Cos looking for way around software tax

A new law imposing value-added tax (VAT) on software license sales will not deter software spending by the public sector and financial institutions, industry professionals and analysts said last week. "Most of our customers will not be affected by the new regulation because they can deduct tax from income," said Michał Golębiewski, the spokesman of Microsoft Poland. "For the others (in the) public or financial sector(s), the new situation may help to make faster decisions about new purchasing." The new law, which adds 22% tax on software license sales, is aimed at public institutions, such as hospitals and the military, and banks. Those groups are prohibited from deducting VAT from their income under Polish tax laws. Prices for individuals and other business entities that purchase software will not be affected. According to the law, software license agreements will not be taxed for the next two years if purchases are registered at local tax office within 30 days of the date when the law became effective. Paweł Małyski, an IT analyst at Bank Gospodarki Żywnościowej brokerage, said the new law could force public sector institutions and banks to postpone some IT spending decisions in the short term but that they are finding ways around the issue. Some banks, for example, are establishing separate companies to handle their IT contracts, he said. Since the primary activities of these companies are not directly connected to banking, they would be entitled to receive VAT refunds.

Likewise, the new law will not dent software license purchases by public institutions. "The imposition of VAT on software licenses over the long term will be neutral from the customer's perspective," said Sobiesław Pająk, an IT analyst at CDM Pekao brokerage. "(While) financial institutions are fairly deep pocketed, other entities from other (sectors) can offset VAT on their sales." He added that banks and public institutions would likely shift software purchases made this year in the second, third and fourth financial quarters to the first quarter of 2002, when the VAT law was not yet on the books, in order to receive tax refunds. Previously, software licenses sales have not been subject to VAT. According to the the Polish Chamber of Information Technology and Telecommunications (PIIT), an advocacy group, the issue has been controversial for several years since the Finance Ministry confirmed a ruling in 1998 that such licenses were to remain VAT-free to allow Polish companies to compete with international firms. But it wasn't clear which transactions were to be recognized as license-granting ones, so companies were still not sure if they were acting in accordance with the law. Then new legal regulations enacted in 2001 mandated that VAT from costs related to preparing licenses could not be reclaimed. PIIT said the new law enacted this year clarifies the tax status of companies, minimizes the possibility of duplicate taxation and complies with European Union regulations.

"The previous situation was dangerous for customers, partners and software suppliers because there was no one official statement if software should be covered by tax or not," Golębiewski said. Industry professionals and analysts also said that the new VAT would not lead to increased instances of pirated software purchases by public sector institutions. "I would not exaggerate the possible threat of these entities (buying) pirated versions of software," Pająk said. "Should it become public knowledge, it would be extremely damaging for the state."