The more you create, the less you pay in taxes

You don’t have to be a Picasso or Shakespeare to benefit from this tax break.

   Now that the elections are behind us, the first thorny issue the Democratic Left Alliance (SLD)-led government will have to contend with is the 2002 budget deficit. The likelihood is that they will use a two-pronged approach to tackle the problem: cutting spending and increasing taxes. Which taxes will be raised though is anyone’s guess. My sole hope is that they don’t increase personal tax rates above those we have today (19%, 30% and 40%). I can live without various exemptions and reliefs, but please allow me to keep at least some of my income.

   Before the new government changes the face of Polish tax through the removal all traditional tax-planning vehicles in an effort to save money and increase income (national, not personal) – and with bonus season coming up – let’s take a look at an old favorite of mine, the copyright.

   If you are commissioned to produce a piece of creative work, and if you receive compensation for handing over the rights to that work to the buyer, you can deduct 50% as statutory costs of earnings. In short, only 50% of your income is subject to tax.

   The great thing is you don’t have to be a Picasso or Shakespeare to benefit from this tax break. Your copyright doesn’t have to be registered, and the work can be a group effort, not just individual.

   To qualify for the “copyrightable” status, in accordance with the Law on Copyrights and associated regulations, the work has to be creative, unique, tangible and capable of being duplicated.

   Still not convinced? Believe me, you do not need to publish a book or record a hit single to obtain copyright status. Just ask the guys in your marketing department who have been telling you for years how creative and valuable they are. You should believe them, because according to the regulations, they are. Actually, it’s logical: If their work wasn’t unique and creative it would never be used. But qualifying for copyright status doesn’t have to be limited to glamorous marketing types – just take a look at your desk and shelves. They are filled with reports, training materials and presentations. In other words, new ideas. We are in fact surrounded by materials which, under the existing definition, can be considered as copyrightable. That being the case, why shouldn’t the people who create those materials benefit from them or more specifically from the tax breaks associated with this type of work?

   How can this be achieved? Well, in a number of ways depending on circumstances.

   If an individual is “creative” on a one-off basis, then a specific task agreement would seem the most appropriate. Accordingly, the individual can be contracted to create a specific item, within a specified time frame and for a particular cash payment. On completion of the work, the individual hands over the creative project to the buyer, together with a declaration relinquishing authorship rights for that creative work. The income is then subjected to tax, but only after the deduction of 50% statutory costs.

   If an individual joins a company as a “creative,” a copyright clause can be written into his employment contract. Logically, the individual has no costs of earnings because all materials and tools are likely provided by you, his employer. Also, as the employer you have rights to whatever he creates during working hours and in the course of his employment relationship with you. In short, the employment contract is divided into two parts, one dealing with the day-to-day administrative and non-creative duties and the other dealing with the creative aspects. The declaration handing over authorship rights is built into the employment agreement, and the percentage of the individual’s time (over the course of the year) spent being “creative” is estimated as a percentage of his total annual working time. His monthly salary is then divided into employment and creative income. While the employment income is subjected to normal tax and Social Insurance Administration (ZUS), the “creative” income is subjected to ZUS first, then 50% statutory costs are deducted and only then is the remainder subjected to tax at normal, progressive rates.

   The percentage that can be allocated as “creative” is entirely governed by the nature of the work and the actual volume of the work likely to be created over the course of the year. Don’t forget that the creative work, under the terms of the definition, needs to be tangible so you need to keep hard copies of everything that has been defined as such within the relationship. Further, it’s no bad thing to have a procedure whereby a designated person in the office has to sign off on and accept an item of work as “creative.”

   Going back to the percentages, the most extreme that I am aware of is the structure implemented for a freelance journalist who had entered into a service contract with a leading international newspaper. By virtue of the nature of the business and the nature of his individual work his contract allowed for an allocation of 90% to the “creative” basket and a mere 10% to normal mundane duties.

   The 90:10 split works for him, but his job is unique, as is what he produces – common sense and a knowledge of what proportion of an individual’s work is actually creative.

   It’s a shame I don’t get paid for creating this column … just think of all the tax I could save!

   Anna Szymańska is a tax senior manager in the Warsaw office of Andersen.