The most august heritage
"And it came to pass in those days, there went out a decree from Caesar Augustus that all the world should be taxed." - New Testament, Luke 2:1.
The tax system has changed somewhat since Biblical times, but the Roman dream of a single tax code for the entire world came one step closer to being a reality with the enlargement of the EU. Below, Tax Eye takes a peek at the most significant EU-driven changes.
Corporate tax
May 1, 2004 will mark the appearance of key EU directives on the Polish corporate tax scene, including the Parent-Subsidiary Directive 90/435/EEC on the taxation of dividends, the Interest-Royalties Directive 2003/49/EC and the Mergers-Acquisitions Directive 90/434/EEC.
Poland has incorporated to a large extent the provisions of the Parent-Subsidiary Directive in its domestic legislation. In accordance with the Polish Corporate Tax Law, from May 1, 2004, dividends paid by Polish subsidiaries to their EU parents will be exempt from Polish withholding tax, which is currently set at 19 percent. The exemption will apply under certain conditions, including the requirement that the EU parent company hold at least 25 percent of the shares in its Polish subsidiary over an uninterrupted period of at least two years.
Relief under similar conditions in the form of indirect tax credit will be available for dividends received by Polish parent companies from their EU subsidiaries. Specifically, the corporate tax paid by the EU subsidiary on the portion of profits that corresponds to the dividends distributed to the Polish parent would be creditable against the income tax liability of the Polish parent, but only up to the amount of applicable Polish tax computed on the gross dividend value (19 percent of the gross dividend at 2004 rates).
The implementation of the EU Interest-Royalties Directive has been a hot topic in the European Commission. In May and July 2003, all accession states were invited to submit their formal requests for transitional periods relating to the application of the Directive, which effectively abolishes domestic withholding taxes on interest and royalty payments. The Commission refused the transitional period for interest and reduced Poland's initial eight-year request for royalties to six years. At time of writing, the indication was that during the European Council meeting scheduled for April 29, Poland might be allowed to continue to levy withholding tax at five percent on outgoing interest payments until 2011, 10 percent on royalties payable to EU entities until 2008, and five percent thereafter until 2011.
The Polish legislation has already provided a home to the EU Mergers-Acquisitions Directive, which regulates the assessment of tax on a surviving or newly established company as a result of merger/de-merger. From January 1, 2004, these provisions have applied to Polish corporations taking over the assets of EU tax-resident companies, whereas after accession they will equally cover transactions where EU companies purchase assets in Polish tax-resident corporations. It is only with regard to the 'exchange of shares' that the Polish law is not consistent with the Directive, which is of little practical relevance now that cross-border mergers are so rare due to legal limitations inherent in most member states' domestic legislation.
VAT
The award for most spectacular performance on the post-accession scene would have to go to VAT. No other tax has caused such turmoil in the everyday lives of humble tax payers. Starting from this week, VAT on goods purchased in the EU will no longer be collected by customs authorities, but will be self-assessed in accordance with a new set of rules on the taxation of intra-community trade transactions. As regards the taxation of services, under the new 'place of supply' rules, the notion of 'export' will cease to exist, whereas 'import' will take on a wholly different meaning.
The related VAT reporting requirements are overwhelming, starting with the EU NIP registration that has caused tax offices to overflow with paperwork in the last few weeks, to the preparation of Recapitulative Statements and Intrastat declarations - both requiring the disclosure of a set of comprehensive data that most Polish companies are unable to extract from their existing accounting and inventory systems. Therefore, some Polish VAT payers have already gone through, or have at least budgeted for, the painful upgrade of their enterprise resource planning (ERP) systems.
Customs & excise
The impact of integration is most evident for those crossing Poland's erstwhile customs borders with Germany, Lithuania, the Czech Republic and Slovakia. Customs policy, including clearance of goods, is now regulated by EU customs law, which has replaced Polish customs legislation. Poland has become part of the European Customs Union, which operates on a common Customs Tariff, enabling the unified application of duties on goods imported from outside the Union. Thus, Poland can no longer make its own decisions in the area of customs and trade, for instance on the imposition of anti-dumping duties. Such matters are now within the competency of the EU Council and the EU Commission.
In addition to customs, new Polish excise duty legislation is effective from May 1, 2004. It is based on Council Directive 92/12/EEC, which sets out minimum scope and duty rate requirements with respect to certain excisable goods, including mineral oils, natural gas and car fuel, alcohol and alcoholic beverages, manufactured tobacco and tobacco products, etc. As regards other excisable goods such as cars, cosmetics and electricity, Poland has independently determined the rules of taxation and the amount of duty.
Social security
As a result of EU accession, a number of individuals working in Poland who did not have to pay Polish social security (ZUS) in the past will be required to start contributing. Although there have not been any changes to the Polish social security legislation to mirror the provisions of EEC Regulations 1408/71 and 574/72, the Polish authorities will expect EU individuals who are not covered by other EU social security systems to start paying ZUS. Proof of coverage needs to be certified by an E101/E102 form issued by the social security authority of the EU state where the individual is deemed to have his/her habitual residence.
To conclude: Change may be painful to accept, but it brings us closer to the miracle of a unified EU tax system. Hopefully, one day you will be reading the EU Tax Code.
Donka Darpatova is a tax manager in the Warsaw office of Ernst & Young.
The tax system has changed somewhat since Biblical times, but the Roman dream of a single tax code for the entire world came one step closer to being a reality with the enlargement of the EU. Below, Tax Eye takes a peek at the most significant EU-driven changes.
Corporate tax
May 1, 2004 will mark the appearance of key EU directives on the Polish corporate tax scene, including the Parent-Subsidiary Directive 90/435/EEC on the taxation of dividends, the Interest-Royalties Directive 2003/49/EC and the Mergers-Acquisitions Directive 90/434/EEC.
Poland has incorporated to a large extent the provisions of the Parent-Subsidiary Directive in its domestic legislation. In accordance with the Polish Corporate Tax Law, from May 1, 2004, dividends paid by Polish subsidiaries to their EU parents will be exempt from Polish withholding tax, which is currently set at 19 percent. The exemption will apply under certain conditions, including the requirement that the EU parent company hold at least 25 percent of the shares in its Polish subsidiary over an uninterrupted period of at least two years.
Relief under similar conditions in the form of indirect tax credit will be available for dividends received by Polish parent companies from their EU subsidiaries. Specifically, the corporate tax paid by the EU subsidiary on the portion of profits that corresponds to the dividends distributed to the Polish parent would be creditable against the income tax liability of the Polish parent, but only up to the amount of applicable Polish tax computed on the gross dividend value (19 percent of the gross dividend at 2004 rates).
The implementation of the EU Interest-Royalties Directive has been a hot topic in the European Commission. In May and July 2003, all accession states were invited to submit their formal requests for transitional periods relating to the application of the Directive, which effectively abolishes domestic withholding taxes on interest and royalty payments. The Commission refused the transitional period for interest and reduced Poland's initial eight-year request for royalties to six years. At time of writing, the indication was that during the European Council meeting scheduled for April 29, Poland might be allowed to continue to levy withholding tax at five percent on outgoing interest payments until 2011, 10 percent on royalties payable to EU entities until 2008, and five percent thereafter until 2011.
The Polish legislation has already provided a home to the EU Mergers-Acquisitions Directive, which regulates the assessment of tax on a surviving or newly established company as a result of merger/de-merger. From January 1, 2004, these provisions have applied to Polish corporations taking over the assets of EU tax-resident companies, whereas after accession they will equally cover transactions where EU companies purchase assets in Polish tax-resident corporations. It is only with regard to the 'exchange of shares' that the Polish law is not consistent with the Directive, which is of little practical relevance now that cross-border mergers are so rare due to legal limitations inherent in most member states' domestic legislation.
VAT
The award for most spectacular performance on the post-accession scene would have to go to VAT. No other tax has caused such turmoil in the everyday lives of humble tax payers. Starting from this week, VAT on goods purchased in the EU will no longer be collected by customs authorities, but will be self-assessed in accordance with a new set of rules on the taxation of intra-community trade transactions. As regards the taxation of services, under the new 'place of supply' rules, the notion of 'export' will cease to exist, whereas 'import' will take on a wholly different meaning.
The related VAT reporting requirements are overwhelming, starting with the EU NIP registration that has caused tax offices to overflow with paperwork in the last few weeks, to the preparation of Recapitulative Statements and Intrastat declarations - both requiring the disclosure of a set of comprehensive data that most Polish companies are unable to extract from their existing accounting and inventory systems. Therefore, some Polish VAT payers have already gone through, or have at least budgeted for, the painful upgrade of their enterprise resource planning (ERP) systems.
Customs & excise
The impact of integration is most evident for those crossing Poland's erstwhile customs borders with Germany, Lithuania, the Czech Republic and Slovakia. Customs policy, including clearance of goods, is now regulated by EU customs law, which has replaced Polish customs legislation. Poland has become part of the European Customs Union, which operates on a common Customs Tariff, enabling the unified application of duties on goods imported from outside the Union. Thus, Poland can no longer make its own decisions in the area of customs and trade, for instance on the imposition of anti-dumping duties. Such matters are now within the competency of the EU Council and the EU Commission.
In addition to customs, new Polish excise duty legislation is effective from May 1, 2004. It is based on Council Directive 92/12/EEC, which sets out minimum scope and duty rate requirements with respect to certain excisable goods, including mineral oils, natural gas and car fuel, alcohol and alcoholic beverages, manufactured tobacco and tobacco products, etc. As regards other excisable goods such as cars, cosmetics and electricity, Poland has independently determined the rules of taxation and the amount of duty.
Social security
As a result of EU accession, a number of individuals working in Poland who did not have to pay Polish social security (ZUS) in the past will be required to start contributing. Although there have not been any changes to the Polish social security legislation to mirror the provisions of EEC Regulations 1408/71 and 574/72, the Polish authorities will expect EU individuals who are not covered by other EU social security systems to start paying ZUS. Proof of coverage needs to be certified by an E101/E102 form issued by the social security authority of the EU state where the individual is deemed to have his/her habitual residence.
To conclude: Change may be painful to accept, but it brings us closer to the miracle of a unified EU tax system. Hopefully, one day you will be reading the EU Tax Code.
Donka Darpatova is a tax manager in the Warsaw office of Ernst & Young.
