Journey to the end of the night
It all made perfect sense that Poland's rules should change in line with EU legislation so I left it at that. After all, VAT is in its early teens, only a few days short of EU maturity but still in adolescence and as such requires careful handling, preferably by VAT specialists, an elite group to which I do not belong. Ignorance is bliss, they say, and indeed it was for me until one day a client asked me a specific VAT question on the taxation of services. The more I read, the more confusing it got, as the draft VAT Law was tossed between the Senate and the Sejm with the Ministry of Finance muddying the waters at both shores.
The VAT Law was finally passed on March 11, 2004. It will come into force in two weeks' time - on May 1, 2004 - which gives taxpayers very little time to prepare for the coming changes, given their magnitude and complexity. Preparation is the key to ensuring compliance with tax law, but it only comes second to maintaining a live awareness of tax issues. In appreciation of the fact that Tax Eye readers may have different preferences as to how to spend their leisure time, this week's column takes a bird's eye view of the notorious VAT rules on services.
Before embarking on this VAT sea voyage, I would like to clarify a few basic points. Firstly, this expedition is for entities involved in the international sale or purchase of services. Secondly, the services in question include (without limitation) licensing, advertising, marketing, advisory, accounting, legal, market research, management, data processing, supply of information, supply of staff, rental, telecommunications, and agency activity, etc. Thirdly, there are special terms used in VAT language and these should be applied in a VAT context. Namely, the "supply of services" simply means the sale of services, whereas the "place of supply" is the place where the VAT liability arises.
In order to understand the rules for the taxation of intangible services, it helps to get a feel for the overall design. The VAT architecture is built on basic principles and several layers of exceptions to the basic principles followed by exceptions to the exceptions.
According to the main principle, services are taxed in the country where the supplier has established his business or has a fixed establishment through which the service is supplied. In practice, however, most services qualify as exceptions to the main principle. Depending on the specific qualification of a service, it may be taxed, for instance, in the country where it was actually performed, or the country of the purchaser of the service, or even the country where the service is actually utilized.
Intangible services are usually taxed with VAT in the country of the service recipient. The rationale is that the economic effect of such services is usually utilized by the purchaser. This is a significant change, as currently the applicability of VAT on services is dependent on a number of criteria including physical performance on Polish territory or the listing of a particular service in the National Statistical Classificator (which is by no way exhaustive).
The Classificator will still be in use after May 1, 2004 but it will no longer be exclusive. Both the Polish VAT legislation and the EU Sixth Directive on VAT provide for a general catalogue of services subject to VAT. Fortunately, after accession, Polish VAT payers will be able to benefit from the rich heritage of ECJ court rulings to resolve potential problems with classification and thus with identifying the proper place of supply.
The following examples illustrate the workings of these place of supply rules.
Polish VAT payer renders marketing services to a Swedish VAT payer.
The place of supply for VAT purposes will be Sweden. Technically, the Polish company will issue an invoice without VAT and the Swedish company will apply the reverse charge mechanism to assess Swedish VAT on its purchase.
Polish VAT payer provides advertising services to a non-EU company.
The place of supply will once again be outside Poland, so no Polish VAT will be charged to the foreign recipient of the service. The Polish company may be required to register for VAT purposes in the non-EU country.
Polish VAT payer renders consulting services to a Dutch individual.
This is an exception to the first level of exceptions. In other words, when intangible services are provided to non-VAT payers (e.g. individuals who reside in the EU but are non-VAT payers), the place of supply is determined in accordance with the main principle, i.e. where the supplier has established his business. Hence, the Polish company will charge VAT at 22 percent on the invoice issued to the Dutch individual.
Polish VAT payer purchases management services.
In this situation, the Polish VAT payer will recognize an import of services by assessing reverse charge VAT at the standard 22 percent rate, regardless of whether the supplier is from the EU or from a non-EU country as long as he is based outside Poland.
From these illustrative examples, it becomes evident that the first step in compliance with the new rules of taxation of intangible services involves reviewing all binding service contracts in order to properly determine the place of supply of services purchased or sold after May 1, 2004. Remember that the new rules will even apply to those contracts signed prior to EU entry in respect of VAT liability arising after the accession date. Moreover, under the transitional provisions of the VAT Law, certain transactions (e.g. licensing) can be covered by a VAT exemption until the end of 2005.
We have not yet come to the end of our journey. Other issues await exploration even after EU accession - the Cape Horn for tax advisors.
Donka Darpatova is a tax manager in the Warsaw office of Ernst & Young.
The VAT Law was finally passed on March 11, 2004. It will come into force in two weeks' time - on May 1, 2004 - which gives taxpayers very little time to prepare for the coming changes, given their magnitude and complexity. Preparation is the key to ensuring compliance with tax law, but it only comes second to maintaining a live awareness of tax issues. In appreciation of the fact that Tax Eye readers may have different preferences as to how to spend their leisure time, this week's column takes a bird's eye view of the notorious VAT rules on services.
Before embarking on this VAT sea voyage, I would like to clarify a few basic points. Firstly, this expedition is for entities involved in the international sale or purchase of services. Secondly, the services in question include (without limitation) licensing, advertising, marketing, advisory, accounting, legal, market research, management, data processing, supply of information, supply of staff, rental, telecommunications, and agency activity, etc. Thirdly, there are special terms used in VAT language and these should be applied in a VAT context. Namely, the "supply of services" simply means the sale of services, whereas the "place of supply" is the place where the VAT liability arises.
In order to understand the rules for the taxation of intangible services, it helps to get a feel for the overall design. The VAT architecture is built on basic principles and several layers of exceptions to the basic principles followed by exceptions to the exceptions.
According to the main principle, services are taxed in the country where the supplier has established his business or has a fixed establishment through which the service is supplied. In practice, however, most services qualify as exceptions to the main principle. Depending on the specific qualification of a service, it may be taxed, for instance, in the country where it was actually performed, or the country of the purchaser of the service, or even the country where the service is actually utilized.
Intangible services are usually taxed with VAT in the country of the service recipient. The rationale is that the economic effect of such services is usually utilized by the purchaser. This is a significant change, as currently the applicability of VAT on services is dependent on a number of criteria including physical performance on Polish territory or the listing of a particular service in the National Statistical Classificator (which is by no way exhaustive).
The Classificator will still be in use after May 1, 2004 but it will no longer be exclusive. Both the Polish VAT legislation and the EU Sixth Directive on VAT provide for a general catalogue of services subject to VAT. Fortunately, after accession, Polish VAT payers will be able to benefit from the rich heritage of ECJ court rulings to resolve potential problems with classification and thus with identifying the proper place of supply.
The following examples illustrate the workings of these place of supply rules.
Polish VAT payer renders marketing services to a Swedish VAT payer.
The place of supply for VAT purposes will be Sweden. Technically, the Polish company will issue an invoice without VAT and the Swedish company will apply the reverse charge mechanism to assess Swedish VAT on its purchase.
Polish VAT payer provides advertising services to a non-EU company.
The place of supply will once again be outside Poland, so no Polish VAT will be charged to the foreign recipient of the service. The Polish company may be required to register for VAT purposes in the non-EU country.
Polish VAT payer renders consulting services to a Dutch individual.
This is an exception to the first level of exceptions. In other words, when intangible services are provided to non-VAT payers (e.g. individuals who reside in the EU but are non-VAT payers), the place of supply is determined in accordance with the main principle, i.e. where the supplier has established his business. Hence, the Polish company will charge VAT at 22 percent on the invoice issued to the Dutch individual.
Polish VAT payer purchases management services.
In this situation, the Polish VAT payer will recognize an import of services by assessing reverse charge VAT at the standard 22 percent rate, regardless of whether the supplier is from the EU or from a non-EU country as long as he is based outside Poland.
From these illustrative examples, it becomes evident that the first step in compliance with the new rules of taxation of intangible services involves reviewing all binding service contracts in order to properly determine the place of supply of services purchased or sold after May 1, 2004. Remember that the new rules will even apply to those contracts signed prior to EU entry in respect of VAT liability arising after the accession date. Moreover, under the transitional provisions of the VAT Law, certain transactions (e.g. licensing) can be covered by a VAT exemption until the end of 2005.
We have not yet come to the end of our journey. Other issues await exploration even after EU accession - the Cape Horn for tax advisors.
Donka Darpatova is a tax manager in the Warsaw office of Ernst & Young.
