The Provincial Administrative Court in Warsaw in a judgment of March 24, 2014 (case no. III SA/Wa 2328/13) resolved that hire purchase does not lead to the occurrence of payment gridlocks, which the introduction of Art. 15b of the CIT Act intended to eliminate. As a result, if the parties agree on such a manner of payment, the limitation of deductible costs under Article 15b of the CIT Act will be applicable only when any of the installments is not paid. Then, after the lapse of a 30-day period from the date of classifying the expense as a deductible cost, a correction of the deductible costs should be made.
The above judgment was issued in a case initiated by a complaint against a tax ruling. In the application for a tax ruling the Company pointed out that as part of its business operations it acquires from its trading partners (businesses) movables and real properties, depending on their tax classification, constituting intangible or fixed assets or neither of the above assets included in the register of fixed and intangible assets, i.e. constituting costs of current operations. Depending on the provisions of commercial contracts, payment for the acquired items is made on a one-off basis or through a few or even tens of installments.
Therefore, the following question was asked, among others: Is the purchase of an item not constituting a fixed or intangible asset, in the meaning of the CIT Act, the invoiced payment for which is made on dates specified in the invoice, e.g. on the 10th day of each month for 60 consecutive months, subject to limitations arising from Article 15b sec. 1 and 2 of the CIT Act, if the parties specified payment dates as falling on a particular day of a month (or alternatively - of a year) at their discretion?
The tax authority stated that in the case of payment in installments made on certain dates specified on an invoice (e.g. on the 10th day of each month for 60 consecutive months) the limitation arising from Art. 15b sec. 2 of the CIT Act shall be applicable, as pursuant to the literal wording of the above regulation, in the case of a payment date falling after 60 days, a correction of tax deductible costs depends on the date of recognizing the invoiced amount as a tax deductible cost and a failure to pay that amount by the specified deadline. If the payment is not made within 90 days from recognizing it as a tax deductible cost, a correction of deductible costs should be made. These regulations do not refer to the date of occurrence of the payment obligation, i.e. the issue date of the invoice or other document specifying the payment date. In consequence, according to the tax authority, if the payment date is determined as e.g. 360 days from the invoice date, after the lapse of 90 days from the date the Company recognizes a given amount as a tax deductible cost, the Company will be obligated to file a correction of tax deductible costs as referred to in Art. 15b sec. 2 and sec. 3 and 5 of the CIT Act.
The Provincial Administrative Court in Warsaw determined that the tax ruling issued by the tax authority does not take into consideration the purpose of introduction of the regulation set forth in Art. 15b of the CIT Act. In the oral statement of grounds the court relied on the merits of the amendment of the CIT Act, in which the purpose of Art. 15b was specified as the introduction of a general rule providing that: “if someone does not pay the invoiced amount on time, he shall reduce the tax deductible costs accordingly”. In the discussed case hire purchase also took place with the parties’ mutual consent and the parties agreed respective payment dates. Therefore, in the reviewed case the court did not find any payment gridlock. As a result, the court allowed for the application of restrictions under Art. 15b of the CIT Act only if any of the installments is not paid. Then, after the lapse of 30 days from recognizing the expense as a tax deductible cost, a correction of the tax deductible costs should be made.
When analyzing the abovementioned judgment one should state that the court made a reasonable attempt to mitigate a very rigorous (if literally interpreted) regulation introduced to the CIT Act on January 1, 2013. The previous, though short, practice of application of Art. 15b of the CIT Act by tax authorities reveals that the culpable failure to make a payment on time is treated in the same manner as a deferred payments agreed by parties or payment in installments. Deferred payment and payment in installments are quite common in the market − they fall within the freedom of contracting and, importantly, they do not always arise from unequal positions of trade partners.
In this situation, the discussed judgment should be considered favorable for taxpayers and to meet a business need. Hopefully, the above position of the Provincial Administrative Court in Warsaw will be sustained by the Supreme Administrative Court.