This tax law is designed to make your head spin

Anna Szymańska is a tax senior manager at the Warsaw office of Ernst & Young.

Two columns back I spread doom and gloom about the potential changes to the personal income tax (PIT) law for 2004. In the intervening period we have, of course, had a change at the Finance Ministry, with the departure of Grzegorz Kołodko and the arrival of new Finance Minister Andrzej Raczko. This was followed by a brief period of what some viewed as uncertainty and others viewed as hope, when the flat-rate tax was once again offered up as a topic of discussion.

To cut a long story short, we ultimately ended up with few surprises and only minor cosmetic changes to Kołodko's original plans. For 2004 we can expect the same three PIT tax brackets of 19 percent, 30 percent and 40 percent, with tax brackets remaining fixed at the rate at which they were frozen in 2001. The initial tax-free amount will, however, increase by a few złoty.

Minister Kołodko had planned to remove all reliefs other than joint filing with spouse or child (if a sole parent) and rehabilitation relief. In the end, these two reliefs will in fact remain and, in addition, the relief related to mortgage interest on residential housing will also be likely to remain.

The tax on investment income is to decrease from 20 percent to 19 percent. However, in return for that small windfall, the tax on dividends is to increase from 15 percent to 19 percent.

The new tax causing the greatest stir - which I suspect will become an even greater stir when taxpayers finally get their heads around it and put numbers to the theories - is the capital gains tax, often threatened and now proposed formally on paper. You might think that a flat-rate capital gains tax at 19 percent is not onerous; indeed, if that is what it were it would be actually quite fair and reasonable. The fun starts when you get down to the small print and put planned legal provisions into practice. Though the capital gains tax will indeed be a flat rate of 19 percent, the value of the capital gain will have to be added to the taxpayer's total annual income when she files her annual return in order to ascertain at what tax rate the remaining income should be taxed.

What this means in practice is that an individual who currently pays tax at the 30-percent level could next year have to pay tax on the same income at a higher rate if income from capital gains takes him over the 30-percent limit; plus, she will have the 19-percent capital gains tax on the actual capital gain.

As a sweetener, the provisions are not intended to tax money twice as, having added the capital gain to your cumulative "other" annual income in order to calculate the appropriate tax rate, you then deduct the amount of the capital gain from the total income. So in basic terms the gain is then taxed at 19 percent while the "other" income is taxed at the now higher appropriate tax rate applicable as a result of the capital gain.

I suspect that my explanation has made this concept about as clear as mud, for which I apologize, but that is how it is written and that is how it will function if eventually passed by all appropriate bodies and signed by the president by the middle of November in order to come into effect from January 1, 2004.

What my eight-and-a-bit years of practice in Poland have taught me is that while predictions can be useful, particularly if they are repeated in vaguely similar terms over a period of time in order to implement any sort of tax planning, ultimately nothing is certain until the ink is finally dry on the paper. Like every year, however, the one prediction I continue to make and the one which unfortunately every year continues to be correct is that your taxes in the next tax year will be higher than your taxes in the previous year!

On that cheerful note, I move swiftly on to my next point. In the time-honored tradition of Business Journal tax columnists, after eight happy and fruitful years talking about tax in Poland it is now time for me to bid you a fond farewell. I am packing up house and home, hubby and kids and moving to Budapest to talk about tax in Hungary.

Many thanks to my colleagues who have contributed to columns in the past. Thanks, too, to the Business Journal for giving me the opportunity to air my views on taxes here in Poland. It's been good, it's been fun, it's been eight years and it is time to move on.