Navigating the 250 changes to the Tax Ordinance

This week my thanks goes out to fellow tax manager Donka Darpatova for providing the following column. Over the past few months, legislators have been working furiously to amend all major tax laws, including the Personal Income Tax Law and the Corporate Income Tax Law, which we wrote about in our last two columns before the summer break. As part of our effort to give you a comprehensive picture of what's been happening in these areas, it is impossible to bypass without distinction one of the most important legal acts, namely the Tax Ordinance, which has been undergoing substantial changes in draft form since March. Some boldly call the proposed 250 changes "tax reform," especially given the significance of their potential impact on the Polish tax system, tax culture and each individual taxpayer. These changes can be broadly grouped in two categories: those aimed at strengthening the rights of taxpayers and those regulating administrative tax proceedings. Below is an overview of the most significant changes without elaborating on the related interpretational or practical aspects. How often do the different tax offices, courts, the Finance Ministry and other official bodies provide contradictory rulings on a given tax matter? In practice, it happens quite frequently. The new provisions are intended to streamline the process of granting official interpretations to taxpayers by empowering the Finance Ministry to exercise overall supervision, including the authority to issue rulings binding for tax offices. Furthermore, taxpayers are entitled to request that an official interpretation be provided in a specific case and even more interestingly, taxpayers are relieved from any obligation to bear the cost (for example, penalty interest, assessment of additional taxes and fines) of potentially adverse tax consequences arising from any subsequent change of such an interpretation.

Tax avoidance is another new subject covered by the ordinance, although both income tax laws currently contain related provisions. For those of you who have difficulties recalling the A's and B's of taxation, tax avoidance will earn you a slapped wrist while tax evasion is a criminal offense. With tax avoidance in mind, the legislators have equipped the tax authorities with legal tools allowing them to reclassify transactions or other similar acts for tax purposes based on arguments of their substance prevailing over their form. In an attempt to raise the public trust in fiscal institutions, the creators of the amended law propose to guarantee that taxpayers will have the option of requesting from the tax authorities verification of prior years' tax liabilities before taking advantage of tax benefits in the current year. Under the existing rules, a tax benefit (housing deduction) can be disallowed if, for example, in the course of a tax audit an underpayment of tax is found and respective penalty interest is assessed on the taxpayer. Under the proposal, the tax man would not only be required to do extra work at the taxpayer's request (auditing prior years' tax returns), but he would also have an obligation to provide the taxpayer with all the necessary information and clarification in the course of tax proceedings without the need of putting this in writing as a formal request. Moreover, new rules will limit the tax authorities' ability to procrastinate the assessment of additional taxes (found in the course of a tax audit) solely for the purposes of imposing higher penalty interest charges. A very important development in the Polish tax system is the proposed combination of the two existing fiscal control procedures (carried out by different authorities) into one. This new procedure is regulated in detail, but some of the more interesting provisions include the obligation on the part of the tax authority to assist the taxpayer in the course of a tax audit, in understanding his rights and obligations and in properly interpreting and dealing with the comments and/or clarifications noted in the tax control protocol. As you can see, the humble taxpayer will, under the proposed amendments, be armed with new and substantial rights and privileges. It comes as no great surprise, therefore, that those same proposed amendments also aim to increase the arsenal available to the dreaded tax man, to enable him in his duties of collection, enforcement and execution, and thereby ensuring that the overall balance of power does not accidentally tip in favor of the humble taxpayer. With this in mind, more rigorous and precise regulation of the taxpayers' and tax agents' liabilities for failure to withhold/pay taxes due to the tax office will be put in place. These include implementation of mechanisms securing tax settlements by way of a mortgage or a pledge against the taxpayers' property.

At present, tax execution against secured property is not possible where the obligation for fulfillment of the tax liability of a taxpayer lies with persons/entities, which do not qualify under the current definition as taxpayers or tax agents; in other words, third parties, such as members of the board of directors of a company, a surviving company in a de-merger, a divorced spouse, a user of a taxpayer's real estate or a partner in a non-legal entity. This will no longer be the case if and when the respective changes are passed. The other exciting news is that taxpayers will have the option of filing tax returns in electronic form. How and when are questions that no one can answer at this point in time. The above provides a very general overview of what is expected to change hopefully at the beginning of 2003. There are a great number of other important new provisions, which will be discussed in more detail in subsequent articles.

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