Black and white may not be so clear cut after all
This week's "Tax Watch" looks at more of the tax law changes for 2001. In particular, a change that looks reasonable at the outset, but causes significant problems for one section of industry, and may lead to it losing out to foreign imports. This is a good example of how tax changes can distort the market and make life unnecessarily difficult for one specific section of industry. Thanks to my colleague, Anna Strzelecka, for pointing this one out to me.
As of Jan. 1, new tax regulations were introduced, increasing the previous 0% VAT rate to 7% for all periodicals and books (apart from the specialist ones listed in the new regulations) and to 22% for printing services. So if you buy a periodical, it's got a 7% VAT rate on it, but as part of that, the publisher has paid the printer 22% VAT for printing it.
In theory this should not matter, as the publisher can claim back the 22% he's paid the printer, and offset it against the 7% he charges the reader, going through the long wait to get that VAT refund. As most periodicals are sold at a specific cover price, publishers are often unable to pass the additional costs on. For example, it's unrealistic to expect people to pay zl. 2.14 for a magazine when they once paid zl. 2.00. (Let's face it, who likes fumbling for groszy at a kiosk?) So either the price stays at 2.00, or goes up to 2.20, which causes inflation.
As publishing is often such a tight-margin business, this means many publishers are dependent on tax refunds for their entire profit margin, and have a large amount of cashflow tied up in refunds owed to them.
However, two factors cause discrimination in these new regulations.
Firstly, production outside Poland is taxed as an import, causing inequality between companies operating in Poland and those operating abroad. If you're a Polish publisher, you can then get a foreign printer to print it for you. In most countries, as that's an export, no VAT will apply, and the publisher imports it to Poland as a publication subject to 7% VAT on import that offsets the 7% VAT on sale. So there seems to be distorting competition in favor of foreign printers (which doesn't seem very fair to all of those people employed in the Polish printing industry).
Secondly, products and services are not taxed identically, i.e. printers operating as publishers and publishers owning a printing plant don't have a VAT-able sale between printing and selling. They buy the paper, ink and content, then print and publish all within one company, so there is no "sale" between printing and distribution, hence no transaction is subject to the 22% rate. They are moving the published materials between parts of the same company, and so they only need to charge the final 7% VAT rate on the end sale.
Any printer that is operating solely as a printer selling to the end publisher has to impose 22% VAT on all their printing services, as they are not publishers selling the end product. This distorts competition between differently organized producers in the same industry, artificially penalizing one against the other. Publishers who buy-in printing are therefore at a tax disadvantage to those that do their own.
As the complex multi-stage process of VAT is supposed to ensure a level playing field for all companies (as opposed to sales tax that distorts based on the number of transactions), we're effectively back at that distortion, which should have been abolished eight years ago when Poland did away with sales tax in favor of VAT.
So what's the solution in this area? Well, printers and publishers assembled by the Polish Chamber of Print, the Chamber of Press Publishers and the Chamber of Books are actively lobbying to change the law, i.e. to return to 0% VAT rate, or to impose regulations making the situations of all companies equal and stopping discrimination against domestic firms.
They have lobbied with the Parliamentary Committee on Culture and Mass media to start the process of passing a law amendment, but that procedure will take approximately six months, with no guarantee that it will succeed. The other way to change the law is through a directive issued by the Finance Ministry, relieving the higher rate with a temporary lower one until the law can be amended.
Unfortunately, the ministry's response has been negative: they explain that with Poland approaching European Union (EU) accession, VAT has to be imposed at the current level. Also, the inevitable need to increase budget receipts probably comes into play here (although I'm not sure how exporting jobs helps budget receipts).
It's too easy to blame EU accession for everything, though. I have grumbled bitterly in the past about how slowly laws are being amended to harmonize them with the EU, so it seems a bit ironic for me to start complaining the moment one is brought into line. However, under EU law, each member state is free to determine the VAT amount and to implement a reduced or standard rate on printed materials, both the selling of printed products and provision printing services. These types of goods and services are not included in the relevant directive as items on which member states are required to implement a mandatory rate, so Poland can choose whatever rate it feels is appropriate.
However, it is impossible to completely remove VAT on magazines or printing services as Poland adjusts its books to EU law, if Warsaw wishes to keep within the directive.
The solution is therefore simple in every other EU country that I looked at in preparation for this column, the VAT rate on printed materials equals the VAT rate on printing services. It means that no matter where magazines are printed (domestically or abroad), the VAT for printing and selling magazines is the same, so no harmful competitive distortion applies.
The current law change costs jobs in one of Poland's more successful recent growth industries. The solution is clear. Why is it then difficult to get the relevant amendments enacted?
Peter Ferrigno is a partner in the Warsaw office of Arthur Andersen. He was assisted in the preparation of this article by Anna Strzelecka, tax manager in the Katowice office. However, all views expressed are exclusively those of the author.
