Thinking like the tax man
Donka Darpatova is a tax manager in the Warsaw office of Ernst & Young.
Complying with Polish tax law can be a real challenge. No matter how hard tax payers try to plan ahead, two out of three times the taxman will take them by surprise. There are two main reasons for this.
Firstly, taxpayers tend to overestimate their ability to read between the lines of published minutes of tax committee meetings, expert opinions and the draft legislation itself. Let us take the 2004 personal income tax rates as an example. The proposed top rate jumped from 40 percent to the cosmic 85 percent and, at the time writing, had dropped back to percent.
Trying to spot and track hidden trends in the aforementioned tax rate fluctuations is probably not worth the effort. Certainly, any conclusions about future tax rates made on the basis of such data should not be relied upon for budgeting purposes. This is not because the taxman is a devious creature seeking to mislead us - it is simply that his way of thinking differs from ours. We, law-abiding tax payers, often forget about his nature and thus end up making erroneous predictions while attempting to second guess his thought process.
Secondly, by the time everyone who has something to say and has the authority to do so - no matter how remote or irrelevant - has had their turn, taxpayers become impatient, frustrated and eventually lose interest. It can be quite a tedious task, even for the most diligent of bookkeepers, to follow through the sequence of changes to various tax laws.
Remembering which of the debated draft laws or amendments were finally adopted and when can be equally difficult. For example, some may have forgotten about the new requirements imposed by the Tax Ordinance and more specifically its Article 82A, which was introduced way back on January 1, 2003.
It imposes on certain entities the obligation to collect, prepare and disclose information on the remuneration of individuals who are paid from abroad, but carry out work or render services in Poland for the benefit these entities. In other words, it is relevant to Polish companies benefiting from the work of expatriates who receive pay via their home country payroll.
The Ordinance makes the above obligation conditional on two criteria. The first criterion specifies that the obligation is triggered if it is considered to "affect" the Polish tax liability of the individuals concerned in connection with tax treaties or other international agreements ratified by Poland. A more scrupulous reader will instantly note that it, being the obligation to collect, prepare and disclose information cannot, per se, give rise to Polish taxes or be used to determine the amount of taxable remuneration. On the contrary, the obligation should only apply where the tax liability is already determined as being due. Making a reference to international treaties is also inaccurate. Such treaties seek to alleviate the burden of double taxation and are used to determine priority taxing rights, rather than impose tax obligations.
The second criterion defines the qualifying Polish entity. It is one where a non-resident foreign entity participates, directly or indirectly, in the management or control or holds an interest (represented by at least 5 percent of voting rights) in the share capital.
However, it is not clear whether both criteria need to be met for the information requirement to apply. Academics and tax practitioners alike tend to believe that having a coma separating points 1 and 2 of Article 82A is indicative of the legislators' intent to make this requirement conditional on both.
To put it simply, most Polish subsidiaries of foreign companies which assign expatriates to Poland will have to comply with this requirement by sending a special form, named ORD-W, to the tax office by March 31, 2004 or else be exposed to fines under the Fiscal Penal Code of up to zł.1.2 million.
Those taxpayers determined to comply with the legislation, no matter what the cost, having managed to find their way through the intricate labyrinth of conditions and made note in their calendars of the forthcoming March deadline, can still fail to succeed. The last hurdle may be limited access to information.
Foreign companies, often being the parent companies assigning expatriates to Poland, may not wish to disclose confidential salary information (especially if the expatriates hold high executive positions) and thus refuse to provide such data to the Polish company, which is subject to the information obligation. Moreover, it may be impossible for the Polish companies to extract the required data to prepare the ORD-W form solely based on the amounts recharged from abroad. This is particularly true for multinationals using various allocation tools to channel costs to foreign subsidiaries.
Oddly enough, from a strictly legal perspective this is not a problem, as the information requirement cannot be imposed on a foreign entity. The Minister of Finance has acknowledged this point in his Regulation dated December 24, 2002 (working on Christmas Eve is a clear testament of commitment to serve the public) by stating that it is sufficient for the Polish company to demonstrate that it has employed diligent effort in obtaining the required data.
One can only guess as to what is meant by "diligent effort" on the part of the Polish entity. Of course, there is no relevant definition or guidance to set boundaries on authentic effort. This opens up a new gray area of uncertainty of a quantitative and a qualitative nature. For example, can the sheer volume of correspondence between the Polish company requesting information and its foreign counterpart be used to measure diligence? One can argue that quantity is not a significant factor in assessing diligence, but rather the qualitative aspect, namely tone, detail, persuasiveness, skillful use of language to convey a threat, etc.
It is, indeed, very difficult at times to comply with the Polish regulations despite best efforts to anticipate change. It also makes one wonder whether giving up on the idea of predicting future rates and new tax rules is not the best solution for a less stressful lifestyle. Let's come back to that point after January 1, 2004.
