VAT rules may change at last, but don't forget 'to do' list
Regular readers will remember that I do not like making comments on proposed changes in the law before they come into effect, as they have a nasty habit of being overturned in the short timescale between the column being transmitted for printing and the paper appearing in your in-tray, which makes life a bit awkward sometimes.
So this column is not about the proposed change to the value-added tax (VAT) on imported services. Instead, it is a hypothetical scenario of how life would be better if, and only if, the proposed change gets passed into law and what should be considered in the event the new rules come to pass.
I have explained this issue so many times in the past that former Editor David Reilly could give a succinct summary of it with all the correct details and technicalities, solely from translating the previous columns on this issue into something comprehensible. As this may be the last time it gets explained, here goes again. A service performed in Poland is subject to VAT. If the service is bought from a foreign company but performed in Poland, this is called an "import of services." The supplier cannot charge you the VAT on top, so the recipient is responsible for "self-charging" the VAT, and handing it over to the government. The idea of self-charges or reverse-charges is that the recipient is then put in exactly the same position regardless of whether he is buying the service from a foreign or Polish supplier, to ensure that there is no fiscal discrimination against the Polish supplier.
The problem in Poland is that, unlike in the European Union (EU), this self-charge VAT cannot be treated as "real" VAT for recovery purposes, and instead represents a cost to the company.
Now, self-charged VAT on the import of services has been an evil villain ever since the beginning of Polish VAT law back in the dark days of 1993, wearing its black hat and generally making everyone's life difficult. Every year at this time we have lived in hope of having the law changed to bring the Polish VAT law in line with EU VAT directives, and every year for the last few years we have been disappointed. But this year it looks like at last that change will come into effect, subject to last-minute surprises.
So now our brilliant VAT planning strategy of registering the foreign company as a VAT taxpayer to allow it to charge recoverable VAT will no longer be necessary. Instead, the recipient of the service will be able to self-charge and recover the VAT (assuming of course that they are not a bank that can't recover anyway) with minimal administrative complexity.
So what does this do for the VAT compliance team that faithfully prepares and files monthly VAT returns for all of our international clients that have registered for VAT? Fortunately for them, they still have lots of work to do.
The way the law works is that imported-service VAT is recoverable. However, it is still in theory possible for foreign companies performing services on the territory of Poland to register for VAT should they wish (e.g., if they are both buying and selling services performed in Poland and want to recover the VAT on their purchases).
And once you are registered, there are only certain circumstances in which you can de-register, such as if you stop performing services. Changes in the VAT law that make your customers able to recover their VAT is not one of those circumstances. So if you are VAT registered because you are performing services here, then you must stay VAT registered, and must continue to charge VAT, that your customers can continue to recover i.e., there is no change for you.
Long term, there is the issue of whether it is more cost effective to continue with the existing structure, or reorganize your entire operations to have the services performed by a different entity in the group to avoid the need for VAT compliance for the foreign company. But you need to talk to the "Men in VAT" about that.
The other change is to VAT on the export of services that is, services performed in Poland for the benefit of customers abroad. This is more complex and potentially wider reaching, and so for superstitious reasons I will avoid talking about that this week, and come back to it once we're sure it's in the law, hopefully in two weeks' time.
Peter Ferrigno is a tax manager in the Warsaw office of Arthur Andersen.
