VAT change on exported services doesn't happen after all
A few weeks ago, I talked about the changes to the value-added tax (VAT) law on the import of services, and mentioned that the position was also going to change with respect to the export of services (such as performing services in Poland for entities registered abroad).
Sometimes I surprise myself with my crystal balls, particularly finishing the column with the following "for superstitious reasons I will avoid talking about that this week, and come back to that once we're sure it's in the law." Because, guess what, the change did not quite come into force as we expected. Here's why.
The general position is that services performed in Poland are subject to Polish VAT. Certain types of services can be taxed with a zero-percent rate, on the condition that the recipient is a foreign entity not registered for VAT in Poland, and pays within 90 days. This is used most commonly for consulting services and legal services, and over the years the different interpretations from the statistical classifications as to what constitutes an advising or consulting service has consumed a fair amount of paper.
If this preference does not apply, all services invoiced to abroad have a 22% VAT levy on top, making costs higher, and making Polish service-providing companies uncompetitive in international work, thus why the preference is applied. As a service would be zero-percent rated if it were performed outside Poland, this levels the playing field for foreign customers.
Polish VAT law is based on European Union (EU) VAT directives, and these provide certain categories of services where the VAT treatment is also deemed to be equivalent to an export, even if it is provided in-country.
Now, the idea for this year was that, instead of using a separate Polish classification that was based on Polish statistical classifications, the wording of the "EU Sixth VAT Directive" would be incorporated directly into the "Polish VAT Ordinance," meaning that the treatment would be consistent with the rest of the EU. This was indeed what appeared in all the drafts, right up to the actual publication of the ordinance in that nice quiet period between Christmas and New Year.
It's good to have it based on the directive, as this adds a few more services to those that existed already, and better defines those we have already. The changes were proposed and lobbied for by various interests that would be served by the change (and also where it was appreciated that additional projects had already been located places other than Poland solely because of these VAT problems).
However, in the minuscule time period between drafts being reviewed by external advisers and publication, an extra phrase was inserted that moves things right back to trouble.
The EU directive allows countries to restrict the zero-percent rate to cases where the effect of the use of the service takes place outside the country. This means in real English that if you're really doing something in (say) Poland for a Polish company, then you'd calculate the VAT by Polish standards. Tax authorities can deny you the zero rate if it is used in country, and only paid for from abroad. This is to get around cases where companies in country can't recover the VAT, so have the invoice paid from abroad.
However, this is a right not an obligation and most EU countries do not put this restriction in their domestic laws. Let's just think about why not. It all comes down to how you decide how or where a service is used. If you advise on Polish law to a foreign company, who then makes a decision (abroad) to execute a transaction (in Poland), then the question becomes: Where is the effective use of the service? In some cases, it may be easier (such as if you were displaying poster advertising in the street). But you can also create as many weird and wonderful scenarios as you like (where do you effectively use the contents of this column? Where you read the column, or where you make decisions later based on what you've read in it?)
Also, there is no clarity as to whether this use is exclusive or not. Many services will be effectively used in many places, both inside and outside Poland (e.g. the legal advice above). Is it enough that some of the effect is outside Poland, or does the fact that some use may take place here enough to trip us up completely?
So the situation is currently as follows. The VAT law was (until Dec. 31) comparatively clear, not overly generous but workable. As a result of various lobbying activities, the ordinance was changed to be in line with the directive. So at the last minute, the "effective use" clause comes in, which makes the position worse than it was before the law changed.
I suppose this is an argument not to lobby for the law to be changed. But I'd like to think that more thought and reasoning went into the original lobbying, and the original agreement incorporated the suggested changes into the ordinance.
Peter Ferrigno is a tax manager in the Warsaw office of Arthur Andersen.
