Changes to the tax law are on the way in 2004

Anna Szymańska is a tax senior manager at the Warsaw office of Ernst & Young.

There have been so many rumors, educated guesses and predictions as to what the changes to the tax law for 2004 will be that many have given up, preferring to wait until year-end when those predictions may be a little more likely to become fact.

It had been hoped that someone would take the initiative and create something completely new. However, it now seems clear that as far as personal (PIT) and corporate (CIT) income tax are concerned, we can look forward to further amendments of the existing legislation.

The CIT law in the three-year period from 2000 to 2002 has been changed some 18 times, while in the same period the PIT law has undergone some 31 changes. The more changes, the less clarity and the longer the provisions.

It appears that there will be some good news on the corporate front with the CIT rate potentially coming down from its current 27% (with three reliefs and 71 specific exemptions) to 19% (with no exemptions or reliefs). But it will be less jolly on the PIT front if the finance minister's latest suggestions are finally agreed upon and passed as law.

Currently (and without detail), the PIT law sets out tax brackets and appropriate rates at 19%, 30% and 40% with 15 tax reliefs and a list of 127 specific exemptions. There is no capital gains tax, a flat rate 20% tax on investment income, 15% tax on (Polish) dividends and no agricultural PIT.

The proposals for 2004 - and this in part at least remains unchanged from the beginning of this year - are to retain the existing three tax rates (19%, 30% and 40%) and to add a fourth tax rate at 17% for low-income earners (those with a cumulative annual income up to zł. 6,600). For the third year in a row the level of the tax brackets will remain unchanged, updated only to take inflation into account. The initial tax-free sum (currently zł. 530.08) will also remain unchanged.

The major changes come in the form of a proposal to reduce the number of available reliefs from the current 15 to just two (rehabilitation relief for the disabled and the possibility of using joint filing between spouses or sole parents with a dependent child or children). The finance ministry also plans to delete the current taxpayers' favorite article from the PIT law - article 21 - which sets out the 127 specific exemptions mentioned above.

But wait, there's more. The proposals include plans to introduce a capital gains tax of 19%, though rumor has it that this is unlikely to be introduced before the middle of 2004 since the banks and other institutions will need to upgrade their technology in order to deal with this new tax. As a sweetener, the proposals plan to reduce the flat rate tax on investment income from 20% to 19%. However, they will increase tax on dividends from 15% to 19%. In addition, the proposals plan to introduce an agricultural PIT tax at a flat rate of 9% for farms up to 15 hectares, with larger farms being taxed at ordinary progressive tax rates.

Of perhaps more interest to some readers is the latest hot-off-the-presses news that the finance minister intends to drastically slim down the scope of the current copyright benefit. Currently, individuals whose work is unique, tangible and capable of being reproduced (a very simplified definition) can benefit, with the correct documentation, from a claim to copyright, obtaining a statutory 50% cost-of-earnings deduction, thus reducing their ultimate tax bills. Polish copyright law does not currently require such works to be registered with the copyright or patent authorities in order to qualify for treatment as copyrightable.

It appears that the finance minister wishes to effectively abolish this benefit, although it has been reported that he intends to compensate those who have used it to date and who would wish to continue with it going forward by introducing a decrease in the statutory costs of earning from 50% to 20%. Whether the definition of work subject to copyright (as far as the tax law is concerned) will remain unchanged is not known as the minister has not divulged any further details in relation to this proposal.

While it had been hoped that these proposals would be the subject of debate by the government at its session on May 20, it has now been confirmed that this particular debate will be postponed until the June 10 session, following the European Union accession referendum on June 7-8.

Watch this space, and I will keep you posted. My only advice for now is to start saving those pennies as your 2004 tax bill is likely to be noticeably bigger than in previous years.