A taxing time for retail

Few details are available about a new tax that is to be placed on large retail outlets, but for the sector it already looks like bad news By Alex Hayes There can be no doubt that the proposed taxation on large format stores (which is defined as any store of over 250 sqm) is a protectionist measure. The justification for the bill that will establish the tax even states this quite specifically: “The new taxation is also to counteract the expansion of foreign retail networks, which having at their disposal the financial means and the requisite know-how, have been able to quickly subordinate the retail market of our country for themselves.” Any overt discrimination of foreign firms would clearly be a breach of EU law. However, the Act itself will target firms with retail areas of over 250 sqm regardless of nationality. Such a solution has already been implemented by the Fidesz government in Hungary, and according to the new socially conservative Law and Justice party (PiS) government, “These actions were one of the elements of the policy that has brought Hungary’s Prime Minister Victor Orban positive results, and which has led to an improvement in the country’s economic situation and the protection of its national interests.” This new tax should be in place by the end of the first quarter of 2016. Are such proposals legal under EU law? Well, it’s hard to say. “Under EU regulations, member states are not allowed to introduce any turnover taxes other than VAT. Also, any discrimination of foreign businesses is prohibited,” said Mieczysław Gonta, a director at consultancy PwC. But, he points out that until further details are made available about this law (in particular the tax scale and rates remain unknown) it is impossible to say whether this will be in line with EU regulations. Interfering in the market [caption id="attachment_95096" align="alignleft" width="300"] Image: shutterstock[/caption] Currently, Law and Justice is talking about a tax of around 2 percent on income. In the government’s view this is approximately equivalent to the taxation that such large retail concerns are avoiding in Poland and such a proposal will discourage the remittance of profit to other countries. However, the Polish Chamber of Commerce has a slightly different opinion as to how such a taxation will affect the retail sector: “The so-called taxation on hypermarkets should, according to its principles, protect independent retailers in Poland. If, however, it is poorly constructed, instead of helping it could destroy small and medium-sized retail businesses.” PwC appear to agree. Gonta pointed out that, “It will not only impact foreign hypermarket chains but also other market players. Most probably it will increase everyone’s food bills, but this price increase will be smaller than the tax rate.” He also points out that the larger supermarket chains will be able to offload some of their costs onto their suppliers. Marek Maruszak, the president of Rossmann Polska, is equally critical of the proposal. In his opinion, businesses will have a really hard time looking for ways to reduce costs: “Does it mean we should fire some of our people and order the rest to work harder? Lower salaries? Some chains will close their business, there will be fewer price wars and prices will rise. That is what happened in Hungary,” he told Gazeta Wyborcza. But one has to remember that it is not just the hypermarkets that will be hit by such a tax. According to Lukas Nemela, the public relations manager for ECE Projektmanagement, over 60 percent of the tenants in the company’s shopping centers lease areas of over 250 sqm. Moreover, the company doubts that its powerful anchor tenants would have the negotiating strength to share the costs that the new taxation will cause with mall developers, especially when many are locked into long-term contracts. Rank Progress pointed out that in its retail parks, all of its tenants lease more than the proposed tax-free area. “Such a change will be felt by the whole sector – because we’re talking here about a new tax, which will influence the profitability of tenants,” stated Piotr Kowalski, commercial director at Rank Progress. [negative] The direct effects of taxes and fees constructed in a similar manner to the solutions adopted in Hungary over the last few years could mean a financial burden on the retail sector of PLN 2.5 billion per year [/negative] Let’s wait and see Many retailers seem to fear that they are being personally attacked. Maruszak told Gazeta Wyborcza, “For my industry this will be a penalty, and a penalty that has been dishonestly applied. The message is: Because you’re a sucker who honestly pays his bills, now you’re going to pay more.” Lidl felt obliged to explain the comment, “Lidl Polska has not received any tax exemptions in payment of corporate income tax and has not benefited and does not benefit from any income tax exemptions on account of investments in special economic zones.” However, when it came to commenting on the effects of the new taxation on the development of the sector, all the German-grocer would say was that: “In our opinion it is too early at the moment to competently comment upon the announced changes in tax law and the Polish Labor Code.” They are not the only ones that want to keep schtum. Both Colliers and CBRE also refused to comment. The market reaction to the election of the present government has not been optimistic, with the Warsaw Stock Exchange registering falls. “PiS will be able to implement its populist policy agenda unconstrained by coalition partners,” RBS said in its research. “We remain of the view that this is unlikely to be market-friendly and may keep Polish risk premia elevated, even as a strong economy provides cushions.” Clearly, foreign investors are not enamored of the new government’s policies. The proposed changes to retail must also be considered with other proposed changes to the taxation regime in Poland, such as a tax on banks and derivatives. But, in spite of these unconventional policies, economists are still predicting Poland’s economy to grow by over 3 percent through to 2018, according to figures from Oxford Economics. “Economic projections are based on data analysis. The figures for Poland are still optimistic. The combined direction of the government reforms on GDP growth cannot be determined. Some of the reforms could even boost economic growth,” explained Mateusz Walewski, a senior economist at PwC. We don’t do Sundays either This tax on large-scale retailers is not the only policy of the present government that will directly interfere with the retail sector. The government is also proposing a ban on Sunday trading. Most players on the market seem unconcerned by such proposed changes. “As proven by the example of other countries, this type of a decision usually leads to a change in shopping habits, which does not necessarily mean a decrease in a shop’s turnover,” wrote Joanna Mroczek in the CBRE Viewpoint Polish Property Market 2015 report. Rank Progress was also non-committal on the issue of whether the introduction of such a ban would hurt trade. “The greatest impact of these changes will be felt, above all, by all shopping malls, which offer a wide range of entertainment that is directed at the needs of families and which has registered the greatest numbers of visitors at weekends,” explained Kowalski. According to a report by PwC, “The direct effects of taxes and fees constructed in a similar manner to the solutions adopted in Hungary over the last few years could mean a financial burden on the retail sector of PLN 2.5 billion per year.” PwC then simulated the effects of such a tax on the financial results of individual companies and concluded that, “the effect of additional taxes on financial results, discounting other factors, would result in the almost total elimination of the profits that were researched.”