Return of the tax avoidance clause?

Discussion is underway on guidelines for proposed amendments to Poland’s Tax Ordinance. The most important changes proposed include introduction of a tax avoidance clause, safe harbour opinions, and a Tax Avoidance Council.

The proposal, issued on 29 April 2013, generated a great deal of controversy from the start. Introduction of a tax avoidance clause could have a major impact on transactional and restructuring practice for entities operating in Poland. In addition to business and financial risks and standard tax risks, taxpayers would have to take into account the risk that the legal constructions used in a transaction or reorganisation could be challenged on the grounds that they were used solely in order to minimise taxation.

According to the authors of the proposal, the tax avoidance clause is intended to counteract the globalisation of tax avoidance and improve the effectiveness of measures aimed at prevention of aggressive tax planning. Under this clause, the tax authorities could challenge the tax effects of a transaction if they find that the main purpose of the transaction was to achieve tax benefits rather than a specific commercial result. As the authors stress, introduction of general tax avoidance clauses is one of the solutions recommended by the European Commission to combat aggressive tax planning.

It is proposed that the clause would concern all taxes and would apply to events connected with the conduct of economic activity or participation in commercial entities (such as shareholding and management). However, certain events, e.g. arising under the Family and Guardianship Law or inheritance, would be excluded from application of the clause.

In order to achieve the preventive purpose, in the case of resort to the clause, in addition to paying the tax itself the taxpayer would also have to pay an additional tax liability equal to 30% of the underpayment of tax caused by tax avoidance.

In fact, Polish tax law is no stranger to the institution of a general tax avoidance clause. Such a clause was in force from 1 January 2003, but the Constitutional Tribunal held in its judgment of 11 May 2004 (Case No. K 4/03) that the clause then in force did not meet the constitutional standards for proper legislation, violated fundamental principles of reliance on the state and the law, and did not meet the requirement for proper determination of specific statutorily defined elements of tax liabilities.

Introduction of a tax avoidance clause would be accompanied by issuance of safe harbour opinions on the existence of grounds for application of the clause. This would soften the effects of introduction of the clause. The competent authority for issuance of safe harbour opinions would be the Minister of Finance. According to the proposal, such an opinion would be issued within 6 months after filing of an application, and the application itself would bear a fee of PLN 25,000, or PLN 50,000 if the planned transaction was to be conducted with foreign entities or domestic entities with foreign capital. The recipient of a safe harbour opinion would have a right to challenge the ruling in the administrative court.

The Tax Avoidance Council is a notion borrowed from institutions already in place in Australia, Canada and France. Establishment of the council would be designed to heighten the objectivity of the tax authorities in applying the tax avoidance clause. Composed of experts on tax law, financial markets, commerce, and international financial and commercial law, the council would issue independent opinions. The members of the council would include representatives of the president of the Supreme Administrative Court, universities, the Ombudsman, the National Chamber of Tax Advisers, and the Minister of Finance. Officials of the administrative court system have already criticised the idea of participation on the council by judges of the Supreme Administrative Court.

The proposal states that the Tax Avoidance Council would issue non-binding opinions on the justification for use of the tax avoidance clause at the appeal stage of tax proceedings. The taxpayer and the appellate tax authority with doubts concerning the justification for applying the clause in a given case would be entitled to apply for an opinion. The council would have 6 months to issue a decision. The proposal provides that the taxpayer and the appellate tax authority would both have a right to participate actively in the session of the council.

A fee would be charged for the application but would be refunded if the council issued an opinion consistent with the taxpayer’s position. However, an opinion in favour of the taxpayer would not be binding on the tax authority conducting the matter.

In response to a parliamentary inquiry dated 8 May 2013 (No. SPS-023-17945/13), the Minister of Finance explained (by letter dated 17 June 2013) that in his opinion the tax avoidance clause would not be unconstitutional, but would be worded to meet all requirements and guidelines for compliance with the Polish Constitution (including an absence of inadequately defined terms). In the minister’s view, the clause proposed in the draft guidelines for the amendment complies with the guidelines from the Constitutional Tribunal because it assures the predictability of application of the clause and does not leave room for arbitrary or discretionary application of the clause by the tax authorities.

However, the minister’s position conflicts with the comments and reservations with respect to the proposal issued by the Government Legislation Centre in a letter dated 13 June 2013. Among other things, the centre objected to introduction of the tax avoidance clause and safe harbour opinions. According to the centre, the proposed changes do not meet the constitutional requirements which the Constitutional Tribunal found were violated by the previous clause from 2003 and did not adequately foster confidence in the state in the area of tax obligations. The centre also had reservations under the principle of separation of powers, because the proposal would vest non-legislative institutions with the power to make law. According to the centre, the current Art. 199a of the Tax Ordinance provides the tax authorities the ability to verify the true substance of transactions. The centre also expressed doubts with respect to the amount of the fee for issuance of a safe harbour opinion.

According to the proposal to amend the Tax Ordinance, the tax avoidance clause would enter into force in mid-2014. Considering that no actual bill has been drafted yet, and in light of the reservations expressed by the Government Legislation Centre and the limitations arising under the existing ruling by the Constitutional Tribunal, it may be assumed that the process of drafting the regulations in this matter will be time-consuming. But given the recommendations by the European Commission, the fairly common use of similar clauses in other jurisdictions, and the state’s revenue needs, it is likely that sooner or later such a clause will return to the Polish legal system.

Michał Nowacki, Tax Practice, Wardyński & Partners