Tax litigation nightmare
For a brief moment, while searching the kitchen for a knife to cut open the envelope, you fantasize in contemplation of the magnificent estate of a deceased uncle whom you've never met.
But instead of a letter undersigned by the trustee of your mystery uncle's estate, you find one stamped by the tax office. You then recall your recent dealings with the tax authorities and their decision to charge you with extra tax. And suddenly, your dream of riches dissolves into the day's reality of court appeals.
Taking the Tax Man to court can be, and often is, a nightmare in Poland. Regardless of how solid the technical justification behind a taxpayer's case may appear to be, there is no guarantee of success. As a result, court proceedings consistently exceed most conservative time estimates, thus making it much too expensive for ordinary taxpayers to even consider.
Recently, I came across two contradictory court decisions that demonstrate the hurdles that taxpayers in Poland face when choosing to go down the route of court appeals. Both decisions were issued by the Provincial Administrative Court (PAC) in Warsaw, based on two complaints filed by the same taxpayer on the same matter but with respect to different tax years. The issue at hand was the tax treatment of losses resulting from shoplifting of stock on supermarket shelves.
In mid-March 2004, the court ruled that no special documentation was required to allow the recording of a tax loss for stolen stock. In other words, the court recognized that the phenomenon of shoplifting is an inherent part of business. Involving the police to simply certify this fact will not reduce the number of overly keen shoppers. One week later, the court issued a second ruling said that the stock count reports provided insufficient proof of unintentional losses.
The list of stories is long and varied - horror, drama, Kafka-style or simply hilarious. I have heard many from those who have been around on the Polish tax scene longer than me. I have also noticed that over the years the plot has progressively deteriorated in terms of spectacularity. The reform of the Polish administrative judicial system is, for the most part, to blame for this.
For example, from January 1, 2004, taxpayers and tax authorities can avail of a new form of dispute settlement proceedings. These are called mediation proceedings, and are invoked by the taxpayer (appellant) or the tax authorities (administrative authority) for the purpose of resolving a case without an authoritative court judgment.
Flexibility has been further enhanced by the introduction of a two-tier judicial administrative system where the single Supreme Administrative Court (SAC) has been replaced by the new PACs and new SAC.
The aforementioned reorganization paves the way for a more efficient appeals process, where not only tax payers but also tax authorities can appeal a first-tier PAC decision under the new 'application for revision.' This is a significant change compared to the old regime, which only allowed SAC rulings to be appealed under the cumbersome 'extraordinary revision' proceedings. The fact that the old appeal proceedings applied only in cases of gross violation of the law or of state interests made it difficult to challenge SAC rulings on more trivial technical grounds.
EU accession will have a substantial impact on the further development of the Polish judicial system, and the European Court of Justice (ECJ) will play a key role in this process.
Technically, there are a number of ways to invoke ECJ proceedings. Most often, the taxpayer would initiate administrative appeal proceedings, and if the national court is in any doubt over the interpretation of EU law, it would then ask ECJ for advice. This advice is given in the form of a 'preliminary ruling.' For example, in the course of an appeals procedure the SAC can ask the ECJ for its view of tax deductibility of losses from shoplifting.
Alternatively, the European Commission (or another EU member state) can initiate proceedings if it believes that Poland has failed to fulfill its obligations under EU law. For instance, if a particular provision in the Corporate Income Tax Law is in violation of the EU Parent-Subsidiary Directive, then the case is brought before the ECJ.
It is often taxpayers that directly bring to the attention of the Commission the existence of such violations. This should give some food for thought for Polish taxpayers. There are a number of Polish tax regulations that are unlikely to pass the test of compliance with the fundamental freedoms of movement of capital, people, freedom of establishment, etc.
Under the 'proceeding for annulment,' at the request of the Polish state or even a Polish private individual, the ECJ can annul a particular piece of EU legislation if found to be in violation of the EC Treaty. Theoretically, any of you can go directly to the ECJ and claim, for example, that indirect taxation poses a threat to the fundamental freedoms stipulated in the EC Treaty. Who knows, the ECJ may agree with you and declare the Sixth Directive on VAT null and void.
Perfecting the judicial system is everyone's personal responsibility, not only in Poland, but in the whole of the EU. It will take some time before Polish tax payers, authorities and courts grow accustomed to the active use of the system and its tools. Based on the achievements to date, the prospects are promising.
Donka Darpatova is a tax manager in the Warsaw office of Ernst & Young.
But instead of a letter undersigned by the trustee of your mystery uncle's estate, you find one stamped by the tax office. You then recall your recent dealings with the tax authorities and their decision to charge you with extra tax. And suddenly, your dream of riches dissolves into the day's reality of court appeals.
Taking the Tax Man to court can be, and often is, a nightmare in Poland. Regardless of how solid the technical justification behind a taxpayer's case may appear to be, there is no guarantee of success. As a result, court proceedings consistently exceed most conservative time estimates, thus making it much too expensive for ordinary taxpayers to even consider.
Recently, I came across two contradictory court decisions that demonstrate the hurdles that taxpayers in Poland face when choosing to go down the route of court appeals. Both decisions were issued by the Provincial Administrative Court (PAC) in Warsaw, based on two complaints filed by the same taxpayer on the same matter but with respect to different tax years. The issue at hand was the tax treatment of losses resulting from shoplifting of stock on supermarket shelves.
In mid-March 2004, the court ruled that no special documentation was required to allow the recording of a tax loss for stolen stock. In other words, the court recognized that the phenomenon of shoplifting is an inherent part of business. Involving the police to simply certify this fact will not reduce the number of overly keen shoppers. One week later, the court issued a second ruling said that the stock count reports provided insufficient proof of unintentional losses.
The list of stories is long and varied - horror, drama, Kafka-style or simply hilarious. I have heard many from those who have been around on the Polish tax scene longer than me. I have also noticed that over the years the plot has progressively deteriorated in terms of spectacularity. The reform of the Polish administrative judicial system is, for the most part, to blame for this.
For example, from January 1, 2004, taxpayers and tax authorities can avail of a new form of dispute settlement proceedings. These are called mediation proceedings, and are invoked by the taxpayer (appellant) or the tax authorities (administrative authority) for the purpose of resolving a case without an authoritative court judgment.
Flexibility has been further enhanced by the introduction of a two-tier judicial administrative system where the single Supreme Administrative Court (SAC) has been replaced by the new PACs and new SAC.
The aforementioned reorganization paves the way for a more efficient appeals process, where not only tax payers but also tax authorities can appeal a first-tier PAC decision under the new 'application for revision.' This is a significant change compared to the old regime, which only allowed SAC rulings to be appealed under the cumbersome 'extraordinary revision' proceedings. The fact that the old appeal proceedings applied only in cases of gross violation of the law or of state interests made it difficult to challenge SAC rulings on more trivial technical grounds.
EU accession will have a substantial impact on the further development of the Polish judicial system, and the European Court of Justice (ECJ) will play a key role in this process.
Technically, there are a number of ways to invoke ECJ proceedings. Most often, the taxpayer would initiate administrative appeal proceedings, and if the national court is in any doubt over the interpretation of EU law, it would then ask ECJ for advice. This advice is given in the form of a 'preliminary ruling.' For example, in the course of an appeals procedure the SAC can ask the ECJ for its view of tax deductibility of losses from shoplifting.
Alternatively, the European Commission (or another EU member state) can initiate proceedings if it believes that Poland has failed to fulfill its obligations under EU law. For instance, if a particular provision in the Corporate Income Tax Law is in violation of the EU Parent-Subsidiary Directive, then the case is brought before the ECJ.
It is often taxpayers that directly bring to the attention of the Commission the existence of such violations. This should give some food for thought for Polish taxpayers. There are a number of Polish tax regulations that are unlikely to pass the test of compliance with the fundamental freedoms of movement of capital, people, freedom of establishment, etc.
Under the 'proceeding for annulment,' at the request of the Polish state or even a Polish private individual, the ECJ can annul a particular piece of EU legislation if found to be in violation of the EC Treaty. Theoretically, any of you can go directly to the ECJ and claim, for example, that indirect taxation poses a threat to the fundamental freedoms stipulated in the EC Treaty. Who knows, the ECJ may agree with you and declare the Sixth Directive on VAT null and void.
Perfecting the judicial system is everyone's personal responsibility, not only in Poland, but in the whole of the EU. It will take some time before Polish tax payers, authorities and courts grow accustomed to the active use of the system and its tools. Based on the achievements to date, the prospects are promising.
Donka Darpatova is a tax manager in the Warsaw office of Ernst & Young.
