On September 10, 2014 the Council of Ministers announced a draft amendment to the Tax Ordinance regarding the “general anti-tax avoidance clause.”
The Clause is a new tool the tax authorities can use to reclassify a business transaction in a situation where it was proved that a taxpayer had obtained substantial tax profits through tax avoidance strategies. Under the draft amendment, the authorities will ignore artificial legal constructions, which may trigger the obligation to pay tax and default interest and result in exposure to criminal fiscal liability.
Detailed conditions for applying the Clause
The Clause is to apply to “artificial” legal constructions whose main goal is to achieve a “substantial tax benefit,” which is not envisaged in and runs contrary to the purpose and substance of tax laws. The draft amendment defines an artificial construction as a legal construction which is excessively complicated. For example, it splits one event or combines various events; involves intermediaries; contains elements offsetting / canceling each other out; and is devoid of economic content. The latter means, for example, it conceals the true purpose and meaning of the transaction, does not lead to the consummation of any transaction, is inadequate or useless for the consummation of the transaction, in accordance with its purpose and substance, and does not achieve the intended economic effect. Consequently, such a construction will not be regarded as a typical legal construction, i.e. it would not be applied by an entity operating in a reasonable way, striving to achieve commercial goals through its decision-making.
The Clause is to be limited to events in which the taxpayer “achieved a substantial tax benefit,” i.e. a benefit worth over PLN 50,000 for the tax year or other settlement period; on the understanding that the benefits accumulation principle will be used for the purpose of determining the threshold which must be achieved in order for the clause to be applicable. A substantial tax benefit may consist in the taxpayer reducing or avoiding their tax liability, increasing the amount of overpayment, receiving a tax refund or claiming a loss or avoiding its tax obligation, lowering the tax base in relation to obligations which arose by virtue of a decision or delaying the point in time at which their tax obligation or liability became due, and thus increasing the amount of overpayment, tax refund or loss.
The consequences of the Clause according to the Bill
The Clause will be enforced pursuant to a tax decision issued to assess or determine tax liabilities without taking into account the artificial legal structure, so that the genuine economic transaction is taxed as if it were performed under a typical legal structure. The tax authorities will need to prove that the taxpayer avoided taxation and that it gained a substantial tax benefit as a result. Additionally, the tax authorities will need to prove that a typical legal structure could have been used instead.
According to the Bill, the assessment decision regarding the avoidance of taxation will not be enforceable until the ensuing dispute before an administrative court is finally and non-appealably resolved. Until then, the tax authorities will not be able to append the Clause with an enforceability title either. If the decision becomes final and non-appealable, no sanctions other than default interest will apply. That said, the statement of reasons for the Bill stipulates that an assessment decision may trigger the risk of penal fiscal liability.
In the course of the assessment proceedings regarding tax avoidance, it will be possible to seek the opinion of the Council for Tax Avoidance Matters. This will be an independent collegiate body, staffed by retired judges of the Supreme Administrative Court, university research staff, a representative of the Ombudsman and a member of the National Board of Legal Advisors. The Council will issue non-binding opinions on whether the Clause could be applied in an individual case, either at the request of the law enforcement authorities in the first instance proceedings or at the taxpayer’s request in the appeal proceedings.
Planned protective measures available before the Clause is used
As regards planned legal structures, the Bill stipulates that the Minister of Finance will issue opinions protecting taxpayers from the Clause being applied in their case. Such opinions will contain, in particular, an assessment whether a contemplated legal structure in the circumstances described in the application amounts to tax avoidance, and provide a statement of legal grounds for the assessment. According to plans, the opinion will protect taxpayers abiding by the opinion, in the same way tax rulings can protect compliant taxpayers. In particular, if a taxpayer applies for and receives the opinion, the taxpayer will be exempt from the obligation to pay tax to the extent unspecified in the opinion and from any prospective penal fiscal liability. Besides, it will not face the risk of paying any default interest.
Proceedings regarding the issuance of such opinions will be conducted in accordance with special rules, and the application processing fee will depend on whether the contemplated legal transaction will be effected with residents or non-residents (PLN 15,000 and PLN 30,000, respectively). It will be possible to appeal the opinion to an administrative court.
Additionally, to counteract the application of the Clause, a taxpayer will be given the right to substantiate the use of an artificial legal structure by explaining other important reasons or substantial economic or business benefits justifying the application of the structure in the circumstances of the case.
New scope of protection accorded by tax rulings
The Bill also calls for important changes in the scope of protection offered by tax rulings. If the facts or a future event considered in the tax ruling will be part of an artificial legal device identified as such in the final and non-appealable decision determining the tax obligation amount issued in a case concerning avoidance of taxation, the tax ruling will no longer protect the taxpayer which complied with it. What this means is that if the Clause is applied, the taxpayer will be facing an obligation to pay tax arrears together with interest, also being exposed to criminal fiscal liability without the benefit of protection accorded to it by the tax ruling.
The Bill is yet another attempt at promulgating a general anti-tax avoidance clause in Poland. Despite declarations to the contrary in the statement of reasons, the proposed legislation is inconsistent with the fundamental recommendations formulated by the Constitutional Tribunal when reviewing the previous versions of the clause (set out in the Tribunal’s judgment of May 11, 2004, case file no. 4/03). The definition of “tax avoidance” relies on vague formulations requiring further interpretation. Also, no clear boundary was staked out between legitimate tax planning and tax avoidance. Responding to criticism coming from numerous ministries, business organizations and the government’s legal advisors, the Ministry of Finance recently modified the draft amendments, among other things introducing a tighter definition of “significant tax benefit”.
If the Bill survives in its present form, the new regulations governing the anti-tax avoidance clause are scheduled to come into force on January 1, 2016. It goes without saying that the adoption of this clause on the grounds of Poland’s law may have a severe impact on transaction assessments. The new regulations, being substantive in nature, will apply exclusively to actions taken following the said date. Moreover, transactions covered by tax rulings applied for before the amended legislation comes into force will benefit from the protection they accord as they have done until now. That said, in practice, given the complexity of the existing structures, each of the transactions will have to be reviewed with an eye on the risk of the clause being applied.