NSA deals Wroclaw blow in VAT case
Wroclaw lost its last stand with the tax office last week, when the Supreme Administrative Court (NSA) ruled that the city would have to pay millions of zloty in value-added tax (VAT) owed to the central government.
In the case, which dates back to 1996, Wroclaw was trying to have the court determine what type of transactions it needs to pay VAT on. Wroclaw was specifically looking for exemptions from paying the tax on real estate transactions, as the city is a large land owner.
At issue though was also to what degree cities are generally liable for VAT. Wroclaw argued that as a public government institute working for the public good, it does not have to pay VAT. In its decision announced last Wednesday, the court rejected that argument.
NSA judges that the city carries out economic activities that are subject to VAT taxation. "The tax on goods and services (VAT) is a universal tax," said Andrzej Grzelak, a judge at the local branch of the NSA. "The claim that the city does not carry out economic activities is not accurate.
"You can't get around the fact that the city carries out economic activities," the court said.
The NSA's decision means that Wroclaw will have to pay an outstanding tax bill of at least zl. 22.3 million ($5 million). While some cities in Poland started paying VAT as early as 1994, the city of Wroclaw has refused to pay the tax until the court ruled on the issue.
Wroclaw's bill amounts to zl. 10 million ($2.5 million) in VAT payments plus zl. 12.3 million ($3.08 million) in interest for 1996 alone. The city's budget this year stands at zl. 1.2 billion ($300 million). In addition, the city can now expect to get a VAT bill for 1997-1999. Wroclaw does not keep VAT logs for transactions, and therefore has not yet determined how much is due for subsequent years.
The court's decision comes as a blow not only for Wroclaw, but also to other cities throughout Poland. The coastal town of Koszalin, for example, is fighting a similar case. On the eve of the decision last week in Wroclaw, Koszalin had just finished presenting another VAT case to an NSA court in Szczecin. On Nov. 23, that court is to decide whether Koszalin will have to pay "tens of millions" of zloty in back VAT for 1995, the city said.
Koszalin city treasurer, Jerzy Galazka, was banking on a positive decision in Wroclaw's case. Such a decision would have helped the town with its own arguments, he said. "Wroclaw raised the question of whether or not a city should have to pay VAT," Galazka said.
Wroclaw's case was also proving to be a rallying cry for other cities that hoped to get out of paying hefty back VAT bills. "If there's a positive decision for Wroclaw, for sure it will be a positive decision for Swieradow and other cities," said Wojciech Kudera, mayor of Swieradow, a spa town in Lower Silesia that also owes back VAT taxes. As of December, Swieradow owed slightly more than zl. 500,000 in back VAT. That is 8.4% of the city's 1999 annual budget of zl. 6 million ($1.5 million).
Wroclaw's loss means that these cities will likely have to cough up the payments and tighten their belts accordingly. That scenario is one another coastal town, Kolobrzeg, has already experienced. Last year an NSA court ruled that the city was required to pay zl. 700,000 for VAT taxes dating back to 1993.
That decision still leaves a sour taste in the mouth of Kolobrzeg Treasurer Urszula Braun. "We really could have done something with that money," Braun said. "Especially taking into consideration that it was paid without grounds."
The NSA court decision is binding and leaves Wroclaw with little legal remedy to appeal the decision. The only road open is to appeal to the Justice Ministry to take an extraordinary review of the case. But if the experience of other towns is accurate, Wroclaw shouldn't expect any salvation from that government body.
Kolobrzeg's appeal to the ministry last year ended in a tersely worded letter stating that officials found no basis for reviewing the NSA decision against Kolobrzeg. "We were shocked. We were very disappointed by the minister's decision," Braun said. "Our road ended there, but we fought bravely."
