EU accession and tax reform
Donka Darpatova is a tax manager in the Warsaw office of Ernst & Young.
Saying that Poland's accession to the EU will bring significant changes for businesses is a bit of a truism. In the area of tax, this holds particularly true for VAT. Even without these upcoming complications, VAT is already disliked by many for its intrinsic injustice. This is because ordinary consumers bear its cost, while, those who are supposed to pay VAT, forego the cost by passing it downstream. However, it is here to stay as it provides the bulk of state tax revenues.
Consumers are naturally inclined to seek ways of reducing their tax expenditure, and a free market with varying VAT rules would provide plenty of opportunity to do so. Thus, in order to protect their fiscal interests from such arbitrage, the EU member states have preemptively devised the harmonization of VAT regimes. This system is founded on the ubiquitous Sixth (VI) VAT Directive of May 17 1977 (77/388/EEC), although it also draws upon other Directives.
Due to the nontransparent and highly technical nature of the subject, I pass the baton to my colleague Piotr Litwin, a member of the Ernst & Young VAT team:
Although Poland has been preparing for EU accession for years and VAT regulations have been amended numerous times, the Polish VAT law still falls short of meeting the harmonization goals.
Even worse, the discrepancies appear in such critical areas as the deduction of input VAT (paid by businesses on the purchases from suppliers) from output VAT (charged by businesses to its customers). A significant problem is that current Polish VAT law recognizes a different timing for tax deductions from the Sixth Directive. Under existing Polish rules, VAT charged on the import of services can only be recovered in the following month, whereas the Directive allows the offset to take place in the same month as the corresponding VAT charge.
For those of you who have forgotten the As and Bs of VAT, the aforementioned deduction rules ensure that the VAT cost is pushed down from the VAT payers - to be ultimately borne by the consumer.
The Polish state and its legislative bodies are not always to blame for the slack in the harmonization process. In certain instances, implementation of the regulations must be delayed until the abolition of customs and fiscal borders on May 1 2004. After that date, VAT will no longer be collected by customs authorities, but will instead be self-assessed by the taxpayer. The notions of import and export within the EU will become irrelevant and, consequently, import will be replaced by intra-community acquisitions, and export by intra-community supplies.
The new reporting requirements, in respect of intra-community trade transactions, are overwhelming. Entrepreneurs will be required to prepare and file with the relevant authorities the soon-to-be infamous Recapitulative Statement and Intrastat declarations. Both documents require the disclosure of a set of comprehensive data that most Polish companies are unable to extract from their existing accounting and inventory systems. Therefore, if voluminous manual data entry is to be avoided, changes in the enterprise resource planning (ERP) systems may be inevitable.
Polish VAT payers will not only have to master the workings of intra-community trade, but also get accustomed to a whole new set of "place of supply" rules, which are the backbone of every VAT system. Contrary to common misconceptions, the "place of supply" does not necessarily refer to the place where the goods are dispatched. It is a legal concept used in relation to both goods and services and it identifies the place where the VAT liability in a particular transaction arises.
The place of supply rules in Polish law have always been unclear, as the law does not go beyond stating that the place of actual supply is decisive for determining VAT. The related EU legislation is also quite complex, although arguably clearer. For example, pursuant to the Sixth Directive, services can be subject to VAT depending on where the supplier or the customer has established business operations, or where the transacted property is situated.
Consequently, from May 1 2004, the Polish VAT treatment of the majority of cross-border transactions will be altered. The aforementioned corporate accounting and ERP upgrades will need to incorporate all changes to the place of supply rules. New information (e.g. the tax registration status of the customer) may be required to properly determine VAT on supplies. Gathering such data in advance will help ensure that invoices show VAT correctly.
However, it would not be fair to leave the reader with the impression that EU accession is just another way to make the average taxpayer's life more difficult. On the contrary, it may result in more VAT controversies being resolved, rather than making new ones appear.
Taxpayers will also get another powerful tool to curb the tax authorities' tendency to collect public funds whatever the cost: the rulings of the European Court of Justice. The ECJ has reinforced the principles of a common VAT system, such as, neutrality of tax, proportionality, etc. Arguments from these rulings may be used by taxpayers in disputes with Polish tax authorities and before Polish courts.
Hopefully, in time, this will change the way we common folk and VAT payers perceive VAT. It is even possible that the courts and, alas the tax authorities, will eventually be forced to acknowledge that VAT as a consumer tax should not be a cost for businesses.
Coming back to the original point, EU accession will bring about changes comparable to a VAT "revolution." To make sure that they do not take our readers by surprise, over the course of the second half of 2003, Tax Eye will be returning to some of the points noted in this column.
