Additional tax obligation for incorrect VAT settlements

The “big amendment” to Poland’s VAT Act entered into force on 1 January 2017. As the popular title indicates, numerous changes were made in the existing VAT Act. The changes were designed to close loopholes in the law and thus improve VAT collections.

The most important changes under the “big amendment” include extension of the period for applying the increased VAT rates (main rate 23%) through the end of 2018, raising the limit for the subjective exemption from VAT from PLN 150,000 to 200,000, and limiting the possibility of filing quarterly VAT returns.

The bill made changes in the services subject to the reverse-charge mechanism. The rules for obtaining an expedited 25-day VAT refund were revised, and some categories of taxpayers were required to file their VAT returns electronically.

But along the way the parliament also decided to introduce a sanction that may prove painful for some taxpayers. The “additional tax obligation,” as it is called, set forth in the newly added Art. 112b of the VAT Act, is not new to the Polish VAT system. A similar institution existed until 30 November 2008.

Additional tax obligation—who is affected?

The additional tax obligation requires a taxpayer to pay an additional amount assessed by the tax authority, on top of the output VAT due. Under Art. 112b of the VAT Act, if the head of the tax office or a treasury audit authority finds that the taxpayer:

  1. stated in a VAT return:
    • an amount of a tax obligation less than the amount due
    • an amount of the difference in tax or amount of input VAT for refund higher than the amount due
    • an amount of difference in tax to be carried over and deducted in future periods higher than the correct amount, or
    • an amount of difference in tax showing input VAT to be refunded or carried forward for deduction in future periods, instead of an amount of tax to be paid to the tax office; or
  2. failed to file a tax return or failed to pay the tax obligation;

then the authority will be authorised to establish the correct amounts and impose an additional tax obligation equal to 30% of the understated or overstated amount. Thus the greater the unjustified understatement of tax due or overstatement of the amount to be refunded or deducted, the greater the additional tax obligation to be assessed.

If following a tax audit or during the course of an audit proceeding the taxpayer files the appropriate VAT return or corrected return and pays the tax due, the additional tax obligation will be assessed at the rate of 20%.

But not all taxpayers who fulfil one of the grounds set forth above will be punished by the new VAT sanction.

This provision will not apply to taxpayers who file a VAT return or corrected return and pay the amount due, with interest, to the tax office, prior to commencement of a tax audit or an audit proceeding.

The additional tax obligation will also not apply to taxpayers who understated the tax due or overstated the amount for refund or carryforward as a result of an arithmetic error or obvious oversight. The same applies to taxpayers who failed to include output or input VAT in the correct settlement period but did include it in earlier or later periods.

Additional tax obligation and fiscal offences

When restoring the institution of the additional VAT obligation to the Polish tax system after an absence of 8 years, the parliament framed it differently with respect to taxpayers knowingly involved in tax fraud and achieving undue benefits at the expense of the state budget. Thus if taxpayers make an unjustified understatement or overstatement as discussed above on the basis of invoices which:

  1. were issued by a non-existence entity,
  2. confirm transactions that were not performed (e.g. empty invoices),
  3. state untrue amounts, or
  4. confirm transactions covered by Art. 58 or 83 of the Civil Code (e.g. transactions that are unlawful, intended to circumvent the law, or fictitious),

then the amount of the additional tax obligation with respect to the input VAT under such invoices will be 100% (rather than 30%).

Significantly, according to the justification for the amendment, the 100% sanction should not apply to taxpayers unwittingly involved in tax fraud, i.e. taxpayers acting in good faith.

Additional tax obligation—consequences

According to the justification for the bill amending the VAT Act, introduction of the additional VAT obligation is intended to encourage taxpayers to file VAT returns accurately and diligently and to have a deterrent effect on VAT offences.

Doubts will arise in practice whether these ends will truly be achieved by this sanction. VAT fraud is often committed via other entities (straw men) and is organised in such a way that the gains are reduced to cash as quickly as possible. Often the funds are transferred abroad, which greatly reduces the chances for effective enforcement. Then the additional VAT obligation will become just another uncollected shortfall.

The notions of “unknowing participation in tax fraud” and “acting in good faith” also require clarification. According to the proponents of the amendment, these notions should be understood in light of the case law from Polish and EU courts, which employ the concept of “due care.” But in practice this notion is interpreted variously by the tax authorities and the administrative courts. It is problematic to point to the actions that should be taken by a taxpayer in a particular case to show that it exercised due care. Consequently, leaving these notions open to interpretation by the tax authorities in assessing the additional tax obligation may lead honest taxpayers to waive the right to deduct input VAT so as to avoid exposure to an additional VAT sanction.

Mateusz Jopek, Tax practice, Wardyński & Partners