New reporting obligations in Poland – extensive interpretation of the EU directive

by Dominika Tyczka

12 July 2019 

Directive 2011/16/EU came into force at the beginning of 2019. What is important, the regulations apply retrospectively since 25 June 2018. Polish taxpayers must disclose also domestic schemes. Deadlines for disclosing schemes are short and the definition is controversial.

The amended Tax Act introduces an obligation to inform the Head of the National Tax Administration (NTA) about arrangements which make up a so-called tax scheme. Due to the vagueness of the statutory regulations, the lawmakers have published written guidelines on their application. If taxpayers follow the guidelines, they are protected from adverse consequences as long as they are in force.

The guidelines published on 31 January 2019 say that the objective of the new regulations is to:

• give the tax administration information which they will use to improve the quality of the tax system;
• improve effectiveness of legislative work;
• give tax authorities quick access to information about potentially aggressive or abusive tax planning, as well as information about promoters and users of tax schemes.

Poland was first to implement Directive 2011/16/EU. Polish regulations are much broader than the reporting obligations stipulated in the directive. Firstly, reportable are also Polish arrangements, while the directive applies to cross-border schemes only. Secondly, the Polish statute includes a longer list of hallmarks and even the lack of a tax advantage does not rule out a tax scheme.

Practice has shown that the regulations are often incomprehensible to taxpayers. Most troublesome is understanding what a tax scheme actually is and what roles the respective participants play in the reporting process. Given the short reporting deadlines, harsh penalties for violations and a broad definition of the reporting obligation, this topic may be crucial for many businesses.

Users and their obligations

The user is a natural or legal person, or an organisational unit that does not have legal personality, to whom the arrangement is made available, or in whose enterprise the arrangement is being implemented, or who is prepared for the implementation or who has taken a step to implement the arrangement. In other words, the user is generally an enterprise. Under certain circumstances, an enterprise which believes that it has been given a scheme will be obliged to disclose it and then report the tax advantage it has obtained.

Promoters and their obligations

A promoter may also be involved in an arrangement. Then, it is generally him who has to disclose the scheme. The promoter is a natural or legal person, or an organisational unit that does not have legal personality, especially a tax adviser, an attorney at law, an employee of a bank or another financial institution advising clients. It may also be another person who performs services from the realm of those listed above or who has similar qualifications. A promoter does not have to be established in Poland. Someone is a promoter if he/she designs, offers, provides or implements an arrangement or manages its implementation.

As a rule, a promoter must report a scheme made available to the user to the Head of the National Tax Administration. Then, he/she must notify the user of the officially assigned tax scheme number (TSN). 
If the promoter is bound by a professional privilege and the user has not waived this privilege, the promoter must notify the user of the obligation to report the scheme by himself and provide him with the data to be reported.

When is the enterprise obliged to report

MDR provide for two situations when the user himself must report the scheme.

First, when:

• the promoter fails to fulfil his obligation, i.e. fails to tell the tax scheme number to the user;
• the user has not waived the professional privilege in respect of the promoter in the context of a tax scheme other than a marketable one.
Second, when the taxpayer has not engaged a promoter and has implemented an arrangement regarded as a scheme by himself.

How to report

The user informs the Head of NTA about the tax scheme using the MDR-1 form. The user must inform the Head of NTA about the tax scheme within 30 days:

1) of the day following the date when the tax scheme has been made available;
2) of the day following the date when the tax scheme has been prepared for implementation; or
3) of the date of the first step to implement a tax scheme
 – whichever comes first.

The user must additionally submit the MDR-3 form if the scheme has brought about a tax advantage for him. The information disclosed in the MDR-3 form should be delivered within the tax return filing deadline for the accounting period.

Example:

In order avoid disqualification of tax-deductibility of some expenses for royalties for a logo, the taxpayer has changed the method of accounting for the royalties. He has agreed with the other party to increase the royalties for the year (as a cost related to the production of goods it is not limited) and reduce the fee for commercial support (which is subject to limitation).The arrangement was made exclusively between the service provider and the service recipient, without external advisers. The service recipient/user is obliged to report the tax scheme within 30 days of the first step of the arrangement (e.g. initiation of contractual changes) using the MDR-1 form. Then, upon filing the annual tax return (by the end of the third month after the tax year-end) he will have to submit the MDR-3 form to the Head of NTA disclosing the “tax saving”.

Retrospective force of the regulations

Schemes in which the first step was taken before 25 June 2018 do not have to be reported. However, cross-border schemes in which the first step was taken after that date might need to be reported by 30 June 2019 if the user engaged a promoter. If the user has designed the scheme by himself, the reporting deadline is extended until 30 September 2019. Be mindful that Polish laws require also reporting of domestic tax schemes in which the first step was taken after 1 November 2018.

What is a tax scheme

A tax scheme is an arrangement which shows at least one hallmark stipulated in the statute. The Polish statute lists 24 hallmarks broken down into three groups.
The first group includes generic hallmarks which trigger a tax scheme if they are accompanied by a tax advantage, that is, whenever:

• the promoter or user undertakes to abide by a confidentiality clause (meaning special confidentiality beyond the professional privilege, e.g. confidentiality about the method of obtaining the tax advantage);
• the fee is fixed by reference to the amount of the tax advantage derived from the arrangement, i.e. the success fee;
• the documentation or form of the arrangement is significantly harmonised;
• a loss-making company has been acquired, the core business of such a company has been discontinued and the loss has been used to reduce tax liabilities;
• the classification of income or the rules of taxation have changed resulting in a lower tax rate, tax relief or tax exemption;
• there has been circular cash flow;
• cross-border payments have been made between associated enterprises whereby the payee is from a low-tax country;
• the user has undertaken to co-operate with the promoter who designs the arrangement;
• the fee obligations have been actually fulfilled (if a contract lacks a specific reference to the basis of a success fee);
• we are dealing with the so-called hypothetical test of confidentiality – under the circumstances a prudent promoter or user would expect a success fee or confidentiality (it most often concerns innovative or risky solutions).

Definition of a tax advantage

The statutory definition of a tax advantage is broad. We can talk about a tax advantage if the facts and circumstances indicate that a reasonable entity which pursues lawful objectives other than a tax advantage could reasonably chose a different action that would not bring a tax advantage reasonably expected or arising from the arrangement, and the tax advantage is the main or one of the main benefits which the entity expects from the arrangement.

According to the Tax Act, a tax advantage occurs whenever:

a) a tax liability is avoided, deferred or understated; 
b) a tax loss arises or is overstated;
c) a tax is overpaid or the right to tax refund arises, or their amounts are overstated;
d) the payer is not obliged to deduct tax as a result of tax avoidance, deferral or reduction of a tax liability;
e) the excess of input VAT over output VAT to be carried forward is overstated;
f) the obligation to report schemes or other tax information is avoided or deferred.

The second group of hallmarks include specific hallmarks which exist independently – they are not related to tax advantages. They are as follows:

• tax deduction of cross-border payments made between associated enterprises where the payee is established in a country practicing harmful tax competition or has no tax residence;
• the same tangible asset is depreciated in more than one state;
• relief from double taxation in respect of the same item of income or capital is claimed in more than one jurisdiction;
• fee for transfer of assets between countries differs (for tax purposes) by at least 25%;
• the regulations on exchange of tax information with other countries are circumvented;
• the ownership structure is non-transparent or the beneficial owner is difficult to identify;
• simplified application of transfer pricing regulations introduced unilaterally in one country;
• transfer of hard-to-value intangibles between associated enterprises;
• transfer of functions, assets or risks between associated entities if the taxpayer’s expected annual profit (loss) before interest and taxes (EBIT) within three years after that transfer would be less than 50% of the expected annual EBIT that would have been achieved if no such transfer had taken place.

The third group contains other specific hallmarks (also independent of tax advantage), that is, situations in which:

• the actual or expected impact of the arrangement on the user’s deferred income tax or asset or a deferred tax provision is significant in the meaning of the accounting laws and exceeds PLN 5 million in a calendar year;
• the payer of income tax would be obliged to deduct tax exceeding PLN 5 million in a tax year if the payments made or expected in connection with the arrangement were not subject to tax treaties or tax exemptions;
• income (revenue) of the foreign taxpayer earned in Poland and subject to limited tax obligation here (that is, not earned on goods) exceed PLN 25 million in a tax year; the limit does not apply to transactions on goods;
• the difference between Polish income tax which would be payable if the beneficiary was a Polish taxpayer and the income tax actually paid by the user in his country of establishment exceeds PLN 5 million in a calendar year.

Special tax schemes

Besides the general tax schemes, the statute provides for two more, special scheme types. Schemes may be marketable meaning that they may be implemented or made available to many users without significant modifications, especially to the type of transactions planned and effected under the scheme. If a scheme is marketable, this changes the way it must be reported to the head of NTA.

Tax schemes and marketable schemes do not have to be reported if the user does not meet the so-called eligible user criterion. A user is eligible if he meets the following criteria:

• the user’s revenues, expenses or assets (in the meaning of accounting laws) did not exceed the equivalent of EUR 10 million in the previous tax year;
• the arrangement covers items or rights with market value not exceeding EUR 2.5 million; or
• the user is associated (in the meaning of the Personal Income Tax Act or the Corporate Income Tax Act) with an entity that meets the above criteria.

Schemes may also be cross-border when the arrangement involves more than one European Union Member State. Such schemes have to be reported no matter if the user is qualified or not. A cross-border scheme may also be marketable.

The MDR are highly controversial and undoubtedly pose a challenge for enterprises. With your expectations in mind, we offer comprehensive support in fulfilling your reporting obligations.

Please do not hesitate to contact our consultants if you are interested in more information, an audit of your arrangements to see if they are reportable, or in support in the reporting.