sic!) FATCA statute. The governments of Poland and the United States signed an agreement to this effect on 7 October 2014; this instrument has been designated as a treaty between the two governments concerning improved discharge of international tax duties and implementation of FATCA. The net result is that an American statute will exert an indirect effect within Poland. The amendments to the Polish Tax Ordinance which will bring this effect about have already been drawn up and are now being consulted among the Ministries concerned. FATCA, put briefly, is a body of highly complex and unwieldy rules which will impose a considerable number of disclosure duties and other legal obligations upon Polish financial institutions holding accounts for American citizens and American tax residents. These added obligations will not bring any benefits for Poland, but Polish financial institutions will be left to bear the considerable cost of discharging them.
What other recent developments in the realm of tax law do you consider worthy of note ?
I regret to point out the outrageous internal memo circulated within the Ministry of Finance to the effect that, in 2015, tax audits conducted by the authorities are not to be considered in terms of prevention, but as a means of generating revenue for the state. If these anticipated revenues are not generated, the local tax authorities with the highest percentage of “negative” audits, i.e. of tax inspections which did not culminate with the imposition of penalties or at least of additional taxes, will be “divested of tax control staff". To translate this into plain language, this could very well mean that tax officials who have not demonstrated effectiveness in bringing in additional revenue are liable to lose their jobs. The conclusions are alarming. The long and short of all this is that audit proceedings performed by tax officials in exercise of their statutory authority will not be geared at verifying the correctness of tax accounting and settlements by the taxpayer (as provided for by law) but, essentially, at shaking the taxpayer down so as to haul in extra money. Words, quite honestly, fail me, and the consequences of such a policy may be disastrous. We may once again witness a wave of cases in which well-run enterprises suffer disruption, or even bankruptcy, on account of the depredations of unscrupulous tax officials bent on bringing inflated charges which, several years down the line, will be overturned on appeal, with the end result that the State Treasury will be held liable for compensation (for some victims, this may be little consolation). An added, and equally unfortunate, effect is that such an attitude on the part of the government undermines public trust in the state and its apparatus, which has never been very strong here in Poland, and also that Poland is upholding its reputation as a jurisdiction which is not very business-friendly.
Just for a change, is there anything positive which might be said about the Polish tax environment in 2015 ?
Sure thing. I just don’t know whether this will be as positive as it is amusing, and that’s not the same thing, mind you. The campaign preceding Poland’s presidential election is now underway, and some candidates – or even candidates for candidates – have already managed to offer a whole lot of promises pertaining to taxes and, more broadly, to the financial sphere. These run the gamut of PLN 500 child subsidies, tax breaks for new technologies, enigmatically formulated tax accommodations for entrepreneurs, etc. All in all, I find these promises quite amusing, in that they all conform to the time-honoured, yet absurd strategy of increasing state expenditures while reducing taxes. Seeing as the presidential campaign yet has to enter its final stretch, the gloves have not come off yet, so the promises of who will give more – or, to be more precise, who will promise more – are bound to escalate into an all-out bidding war. Quite apart from the fact that, in light of the Polish constitution, the president of the country has no authority to independently increase spending or decrease taxes, these are promises which have no grounding in economic reality.
Of course, the presidential elections are a mere sideshow when considered in juxtaposition with the parliamentary election scheduled for the autumn. These are likely to bring even more fiscal and financial promises insouciantly formulated with no heed for reality. To return to more serious comments, however, one positive piece of news in early 2015 came in the form of the announcement that the actual budget deficit for 2014 ended up PLN 17 billion lower than that provided for in the budget. Let us hope that this tendency can be kept up in 2015.