Tax advantage and the potential reporting obligation

by Krzysztof Wylegalski

12 September 2019

One of the objectives of the MDR is to obtain information about taxpayers’ transactions which bring tax advantages. Importantly, reportable may also be lawful arrangements made for valid business reasons. At the same time, taxpayers may be obliged to disclose arrangements no matter if they bring tax advantages or not.

The lawmakers have explained that a mere existence of a tax scheme in your business should not be regarded as wrong or reprehensible and a violation of law. According to the official clarifications concerning the MDR, generally not every arrangement considered a tax scheme is covered by the anti-tax avoidance regime. The MDR have much broader application than the anti-tax avoidance regulations. Consequently, arrangements which are not artificial in the meaning of the anti-tax avoidance clause are not excluded from the mandatory disclosure regime. This is because the Head of the National Tax Administration and the Ministry of Finance want to independently assess whether a certain arrangement has been implemented to obtain an unlawful tax advantage.

Main benefit test

The Polish Tax Act contains an additional “filter” through which arrangements that show generic hallmarks must pass to be regarded as tax schemes. This is the so-called main benefit test.

According to the guidelines, the main benefit test is passed if all of the following conditions are met:

• there is a tax advantage, and
• the tax advantage is the main or one of the main advantages – it is a decisive factor for implementation of an arrangement, and not just a side effect of an arrangement (the arrangement would not have been implemented had it not been for the expected tax advantage), and
• there is an alternative, reasonable course of action and a prudent enterprise could reasonably choose a different course of action that would not have brought a tax advantage.

Tax regulations are among the most important factors considered in choosing a business strategy. The Supreme Administrative Court rightly noted in its judgment of 8 July 2019 (file no. II FSK 135/19) that taxpayers were not obliged to pay the highest tax. Still, be mindful that arrangements made mainly for valid business reasons are not excluded from the MDR regime.

List of transactions regarded as tax advantages

The list of transactions regarded as tax advantages is included in Article 3(18) and Article 86a(1)(4) of the Tax Act.

The regulations contain an exhaustive list of tax advantages meaning situations when, e.g.:

• a tax obligation is avoided;
• a tax obligation is deferred;
• a tax obligation is reduced;
• a tax loss is created or overstated, a tax is overpaid or the right to a tax refund is created;
• a withholding agent is not obliged to deduct tax;
• the excess of input VAT over output VAT to be carried forward is overstated;
• the obligation to prepare and report tax information, including about tax schemes, is avoided or deferred.

Tax reliefs and preferences

Tax reliefs and preferences guaranteed by the legislator, such as a research and development allowance, Innovation Box, CIT rate for small taxpayers, VAT bad debt allowance, and reduction of tax liability as a result of deduction of a valid expense from tax, will generally not be reportable.

They should be regarded as reasonable actions dictated by the need to maintain competitive edge and continue company growth. Consequently, they are typical for a business activity.

However, if your main motive behind the above-mentioned tax reliefs was to obtain a tax advantage and despite the availability of an alternative course of actions which would not bring the tax advantage you did not chose that course, then tax authorities may claim that the arrangement passes the main benefit test.

Examples

Change of contract from an employment contract to a B2B relationship

As a rule, this is not reportable. However, if you hire people on B2B contracts without a valid business reason or change the contract during the relationship, tax authorities may treat it as a tax scheme. Such a conduct passes the main benefit test and shows the generic hallmark of standardised documentation and new taxation rules which lead to lower taxation.

50% tax-deductible costs on employees’ salaries

The tax-deductible costs of employees may be increased if they perform work protected by copyrights or similar rights. To this end, the employee’s contract must stipulate a part of the remuneration for use of such rights and the increased tax-deductible costs apply to that part.

Such an arrangement may be regarded as a tax scheme – tax advantage and standardised documentation. However, the Ministry of Finance emphasises that the obligation to inform the Head of the National Tax Administration about the MDR should be based on the assessment of its existence and does not arise automatically.

Preferential CIT rate of 9% for associated enterprises

If you undertake to carry out a contract and intentionally break it down into smaller parts implemented by your associated enterprises which enjoy the preferential tax rate of 9%, you implement a tax scheme. There is a tax advantage here, namely the preferential tax rate and standardised procedure.

Each and every action must be assessed to see if it brings a tax advantage and then if the arrangement has been implemented mainly to obtain a tax advantage. If the answer to both questions is ‘yes’, you should check if there was an alternative available which would not bring a tax advantage.

If you have any doubts about reporting your business actions to the authorities, Rödl & Partner’s experts are at your service in our offices in Cracow, Gdansk, Gliwice, Poznan, Warsaw or Wroclaw.