The dark and dirty underbelly of doing business in Poland
This week's column deals with the murky side of business life in Poland. If you find this kind of thing unpleasant, as I do, then you might want to lock the door and close the curtains so that nobody sees you reading this. You may be doing that anyway of course, but that's another story altogether.
One thing regular readers will be used to by now is my ambivalence in my role as a tax adviser, insofar as I am sometimes adamant that you do in fact need to pay tax, and that dodgy arrangements that rely on not telling anyone go against my artistic sensibilities.
The other thing that creates a similar response from me is corruption, and what we Londoners call the passing of brown envelopes. And why does this merit mention in a tax column? Well, there are several reasons.
The first is related to the question of whether such payments are taxable. I think we can avoid any discussion of this, though mentioning the issue does give me an opportunity to nail one misunderstanding. I have often heard it said that foreign companies get away with paying bribes in Poland because bribes are tax deductible in their home country. This may create the impression that some countries' laws have a specific paragraph that says something like "payment of a bribe in a foreign country is tax deductible," when it usually doesn't.
All we may have is that if all payments related to earning income are deductible, then a bribe is one of those payments, and so not specifically excluded. Were "normal" abnormal payments specifically excluded, then companies would be at a disadvantage when competing for contracts in more backward countries where such payments are still normal practice. And let's be clear here I'm not talking about Poland, as I do not see this as normal practice in Poland nobody has ever offered me anything.
Let's not forget that even if bribes were tax deductible, the after-tax amount is still a real cost to the payer, so in a 45% tax country (picking a rate I believe nobody has for neutrality purposes), a $100 bung still costs you $55 after tax. Also, such a payment would often be covered by criminal law. It's the company that pays the tax, but it's the individual that serves a jail sentence.
Another unpleasantness that many of you know I dislike is the implicit collusion of a foreign employer in encouraging expatriates to avoid paying their taxes. I am thinking here of the provision in the Personal Income Tax Law which says that if you are employed by a foreign company and paid from outside Poland for work being done here, then it is your responsibility and liability as an employee to report the income and pay tax. Or put another way, the employer has no liability if the income is not reported and tax not paid. In many ways this is sensible, as the Polish company for which the foreigner is working cannot withhold tax if it is not paying the salary. But in other countries, it is possible for the law to be designed so that the withholding obligation has been assigned to, for example, the company where the person is physically working, or there is a withholding obligation put on the foreign company to register for payroll taxes.
However, you can sometimes see some companies hiding behind the responsibility/liability issue to pay someone "gross=net," ignoring that the Polish tax liability will arise. After having agreed to terms, including sometimes telling the individual he won't pay tax on the income often taken to mean "there is no liability to tax" when the real meaning is "we have no intention of paying tax here" we get involved and find out clear as clear can be that there is a tax liability that nobody wants to pick up. Then the individual is faced with a choice pay the tax and end up with 40% less money than expected, or don't pay. And if the individual pays, there's the peer pressure argument that this will mean all the other people in the company will have to pay as well, even if they don't want to, as they will be more visible. And apparently that's not fair.
So why is this a subject for the tax column? Well, as you might guess, someone succeeded in tying the two issues together so they suddenly appeared as two sides of the same coin.
In general, when foreign companies complain about business ethics in Poland, they take a moral high ground on how they abhor the whole shabby business, they'd never do it at home, people should go to jail for this kind of thing, etc.
If they take this principled moral stand, which I agree with totally, the same people should not at the same time be asking me how they can avoid paying Polish taxes on income earned in Poland, or how they can recharge their "offshore" payments back to Poland. They should also not be hiding behind the fact that their employees are paid from abroad and they as an employer have no obligation to report the income and pay the tax.
If someone wants to be ethical, then this is an all or nothing state. It is not possible to apply one standard for everyone else, and one for yourself if you want to retain credibility.
The reason why I don't like comments that foreigners are responsible for corruption is that the majority of foreign companies I know doing business here want to follow the law, and be seen to be following the law. They want Poland to be a normal country where business and administrative decisions are made on the basis of a clear law consistently being applied and upheld. In such case, we in the international business community need to lead by example by standing up to our responsibilities and liabilities, and by paying what is due as we would in the home country.
Peter Ferrigno is a tax manager in the Warsaw office of Arthur Andersen.
