Less painful scenarios
The grounds are that the one-off sanction-free tax payment (relating to the undisclosed income) would in fact be the equivalent of granting a privilege to a particular group of people while effectively penalising the remainder of the population by allowing them to pay a one-off tax payment of just 12% as compared to the normal progressive tax rates of 19%, 30% and 40%, depending on their levels of income and without even taking into consideration ordinary penalty interest and/or the sanctions available under the provisions of the Fiscal Penal Code. This would fly in the face of the constitutional promise that all residents will be treated equally for tax purposes. With regard to the second issue, namely the estate declarations, these are to be reviewed on the grounds that they would interfere unduly with individuals' privacy entitlements.
Because the new legislation is, or at least was, tied to the budget for next year, promising to bring into the national coffers an additional €1.48 billion (zł. 6 billion) just from taxing previously undisclosed income (even at a preferential rate), the Constitutional Tribunal has fast-tracked this issue in its agenda, and a decision is expected before the end of November.
Watch this space, and I will keep you posted.
In the meantime, what other snippets of information can I interest you in this week from the world of tax? How about the changes to the Labour Code? A tenuous link, you might think, but read on and all will be revealed. I hasten to add that my intention is not to summarise all the changes to the Labour Code - that I leave to the legal eagles - but rather a specific addition to the Labour Code which could have potential tax repercussions.
As with the changes to the Personal Income Tax (PIT) law relating to tax residency status, the change in the Labour Code that I want to discuss is not so much new, but a case of dotting the i's and crossing the t's in the existing Labour Code by adding something in writing, which was already in practice an accepted state of affairs.
To the point
"Will she ever get to the point?" I hear you mutter. Here goes. A new, or rather two new paragraphs have been added to Article 22 of the Labour Code, under the heading "Employment". These paragraphs spell out (Art 22.1) that in entering into an employment relationship an employee is obliged to perform work of a specific type for the benefit of his employer, and under his control and management, in a place and at a time designated by his employer, while the employer is obliged to pay the individual.
Fairly standard so far.
The next new paragraph (Art 22.1(2)) adds that it is not possible to replace an employment contract by a civil law contract (e.g., a personal service contract - umowa zlecenia) while retaining the same conditions of carrying out one's work as described in Art 22.1 as above (i.e., nothing more or less than the principle of substance over form).
As with the residence issue in the PIT Law, this additional wording in the Labour Code may bring no practical changes - there does, however, exist the possibility that armed with this specific wording, the relevant authorities may start to look more closely at your paperwork, how it is worded and the actual duties you perform.
This is unfortunately not only a labour issue but also a potential tax issue if your existing service contract is questioned and ultimately reclassified as simple employment.
Such a reclassification will have differing consequences for individuals with limited and unlimited liability to PIT.
One good piece of news is that all service contracts entered into after January 14, 2000 are subject to ZUS contributions as ordinary income, so there should be no catching up on the social insurance side of things unless for whatever reason your particular income was exempt (e.g., you had earlier entered into an employment contract with a different principal).
Back to PIT - let's start with the simpler and less painful scenario, namely individuals with unlimited liability to tax (i.e., those who benefited from a 20% statutory costs deduction in relation to their service income (here the scenario is a little more complex where the service contract was in fact a management contract) and additionally had a cash flow benefit through having to pay monthly tax advances at a flat rate of 20%, making up to full appropriate rate tax only at annual reconciliation by April 30 of the following year. In respect to these individuals, as from the date on which the new provisions come into effect (i.e., November 29, 2002), the tax withheld from their income should be withheld at the appropriate progressive tax rate with only standard costs applied rather than the previously applied flat 20% rate.
For individuals with limited liability, such a reclassification would prove much more painful with the individual losing the benefit of a 20% flat rate final tax on service income and instead being subjected to ordinary progressive tax rates up to 40%.
Good time
Now, as every year, is a good time to do a review of your existing paperwork and work circumstances to ensure that both you and your principal are happy that the two (paper and fact) are a true reflection of each other. I refer you to an earlier column in which I wrote about the new 17% flat rate of tax available in certain circumstances to individuals carrying on a registered business activity - the checklist I set out there is equally applicable when deciding whether your relationship with your principal is one of an employee or an independent service provider. Here's a summary checklist (otherwise known as the "badges of trade"):
" Contract for services
" Mutuality of obligation
" Control
" Substitution
" Business integration
" Self-employed
" Provision of equipment
" Investment, financial risk and opportunity to profit
" Basis of payment
" Employee benefits
" Right of dismissal
" Length of engagement
" Personal factors
" Intention of the parties
" An overall view
For once, I end on a cheerful note.
Anna Szymańska is a tax senior manager at the Warsaw office of Ernst & Young
