The expense of doing business
My revered editor has instructed me not to get unnecessarily technical when writing about tax. I continue to fight this natural tendency, but hope that he will agree that for this week's column a little technical content is just what we need.
And I hope to put a smile back on your faces with regard to costs and expenses.
You may recall that in the past (until December 31, 2002) the wording of Art. 21.1.16 of the personal income tax law stated that "per diems (daily allowances) and other dues for the period of a business trip" would not be liable to (personal) income tax. Without further specification or definition, this regulation was interpreted and accepted in practice to allow any individual to receive a per diem (up to an approved statutory limit) or a reimbursement of an appropriately incurred and documented business expense free of PIT, regardless of the nature of the legal relationship binding him to the principal bearing the ultimate cost. A fairly sensible arrangement.
Then, towards the end of last year, came the final published version of the PIT Act for 2003 and, in due course, someone read the small print. An amendment had been sneaked into Art. 21.1.16 which drastically changed the above scenario - they had added the word "employee."
The practical outcome of this change would have meant that only an individual engaged under an employment contract would be able to receive a per diem or a reimbursement of a business expense free of PIT. All others, such as board members and individuals engaged under management, personal service (zlecenie) or specific task (dzieło) contracts, would have been liable to pay tax on these additional payments received from their principal.
Hair stood on end in many a finance and HR department trying to figure out how to set up a system of business-expense accounts, advances or straightforward increases in remuneration to deal with this mess.
For once our legislators also noticed this slight blip, and on Christmas Eve 2002 a ministerial decree was issued. Since it couldn't change the PIT law already passed, it sought to deal with the issue by ordaining a waiver of collection of tax on such payments when made to individuals duly appointed to the management board and (here we still have a grey area) individuals engaged under a management contract or other similar contracts (who perform their functions under an appointment or election as determined in accordance with specific provisions).
The end result is that pretty much everyone who isn't engaged under a service contract (zlecenia and/or dzieło) is OK. This leaves the service providers subjected to tax on any such payments.
Logically, this should not be an issue. The whole purpose of being an independent service provider is that you get cost deductions substantially more favourable than any offered to the rest (employees, board members and management contract holders) at a statutory 20% flat rate or actual documented costs, whichever is higher. To a degree you would be correct, but not all independent service providers operate full-time, and not all of them have cash-flow matters negotiated with the bank.
What about the individual you want to hire to report on the findings of an international professional conference? In the normal course of events the man you want for the job is not connected with your organisation; you simply want to engage him on a one-off basis, so you negotiate his fee for the report and foot the bill for his travel and accommodation. At least this is what you would have done until the end of December 2002. Now, to achieve the same result, your costs will be substantially higher as his ultimate tax bill will be higher, so his negotiated fee will be (at a guess) even higher. Not to mention the fact that he may turn down the offer anyway as he doesn't have sufficient funds to pay his travel expenses up front.
What are your options?
" Employ the guy - probably not a viable option either financially or administratively either for you or for him.
" Pay him part of the fee in advance so he can pay for his ticket. Unless you know the individual, this may not be a preferred option as it could potentially (worst case scenario) be the last you see of him or your cash.
" Gross up the overall fee to take in the additional tax - messy and expensive. As I mentioned, the independent service provider can deduct properly documented business expenses - with an expensive airfare he could quite often end up in a nil tax scenario in real terms, while you have paid out more than the value (in real terms to you) of the service being provided.
There's a thought to ponder. Whoever thought a single word could make a world of difference?
And I hope to put a smile back on your faces with regard to costs and expenses.
You may recall that in the past (until December 31, 2002) the wording of Art. 21.1.16 of the personal income tax law stated that "per diems (daily allowances) and other dues for the period of a business trip" would not be liable to (personal) income tax. Without further specification or definition, this regulation was interpreted and accepted in practice to allow any individual to receive a per diem (up to an approved statutory limit) or a reimbursement of an appropriately incurred and documented business expense free of PIT, regardless of the nature of the legal relationship binding him to the principal bearing the ultimate cost. A fairly sensible arrangement.
Then, towards the end of last year, came the final published version of the PIT Act for 2003 and, in due course, someone read the small print. An amendment had been sneaked into Art. 21.1.16 which drastically changed the above scenario - they had added the word "employee."
The practical outcome of this change would have meant that only an individual engaged under an employment contract would be able to receive a per diem or a reimbursement of a business expense free of PIT. All others, such as board members and individuals engaged under management, personal service (zlecenie) or specific task (dzieło) contracts, would have been liable to pay tax on these additional payments received from their principal.
Hair stood on end in many a finance and HR department trying to figure out how to set up a system of business-expense accounts, advances or straightforward increases in remuneration to deal with this mess.
For once our legislators also noticed this slight blip, and on Christmas Eve 2002 a ministerial decree was issued. Since it couldn't change the PIT law already passed, it sought to deal with the issue by ordaining a waiver of collection of tax on such payments when made to individuals duly appointed to the management board and (here we still have a grey area) individuals engaged under a management contract or other similar contracts (who perform their functions under an appointment or election as determined in accordance with specific provisions).
The end result is that pretty much everyone who isn't engaged under a service contract (zlecenia and/or dzieło) is OK. This leaves the service providers subjected to tax on any such payments.
Logically, this should not be an issue. The whole purpose of being an independent service provider is that you get cost deductions substantially more favourable than any offered to the rest (employees, board members and management contract holders) at a statutory 20% flat rate or actual documented costs, whichever is higher. To a degree you would be correct, but not all independent service providers operate full-time, and not all of them have cash-flow matters negotiated with the bank.
What about the individual you want to hire to report on the findings of an international professional conference? In the normal course of events the man you want for the job is not connected with your organisation; you simply want to engage him on a one-off basis, so you negotiate his fee for the report and foot the bill for his travel and accommodation. At least this is what you would have done until the end of December 2002. Now, to achieve the same result, your costs will be substantially higher as his ultimate tax bill will be higher, so his negotiated fee will be (at a guess) even higher. Not to mention the fact that he may turn down the offer anyway as he doesn't have sufficient funds to pay his travel expenses up front.
What are your options?
" Employ the guy - probably not a viable option either financially or administratively either for you or for him.
" Pay him part of the fee in advance so he can pay for his ticket. Unless you know the individual, this may not be a preferred option as it could potentially (worst case scenario) be the last you see of him or your cash.
" Gross up the overall fee to take in the additional tax - messy and expensive. As I mentioned, the independent service provider can deduct properly documented business expenses - with an expensive airfare he could quite often end up in a nil tax scenario in real terms, while you have paid out more than the value (in real terms to you) of the service being provided.
There's a thought to ponder. Whoever thought a single word could make a world of difference?
