On February 25, 2016 the Permanent Committee of the Polish Council of Ministers approved and recommended a Bill to amend the Tax Ordinance introducing an anti-tax avoidance clause (the “GAAR”). We estimate that the Bill will soon be accepted by the Council of Ministers and presented to the Polish parliament.
The GAAR is designed as a new tool that the tax authorities can use to reclassify business transactions in situations where a taxpayer was demonstrated to have achieved substantial tax profits through tax avoidance strategies. The draft amendment will now allow the authorities to ignore artificial legal arrangements, which means taxpayers may end up having to pay the avoided tax with default interest and become exposed to criminal fiscal liability.
Applicability of the GAAR
The GAAR is to apply to legal arrangements devised first and foremost with the view to achieving a “tax benefit” that is inconsistent with the purpose and substance of tax laws in the given situation and if use of solutions of this kind is “artificial”. The bill requires certain circumstances to be taken into account when deciding whether a solution was in fact artificial or not. The first thing to consider is whether the solution in question is not excessively complex. For example, a transaction may be split up without any reasonable justification and carried through with the involvement of intermediaries despite there being no good business reason to involve them; there may be elements of the transaction designed to achieve a situation identical or nearly identical to the baseline situation, or mutually compensatory elements or elements that cancel each other out. Also, a solution may involve business risks incommensurate with the anticipated benefits other than tax gains, with the disproportion being so glaring that no rational entity would wish to opt for the given course of action. If that is the case, the arrangement will not be viewed as legitimate, as acceptable to a responsibly operating entity, pursuing lawful business objectives other than tax benefits inconsistent with the purpose and substance of tax laws.
Applicability of the GAAR is to be limited to cases when a taxpayer achieved an aggregate “tax benefit” in excess of PLN 100,000 in a given settlement period. The tax benefit may consist in the taxpayer reducing, avoiding or postponing its tax liability, creating a tax payment surplus or an entitlement to a tax refund, or increasing the amount of tax payment surplus or tax refund.
Consequences of the GAAR application envisaged in the Bill
In case of finding out that there are grounds for GAAR application, Minister of Finance, in a tax decision will determine or set the amount of tax due, confirm a tax payment surplus or set out the amount of this surplus and of the tax refund while ignoring the legal arrangements employed by the taxpayer and taxing the actual business transactions that took place (whenever circumstances suggest that these transactions were driven only by tax advantages), or while taking into account what is described as the “appropriate legal construction”, by which is meant a course of action which the taxpayer could have taken in the given circumstances if it wanted to act reasonably in pursuit of lawful objectives other than the achievement of tax benefits (in all other cases). The tax authorities would need to: (i) prove that the taxpayer’s intention was indeed to avoid taxation, (ii) demonstrate the tax benefit gained as a result, and (iii) demonstrate that an appropriate legal construction was available to the taxpayer.
The Bill provides that tax assessment decisions issued in cases concerning tax avoidance cannot be immediately enforceable. Once these decisions become final and non-appealable, the taxpayers will face no financial penalties other than default interest.
While a tax assessment proceeding is pending in tax avoidance cases, the parties involved may seek an opinion from the Council for Tax Avoidance Matters. This will be a collegiate body independent of the tax authorities, comprised of members: recommended by the Minister of Finance, appointed from among university academics, members of the Science Academy of Poland or research institutes, and recommended by the President of the Supreme Administrative Court from among the retired judges of this court, the Joint Government and Local Government Committee (Komisja Wspólna Rządu i Samorządu Terytorialnego), the Polish Tax Advisors Chamber (Krajowa Izba Doradców Podatkowych), the Minister of Justice, and the Social Dialog Council (Rada Dialogu Społecznego). The Council will issue non-binding opinions on whether the GAAR was applicable in a given case or not, at the request of the authority conducting the proceeding or of the taxpayer in the appeal proceeding.
Amendment of the VAT Act
In principle, the GAAR will not apply in cases concerning VAT, although the Bill adds a definition of “misuse of the law” to the VAT Act. In practice, solutions serving the same purpose as the GAAR are relied on in VAT-related cases adjudicated by the Court of Justice of the European Union and administrative courts.
Proposed legal remedies against the application of the GAAR
The Bill provides that the Minister of Finance may issue opinions disallowing the application of the GAAR. The intention is for these opinions to accord protection to taxpayers by providing guarantees that the GAAR will not apply to them. That said, the Minister of Finance will be able to amend an opinion already issued, on an ex officio basis, if it is found to be inconsistent with rulings of Poland’s Constitutional Tribunal or the Court of Justice of the European Union, with no additional protection offered to the taxpayer if this happens. If the described circumstances provide that the GAAR might be implemented, the Minister will refuse to issue an opinion.
Proceedings to issue an opinion of this kind will be conducted in accordance with special rules, and the entity applying for it will have to pay a fee of PLN 20,000. Both the opinions issued and the decisions to refuse them will be appealable to the competent administrative court.
New scope of protection accorded by tax rulings
The Bill also provides for important changes in the scope of protection offered by tax rulings. These will not cover facts or elements of future events constituting tax avoidance or VAT abuses. Moreover, if the GAAR is applied or a case of VAT abuse identified, the rule whereby a taxpayer acting in compliance with a tax ruling may not suffer harm or may benefit from increased protection will no longer apply. What this means is that if the GAAR is applied, the taxpayer may end up having to pay the outstanding tax with interest and face criminal fiscal liability without the benefit of protection accorded by its tax ruling. The Bill provides that the above rule will not apply to tax rulings issued before the new law comes into force.
The Bill represents yet another attempt at implementing a general anti-tax avoidance clause in Poland. Despite declarations to the contrary in the statement of grounds for the Bill, this new piece of legislation is not in line with the fundamental recommendations formulated by the Constitutional Tribunal when reviewing the previously proposed version of the GAAR (judgment of May 11, 2004, case file no. 4/03). The definition of “tax avoidance” includes vague wording requiring further interpretation. Also, no clear boundary was staked out between legitimate tax planning and tax avoidance.
Hearing what the Ministry of Finance has been saying recently, seeing the pace Parliament is now working at and bearing in mind the vacatio legis proposed for the new legislation (30 days), we could see the Bill passed into law in the second quarter of 2016. Once it becomes law, the GAAR will have the capacity to severely impact assessments of ongoing transactions.
The new regulations, being substantive in nature, will apply exclusively to actions taken after the Bill becomes law. That said, the Bill’s reasoning contains the warning that, “taxpayers ought to discontinue artificial solutions currently serving to avoid taxation” during the vacatio legis period. In practice, given the complexity of the existing solutions that might attract the attention of the authorities, each of them must be reviewed with an eye on the risk of the GAAR being applied.
We will keep you updated on any new developments, to give you sufficient advance warning of impending changes in the law. This will enable you to prepare for the promulgation of the GAAR.