Fate of retail sales tax hangs in the balance


The Retail Sales Tax Act entered into force on 1 September 2016, but so far the state has not raised a single zloty from the tax. Since the European Commission filed an appeal on 24 July 2019 against the judgment of the General Court, the first collection of the tax has been further postponed.

In August 2016, just before the act entered into force, we reported on its key provisions in the article “Retail Sales Tax.” The overriding concern at that time was doubts about the compliance of the new act with EU law. Time has shown that these concerns were partially justified.

Further fate of the tax

As of now, the Retail Sales Tax Act of 6 July 2016 does not apply to revenue generated through 31 December 2019. Until the end of the year, potential taxpayers are not required to file declarations on the amount of tax or to calculate and pay the tax.

However, under the published draft amendment, revenue generated from 1 September 2019 onward would be subject to the tax. Nonetheless, collection of the tax would be suspended until the 25th day of the month following the date when three months have passed since the ruling of the European court becomes legally final. The draft provides for an obligation to file a declaration on the amount of retail sales tax (form PSD-1) with the tax office by the 25th day of the month following the month which the tax concerns.

According to the justification for the draft amendment, the proposed deadline for the first monthly payment of the tax (the 25th day of the month following the date when three months have passed since the ruling becomes final) was established to reflect the time required to adjust the relevant solutions in the event that a legally final ruling is issued finding that the regulations establishing the retail sales tax are contrary to EU law. It also states that this period should serve to gather the funds necessary to pay “overdue” tax (from 1 September 2019 forward) if a ruling in favour of Poland is issued following the Commission’s appeal.

According to the drafters, the amendment respects the rights of payers of the retail sales tax: “It does not impose new obligations on them and does not change the rules for determination and collection of the tax. … Potential taxpayers are aware of the existence of the tax, and successive periods of suspension of collection of the tax would be justified in each instance, conditioned on the result of the proceeding before the EU’s General Court.”

To avoid doubts surrounding when the tax would have to paid when the subsequent judgment becomes legally final (as a result of the Commission’s appeal against the judgment of the General Court), a provision is proposed under which a notice would be published in Monitor Polski announcing the date when the ruling of the Court of Justice becomes legally final. According to figures provided by the Ministry of Finance in its regulatory impact assessment, the proposal would affect about 200 entities. Thus potential taxpayers will need to wait and see how events unfold.

Dispute with the European Commission

On 19 September 2016, just a couple of weeks after entry into force of the Retail Sales Tax Act, the European Commission opened an in-depth investigation into the new tax (decision in state aid matter SA.44351 (2016/C) (ex 2016/NN)). Together with launch of the investigation, the Commission also ordered immediate suspension of collection of the retail sales tax, which was done through 31 December 2016 by a regulation of the Minister of Development and Finance dated 18 October 2016 (now Art. 11a of the Retail Sales Tax Act is in force, providing that the act applies to revenue from retail sales generated from 1 January 2020).

The Commission concluded the proceeding by issuing a finding that the new tax constitutes state aid incompatible with the law and the internal market (Commission Decision of 30.6.2017 on the state aid SA.44351 (2016/C) (ex 2016/NN) implemented by Poland for the tax on the retail sector) (notified as document no. C(2017) 4449).

In issuing the decision, the Commission first defined the common or normal tax system in Poland as the “reference system.” Then it determined whether the bounds of the reference system were laid down consistently by Poland. This assessment included an analysis of the aims of introducing the new tax—whether it was introduced in an arbitrary or biased way, so as to favour certain undertakings. The Commission did not identify a justification for introduction of the retail sales tax and found that it was an impermissible “derogation from the reference system.”

The Commission did not agree with Poland that the justification for introduction of the progressive tax was a redistributive aim. It pointed out that introduction of progressive taxes is justified when their immediate aim is for example to tax revenue in order to “address some negative externalities,” where the externalities “also increase progressively when the turnover (or size) of the taxpayer increases.”

The Commission stressed that it did not intend to infringe Poland’s autonomy in creating its own tax policy, but pointed to the obligation to comply with the provisions of the Treaty on the Functioning of the European Union governing state aid. According to the Commission, the new tax would result in discrimination against certain undertakings, as those with lower turnover would obtain a selective tax advantage. Thus the new regulation could cause serious distortion of the market. It was also alleged that undertakings operating as franchisees would obtain the same advantage.

In its decision, the Commission presented a specific example of the taxation of three undertakings, where the first generated monthly revenue of PLN 10 million, the second PLN 100 million, and the third PLN 750 million. The effective average tax rate for the first undertaking would be zero, for the second 0.664%, and for the third 1.246%.

The act introduced two rates conditioned on the level of revenue (above the exempt turnover of up to PLN 17 million per month):

  • 0.8% on the tax basis up to PLN 170 million
    • 1.4% on the excess above PLN 170 million.

Under the EU case law, the concept of state aid also covers various measures that reduce costs borne by an undertaking (see C-143/99 Adria-Wien Pipeline, EU:C:2001:598, par. 38), such as a “selective tax advantage.” Comparing these examples with the holdings from the EU case law, it was found that privileging smaller undertakings is inconsistent with the state-aid rules.

As pointed out, the Polish authorities had indicated previously that the progressive structure of the tax would help sustain small retailers in their battle with big-box stores. The Commission perceived this as evidence that the Polish government intended to exert pressure on the structure of competition on the market (including discrimination against foreign undertakings).

General Court disagrees with the Commission

In the judgment of 16 May 2019 in Poland v Commission, Joined Cases T-836/16 and T-624/17, the General Court (lower division of the Court of Justice of the European Union) held that the decisions issued by the Commission were invalid.

According to the court, the Commission did not prove the existence of a selective advantage that would lead to disparate treatment of undertakings in a comparable factual and legal situation. This was due among things to an erroneous identification of the “normal” tax system by the Commission. The court suggested that to make a proper identification, the Commission should examine whether the retail sales tax (as a sectoral tax) burdens the relevant scope of activity and whether it allows undertakings conducting their principal business in this sector to escape coverage by the tax. That would result in such undertakings’ receiving a selective tax advantage.

Additionally, according to the court, the Commission committed an error by finding a different purpose for the retail sales tax than that stated by the Polish authorities. The court pointed out that the aim of Poland was to establish a sectoral tax in line with the principle of tax redistribution and not, as the Commission claimed, to tax the revenue of “all undertakings.”

The court held that the progressive tax on retail sales is consistent with the (redistributive) aim adopted by Poland. In the justification for the ruling, the court used an example to explain the redistributive logic: “An undertaking that generates high turnover may, thanks to economies of scale, have proportionally lower costs than an undertaking that generates more modest turnover—because fixed unit costs … and variable unit costs … decline with an increase in the volume of the business—and may enjoy proportionally higher disposable income, which makes it capable of paying proportionally higher amounts of turnover tax.”

Moreover, the General Court relied on the existing case law and recognised that there are taxes whose character does not present any barrier to the use of mechanisms of “modulation” (progression), which can even take the form of exemptions, and “such mechanisms need not result in awarding a selective advantage.”

In the view of the General Court, Poland showed that progressive tax rates may be regarded as justified in light of the motives and aim of introducing the tax, that is, to generate funds for the general state budget. They may even be regarded as a part of the tax system. Regardless of whether taxation occurs at uniform or progressive rates, the amount of the tax burden—as with the tax base, the taxable event, and the set of taxpayers—falls within the fundamental characteristic features of the tax system. For this reason, in examining the permissibility of applying different progressive tax rates to undertakings, the court held that such action constitutes a part of the “normal” system.

On 24 July 2019, the European Commission filed an appeal against the judgment of the General Court. According to a statement released by the Ministry of Finance, “Respecting the authority of the Commission, after receipt and careful analysis of the appeal, Poland will take the appropriate measures provided for in the procedure before the European Court of Justice.”

Maksymilian Olejniczak, Jakub Gerula, Tax practice, Wardyński & Partners