Common Reporting Standard to be implemented in Poland
Poland is introducing regulations implementing a new global standard for automatic exchange of information about tax matters, developed by the OECD.
With the increasing possibilities for investing abroad in a wide range of financial products, it has become harder and harder for states to determine the amount of tax they are owed. The existing exchange of information among EU member states about interest on accounts of foreign taxpayers has proved inadequate. Such taxpayers may escape taxation, concealing income on investments abroad from the tax authorities and failing to contribute their fair share to the budgets of the states where they reside. The tax administration may not be aware of how much income their tax residents earn on foreign sources, or even of the fact that they have investments abroad. Thus the automatic exchange of tax information has become a key goal at the international level. A need has arisen to expand the categories of income and other information that is subject to automatic exchange, and to extend such exchange to countries that are not EU member states.
Global standard for automatic exchange of tax information
In response to the need for a more effective battle against tax avoidance, the Organisation for Economic Co-operation and Development published a set of guidelines known as the Common Reporting Standard in July 2014 as a global standard for automatic exchange of tax information. The main assumption of the guidelines developed by the OECD is to impose on financial institutions of a country the obligation to provide information to its tax authorities on accounts maintained for foreign entities. The information gathered is to be periodically and automatically forwarded to the tax authorities of the countries where the holders are residents. Poland has committed to adopting the standard by 2017.
This will be done via an entirely new law. In September 2015 a proposal for an Act on Mandatory Automatic Exchange of Tax Information was released. However, during the course of further legislative work on the project, a need was identified to consolidate all issues related to exchange of tax information (both new and existing) within a single act. This led to the next draft, dated 19 May 2016, of the Act on Exchange of Tax Information with Other Countries. Under current law, issues related to tax information and exchange are addressed primarily in the Tax Ordinance, and in bilateral tax treaties and other international agreements. Chapter VIIa of the Tax Ordinance includes general and specific rules for exchange of information. Because of the extensiveness of the proposed changes, it was determined that including them in the Tax Ordinance would have a negative impact on the structure of that law. Thus it was proposed to include them in a separate act and to move the current rules from Chapter VIIa of the Tax Ordinance to that act.
One of the goals of the proposed new act is to implement into Polish law the guidelines of Council Directive 2014/107/EU of 9 December 2014 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation. This directive is consistent with the Common Reporting Standard developed by OECD. The new regulations were supposed to be implemented into the national law of the EU member states by the beginning of 2016, but the Polish bill is only now at the phase of public consultations. If the work continues on schedule, the act is supposed to enter into force on 1 September 2016.
What will the automatic exchange of tax information involve?
The act imposes on Polish financial institutions (such as banks, brokerages, investment funds and insurance companies) an obligation to regularly inform the Minister of Finance and authorities designated by the minister of accounts maintained for foreign taxpayers. This information will then be forwarded by electronic means to the tax administration of the countries where the holders of the accounts are residents. Significantly, the exchange will occur automatically, i.e. without prior request by the taxpayer’s country of residence. The Minister of Finance will forward the account information concerning each year by 30 September of the following year.
Introduction of the global standard is one of the most important changes in international exchange of tax information, alongside the solutions agreed in the FATCA treaty with the United States and the act of 9 October 2015 implementing that treaty (as we discuss in more detail in the article “Tough luck of the American taxpayer”). So far Poland has been required to provide such information primarily at the request of foreign tax administrations. The truth is that currently EU member states, including Poland, already automatically exchange information about certain types of income received by foreign taxpayers (including interest on bank accounts). However, the proposed new act expands the scope of exchange of information about income, which may effectively prevent taxpayers from concealing capital abroad. Moreover, it creates the possibility for automatic exchange also with countries that are not EU member states (implementation of the global standard).
Information subject to exchange
Under the proposed act, information about accounts will contain primarily identification of individuals or other entities they control who are the holders of the accounts, including their state of residence, the tax number assigned to them by their state of residence, the account number, and the amount of income, such as interest, dividends and proceeds from the sale of financial assets and other income generated from assets held in the account (capital gains). To minimise the chance of concealing any untaxed sources of income, institutions will also be required to provide information about account balances.
Control of reporting by financial institutions
The Minister of Finance will be authorised to conduct an inspection at financial institutions of the correctness and timely performance of their reporting obligations. As a rule, financial institutions will be permitted to file amendments to the information provided, but not during the course of an audit. The minister or designated authority will be authorised in particular to demand clarifications and access to books and records and make copies of them. If irregularities are found, a deadline for rectifying them would be set. Failure to comply with reporting requirements or to correct irregularities within the time provided would result in imposition of a fine on the financial institution of up to PLN 1 million. Issues concerning such inspections not addressed in the new act would be governed by provisions of the Tax Ordinance concerning tax proceedings and tax audits, as relevant.
Summary
It appears that introduction of a smoothly operating global system for exchange of tax information is a question of time. The approaching changes show that concealing income abroad constitutes an increasingly serious problem for tax authorities, which currently do not have adequate instruments at their disposal to combat underpayment of taxes resulting from concealment of assets abroad. Adoption of the Act on Exchange of Tax Information with Other Countries should in theory comply with the Common Reporting Standard developed by the OECD and codified in EU law. But it remains to be seen whether in its proposed form this will be an effective solution to the problem of tax avoidance. Regular transmission of information about accounts should indeed enable the tax authorities to monitor foreign investments precisely and to identify income that has escaped taxation. The question remains whether financial institutions will properly perform the reporting obligations imposed on them and whether the tax administration will be in a position to effectively eliminate irregularities in this respect.
Tomasz Piejak, Private Client Practice, Wardyński & Partners