Oftentimes the refund from work abroad is worth the effort
This week's column looks at the latest developments in the taxation of Polish nationals working abroad. This remains a developing issue, as many Polish subsidiaries of global organizations are starting to send their Polish personnel abroad, and the system whereby each individual's tax affairs are dealt with by the tax office in the place he or she is registered means that we have to explain it all over again to a new tax office every time a new person from the same company heads off.
My colleague Magda Olejnicka is turning into a bit of a guru on this stuff, so this week's column is based on her expertise and know-how, sub-licensed to "Tax Watch" for your enjoyment.
If someone employed in Poland goes off to work abroad for a period longer than a business trip, then he may be subject to tax in the country in which they work, and this will have some impact on their taxation in Poland. Most assignments we see are westward, with employees going to work in European Union (EU) countries or the United States. In most of these countries, if the assignment will be longer than six months, the individual will be treated as being a tax resident from the time they arrive, without a "183 day" period in the year of arrival, as most places look at the length of the assignment rather than each tax year in isolation.
This is important to remember, as this means that the host country tax issues must be dealt with in the period soon after arrival.
The rules in the individual country will determine the taxability, the amount subject to tax, whether there is any special rule for expatriates in that country, and if so what needs to be done to secure that special status. This then leads to the question of whether you will be offering a tax-protection policy to ensure that individuals do not lose out from moving to a higher-tax country, or whether you will equalize them to ensure that they don't gain from moving to a low-tax country either. You also need to think about social security coverage where you pay, how much you pay, and what you get for the money, but that's a column in its own right and so country specific that it is incredibly complicated.
The next issue is whether Polish taxes still need to be deducted from income paid in Poland. This is one of those highly controversial areas, and I remember having a long discussion about this with a client's lawyer once, who was arguing that withholding applies for taxpayers, but if the person does not have a tax liability, he is not a taxpayer and so there is no need to withhold. I don't believe this to be the case, and the tax laws make withholding an obligation, not an option. There is however a paragraph in the tax ordinance that states employers can apply for cessation of withholding if the individual will not be in a tax-paying position at the end of the year (which tends to support my position about the withholding still being required).
In many countries in the EU, the double-tax treaty between that country and Poland says that if the individual is taxable in that country, then he will be tax exempt in Poland. Therefore, no tax is due in Poland, even if the person is paid in Poland. However, if withholding is still needed, then the company will deduct taxes at the time of payment of salary, then have to pay in the other country as well, and finally claim a refund in Poland later. This means that the individual can be out of pocket for two sets of tax payments at the same time.
Other countries' treaties are on a credit basis (including the U.K. and United States), and so tax would still be payable in Poland as well as there, but again you can still be out of pocket for two tax payments as the foreign tax will be due on all income, even though Polish tax has already been withheld (and should be refunded).
And of course claiming a refund means explaining the whole system again to the tax office, to tell them (i) just because someone is Polish does not mean that they have the automatic right to tax the income (ii) if the person was taxable in the other country then there is such a thing as a tax treaty that specifies what should happen next (iii) applicability of a tax treaty is not at their discretion (iv) yes, if the treaty says this income is exempt from tax in Poland, this is exactly what it means, and the best one of all (v) if the tax is not refunded within three months of the year-end return being filed, then they will end up paying interest at the same crippling 34% penalty rate that they apply to taxpayers who pay late. If it takes them two years to decide whether we were telling them the truth in our explanation, then yes they will have an enormous interest cost.
Over the last few years we have seen a significant increase in the number of outbound expatriate transfers, so this issue comes up more and more often. What we have finally seen though in the last few weeks are tax offices coming around to understanding these issues at last. We have started to see some refunds (for 1997 annual returns). And in certain cases, depending on whether the tax treaty provides for tax exemption in Poland if foreign taxes are paid, or whether the income is still taxable with only a credit for foreign tax, we have seen tax offices start to accept that if no Polish tax liability will be due, the exemption from withholding on the basis of the tax ordinance can be applied.
All of this is very civilized, and indicates that perseverance in explaining how the law works and patience in dealing with the tax authorities can actually bring results sometimes. And the year and a half of interest earned on the late refund was almost enough to pay the costs of chasing the refund.
Peter Ferrigno is a tax manager in the Warsaw office of Arthur Andersen. Magdalena Olejnicka is a tax manager in the Human Capital Services group.
