Retail sales tax
The proposed Retail Sales Tax Act was announced in January and was the subject of much debate and many revisions. Finally the President of Poland signed the act into law on 30 July 2016, introducing an entirely new type of tax into the Polish fiscal system. It will enter into force on 1 September 2016. Who will be subject to the retail sales tax, what will be the amount of the tax, and how will it be paid?
The Retail Sales Tax Act sets forth a number of definitions that are key to determining the scope and reach of the tax. Under the act, “retail sales” are defined as the sale of goods to consumers for consideration as part of the seller’s commercial activity. A “consumer” is defined under the act as a natural person not conducting commercial activity or a “flat-rate” farmer for purposes of the VAT Act. Significantly, providing services is not regarded as retail sales. But if the sale of goods is accompanied by the provision of services, under the act the service is deemed to be a retail sale subject to the tax (e.g. sale of a washing machine together with delivery and installation). A way around this is to register the sale of the service separately from the sale of the goods. Then the separate service will not be subject to the retail sales tax.
The tax will be a tax on revenue. The basis for taxation will be the revenue obtained from retail sales in a given month exceeding PLN 17 million (excluding VAT). This means that a seller who does not reach this level of revenue from retail sales in a given month will not be required to pay the tax for that month.
Two monthly rates for the tax are provided, depending on the amount of revenue which is the basis for taxation:
- 0.8% on the monthly basis up to PLN 170 million
- 1.4% on the excess above PLN 170 million.
It should be assumed that because the tax base is the excess over the tax-exempt amount of PLN 17 million in a month, the higher rate will not kick in until retail sales in the month exceed PLN 187 million (PLN 170 million + PLN 17 million). In other words, a retailer generating sales in a month above PLN 17 million but less than PLN 187 million will pay tax at the rate of 0.8% of sales above the tax-exempt amount. But a retailer generating net sales in a month of, say, PLN 300 million would pay the tax at the rate of 0.8% on the amount of sales above PLN 17 million, up to PLN 187 million, and at the rate of 1.4% on the rest.
Distance sales (e.g. online sales) are excluded from the tax. The tax will also not apply to sale of:
- Electricity and gas supplied to consumers via distribution networks, heat supplied to consumers via a heating network, or water supplied to consumers by water and sewer authorities
- Solid fuels (e.g. coal or briquettes)
- Gas in stationary installations or tanks used for fuel purposes
- Diesel oil intended for fuel purposes, or heating oil
- Medicines, dietetic foods, and medical devices, financed or reimbursed from public funds.
Taxpayers will be required to file a declaration on the amount of the tax for the month by the 25th day of the following month.
Exclusion of commercial groups and franchises
In the initial drafting it was assumed that to expand the scope of the retail sales tax, it would cover entire commercial networks, including franchisers and retailers selling under a single brand. Later the idea arose of taxing commercial groups (with capital ties). Thus large franchise networks and large international groups operating in Poland via numerous entities would be taxed on their aggregate revenue generated in Poland.
This idea was abandoned, however, and the tax base was limited to the retail sales made directly by each seller.
Consequently, the situation could be imagined where in order to avoid the new tax, a single seller might carry out a reorganisation to split into multiple entities which would each be a separate taxpayer (for example spinning off each shop into a separate company). The Retail Sales Tax Act itself does not provide any instruments to combat such an approach, but it should be borne in mind that on 15 July 2016 a general anti-avoidance rule (GAAR) was introduced into Poland’s Tax Ordinance. Under that clause, if a transaction is conducted primarily to achieve a financial benefit that under the circumstances is inconsistent with the purpose and objective of a tax regulation, the transaction will not result in achievement of a tax advantage if the taxpayer’s manner of acting was “artificial.” Then the tax consequences would be determined based on the state of affairs that would have existed if the artificial transaction had not been made.
The Tax Ordinance expressly indicates that the factors to be considered in determining whether a transaction is artificial include unjustified division of operations. Thus if a taxpayer operates through a single company on a scale large enough that it would become subject to the retail sales tax, but tries to avoid the tax by splitting into a group of smaller companies, there would be a risk that the tax authorities would enforce the GAAR against the taxpayer. The taxpayer could defend against application of the GAAR by demonstrating other purposes for creation of the structure apart from tax advantages—for example, increasing sales efficiency, streamlining management, or reducing non-tax costs. But even then the operation could be held to be made primarily to achieve a tax advantage if the tax authority found the economic or commercial justifications asserted by the taxpayer to be minor compared to the tax advantage.
Impermissible state aid?
European Union law deems any aid granted by a member state or through state resources which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods to be incompatible with the EU’s internal market insofar as it affects trade between member states (Art. 107 of the Treaty on the Functioning of the European Union).
This raises the doubt whether imposing a tax selectively, on only certain entities and also in differing amounts, constitutes state aid to the undertakings that are exempt from the tax or enjoy a highly preferential rate. In February 2016 Poland’s competition authority, the president of the Office of Competition and Consumer Protection (UOKiK), issued an opinion raising a number of doubts as to the compliance of the bill with the conditions for permissible state aid under EU law. Notably, the opinion included the following statement: “Although introduction of a progressive tax scale [from 0% to 1.4%, as an exemption is effectively the same as applying a 0% rate] is not in and of itself inconsistent with the regulations on state aid, as a measure causing differentiation between taxpayers, in order not to grant state aid it must be justified by the nature or general structure of the system.” In this respect it should be mentioned that in a notice published in 1998 concerning application of the rules for state aid, the European Commission regarded it as justified to use a progressive scale for a tax on income or profit, but not for a tax on revenue.
State aid requires notification (approval) of the European Commission. When the legislative work on this act was underway, the Commission asserted reservations about the bill. In May, UOKiK also reiterated its position despite revisions to the bill.
Will the European Commission find that Poland’s new retail sales tax constitutes impermissible state aid? The case of Hungary is instructive. There, a tax on turnover by large-format retail chains was introduced in 2014 with a steep and rapid degree of tax progression. As a result of intervention by the Commission, imposition of the tax was first suspended, and then a lower, uniform tax rate was introduced instead. Although the Polish version of the retail sales tax is much less aggressive than the Hungarian one was, it may be assumed that the new Polish regulations will also be closely scrutinised by the European Commission.
Tomasz Krzywański, Maksymilian Olejniczak, Tax Practice, Wardyński & Partners