Weaker protection of individual tax interpretations
From the start of 2017, the protection provided by previously issued individual tax interpretations became doubtful. The problem particularly concerns protection when tax advantages are obtained after 1 January 2017 in connection with adjustment to the factual situation or future events which were the subject of the individual interpretation.
Protective power of individual interpretations following adoption of GAAR
Doubts as to the protective power of previously issued individual tax interpretations had already arisen following enactment of a general anti-avoidance rule in Poland from 15 July 2016 (under the Act of 13 May 2016 Amending the Tax Ordinance and Certain Other Acts).
According to the justification for that amendment, “In connection with the planned introduction of an anti-avoidance rule, it appears reasonable to introduce a solution excluding the legal protection arising out of compliance with an individual interpretation concerning an event that constitutes tax avoidance. There is no justification for an entity that is avoiding taxation to enjoy protection under a previously obtained individual interpretation and claim unlimited legal safety. Given the protective effects of tax interpretations (exemption from the obligation to pay tax), the absence of this proposed solution would significantly limit or sometimes exclude application of the anti-avoidance rule. Consequently, this change should also exclude the legal protection governed by Art. 14k–14n of the Tax Ordinance.”
At the same time, it was specified that the exclusion of legal protection arising out of compliance with an individual interpretation would apply to individual interpretations issued after the effective date of the act.
Consequently, from 15 July 2016 the tax authorities were empowered to issue decisions eliminating unwarranted tax advantages, even when the taxpayer held an interpretation issued on the matter. In such situation, the interpretation will no longer protect the taxpayer. This applied only to tax interpretations issued on or after 15 July 2016, when the new regulations entered into force.
Protective power of individual interpretations following further changes
Tax amendments from November 2016 (the Act of 29 November 2016 Amending the PIT Act, the CIT Act, the Tax Ordinance and Certain Other Acts) changed these interim provisions, however, meaning that from the start of 2017 any previously issued individual tax interpretations could become worthless for their holders.
Under the new wording of the interim provisions, exclusion of the protection under a tax interpretation applies also to individual interpretations issued before the effective date of the amendment if the tax advantage arising out of the state of facts or future event which is the subject of the individual interpretation is obtained on or after 1 January 2017.
For purposes of the Tax Ordinance, a tax advantage means:
- Non-occurrence of a tax obligation, postponement in time of the occurrence of a tax obligation, reduction in the amount of a tax obligation, or incurrence or increase of a tax loss, or
- Incurrence of an overpayment or right to a tax refund, or an increase in the amount of an overpayment or refund.
Moreover, tax avoidance means an action (or set of connected actions) made in an artificial manner to obtain a tax advantage exceeding PLN 100,000 which under the circumstances is inconsistent with the subject and purpose of tax regulations.
It might seem that currently the tax authorities can dispute any action by a business that results in a tax advantage of PLN 100,000 or more—even though the taxpayer holds a valid individual interpretation.
In practice, a doubt arises whether individual interpretations covering actions taken by the taxpayer intending to optimise tax payments cease to protect the taxpayer with respect to tax advantages achieved from the start of 2017, if the tax authorities deem the actions to be tax avoidance.
The problem appears particularly pressing if the advantages from tax optimisation confirmed by an individual interpretation are obtained on an ongoing basis, e.g. by taking amortisation deductions for the value of a trademark contributed to a subsidiary under a contract meeting the conditions for being treated as finance leasing.
Conditions for loss of protection under individual interpretations
The first condition for loss of protection of a tax interpretation is for the tax authorities to show that the method followed by the taxpayer constitutes avoidance as defined in the Tax Ordinance. Only then will the taxpayer will be barred from enjoying the protection under a previously obtained individual interpretation with respect to a tax advantage achieved on or after 1 January 2017.
In practice this may be difficult to prove, because the taxpayer must be accused of acting in an artificial manner with the intention of obtaining a tax advantage which under the circumstances is inconsistent with the subject and purpose of tax regulations.
Even if the tax authority found that the action constitutes avoidance for purposes of the Tax Ordinance, another condition for loss of the protection of an individual interpretation is obtaining a tax advantage of at least PLN 100,000 on or after 1 January 2017. If such an advantage does not occur, or is less than the amount in question, the protection provided by the individual interpretation will remain in force.
Returning to the example of amortisation of a trademark mentioned above, in that situation there may be a doubt of interpretation whether for example amortisation deductions taken under finance leasing of a trademark represent a tax advantage for the taxpayer if the tax authorities have found that the optimisation structure using a trademark constitutes tax avoidance.
Often one-off actions made as part of legal transactions have long-term tax consequences. This would be the case with amortisation deductions for a trademark, which can be taken over several years at a minimum.
Undoubtedly, amortisation deductions cause reduction of a tax obligation of the taxpayer thanks to an increase in the taxpayer’s deductible revenue-earning costs. But it would be hard to claim that the possibility of taking amortisation deductions, provided for by law, constitutes an “advantage” for taxpayers for the purposes of Poland’s general anti-avoidance rule. Nonetheless, the risk of a finding by the tax authorities that amortisation deductions constitute a tax advantage in this instance cannot be ruled out.
Thus if the tax authorities deem a given action to be tax avoidance, and a tax advantage exceeding PLN 100,000 arising out of a state of facts or future event which is the subject of an individual tax interpretation is obtained on or after 1 January 2017, the protection afforded by the tax interpretation may be disputed.
Tomasz Kośmider, Tax practice, Wardyński & Partners