The 'ministry of unnecessary paperwork' strikes again
As the tax-filing deadline approaches, your columnist slowly but surely drowns in unnecessary pieces of paper. Next time I'll talk about filling out your Polish tax return and calculating your tax, but this time I'm back on the ministry of unnecessary paperwork's latest attempts to make life more difficult. This week's example: the obligation to file a tax return as compared to the settling of taxes through withholding.
Under the personal-income tax law, anyone earning income from a Polish employer has their applicable income tax and social security withheld throughout the year. Unlike every other country in the world operating withholding, Poland has a system that is complicated because it's so simple.
"What's he on about now?" I hear you ask. Well, we have three tax bands here, and if your income reaches the top band during the year, then your average tax rate throughout the year will be a composite number approaching, but never reaching the 40% marginal rate. For example, if your year-to-date income does not exceed the first bracket, you pay only 19%. Once you exceed that bracket, the withholding is 30% (from the following month remember, it's important later), and once you exceed the next bracket, you hit 40%.
This means that, gross to net, you receive two cuts in your net take-home pay during the year. Add the fact that you receive an increase in gross pay the month you pass through the social security ceiling, and you can, in theory, have five different net-pay amounts in a 12-month year. This depends on which of the three tax brackets and two social-security contribution bands you are in or passing through.
Tax withholding based on cumulative amounts means that in the months you pass through the brackets, tax is withheld at the rate of the lower bracket only, and so there is an underwithholding of tax in that month. This underwithholding needs to be paid at the end of the year. Therefore, everyone will almost always have an additional tax liability. Confusingly, social security is withheld based on your cumulative income, so that in the month you pass through the ceiling, you will pay full rates on the first part, and reduced rates on the rest.
If you are employed by only one company all year, and this is your only source of income (excluding social-security benefits or income taxed with a lump sum flat tax such as the sale of real estate or receipt of interest), and if you don't wish to file jointly or take any dedauctions, then you can elect to have the company reconcile your taxes and deduct the remaining amount due from your March income. This is a good thing.
If you're foreign, it gets a bit more complicated. Regular readers will know that foreign nationals in Poland on a temporary basis for the purpose of taking employment in a company formed with foreign participation have limited tax-liability status in this country and pay tax only on income from Polish sources. The good news is that all of your, say, foreign investment income, is not taxable in Poland. Technically, this also means you are not eligible to have your taxes calculated by the company and need to file a return. On that return, you need only report income taxable in Poland, which is the amount paid by your employer. Thus you have the same reportable income paid from the same source, but you have an obligation to file a return, whereas a Polish full resident does not, as they can have the employer settle their liability.
If you have limited tax liability status and have received income taxed at the 20% rate during the year, this does not need to be included in the year-end tax return either.
By completing the year-end tax form, you effectively tell the tax authorities that you have other sources of income they legally can't get to (yah-boo!). Your other sources of income are tax-exempt because they relate either to work performed outside Poland, or to income taxed at 20% and not required to be included in the annual return.
If you are employed from abroad and so pay your taxes on an individual monthly return, then you need to file an annual return, reporting all income received for the year and tax due.
What this also means is that in some cases, the tax due on filing the return, or the amount due to be refunded, is very small, particularly if the split between employment income paid locally and management board fees taxed at the 20% rate allocates most of the income to board fees. In addition, month by month the tax payment is rounded to the nearest zl. .10, meaning that total liability for the year is not the sum of monthly liabilities.
I have had a number of returns at the end of the year where the rounding of this zl. .10 resulted in a small underpayment or overpayment. As there is a return filing requirement, that payment must be made by the taxpayer or refunded by the tax office. There is no possibility of not making this payment.
As the costs of bank transfers and paperwork processing exceed this amount, I suggest the following. If the tax due is less than zl. 20 (or zl. 10 if we're being picky, or zl. 50 if we're feeling generous), then the Finance Ministry should let you off. Equally, if they owe you a similar amount, they shouldn't pay the refund either. This policy would eventually have a neutral effect on the state budget as the law of averages means that what they lost on the one hand they would gain on the other. Thousands of bank transfers would become unnecessary (I expect the banks to be against this proposal!) and the tax office would save thousands of hours now spent reconciling minimal payments to returns.
Then again, the tax office would then have the time to audit the people whose returns they deem "interesting." Maybe I prefer them to spend their time reconciling zl. 3 bank transfers after all!
Peter Ferrigno is a tax manager in the Warsaw office of Arthur Andersen.
