(R)evolution in dealings between taxpayers and tax authorities
The draft Act on Resolution of Double Taxation Disputes and Conclusion of Advance Pricing Agreements would introduce a new tax institution, the Cooperation Programme, as part of its implementation of the conception of horizontal monitoring. The Cooperation Programme is intended to enter into force on 1 July 2020.
The Cooperation Programme is to be based on voluntary, individual cooperation by the taxpayer with the head of the National Revenue Administration (KAS).
The bill provides for inclusion in a new Chapter IIB of the Tax Ordinance of three pillars of the Cooperation Programme:
- Cooperation agreements
- Tax agreements
- Tax audits.
The justification for the bill states that the proposed regulations creating the Cooperation Programme are designed to facilitate bilateral cooperation between economically important taxpayers and the tax authorities, based on mutual trust, understanding, and transparency.
The proponents’ intention is for the designed cooperation mechanism to result in minimising the tax risk borne by taxpayers connected with incorrect performance of tax obligations, while also reducing tax optimisation.
The first element of the Cooperation Programme is a cooperation agreement to be signed for an indefinite period between the taxpayer and the head of KAS.
The persons entitled to initiate the conclusion of a cooperation agreement are the head of KAS or a taxpayer whose revenue in the preceding tax year exceeded the equivalent of EUR 50 million.
Before conclusion of a cooperation agreement, the taxpayer would be subject to a preliminary tax audit conducted by the head of KAS to examine the correctness of the taxpayer’s compliance with tax obligations. The audit would cover the year when the application for conclusion of a cooperation agreement is submitted, through the date of completion of the audit, as well as the preceding two tax years.
The audited taxpayer is required to submit the required documents and information to the head of KAS. Documents and information containing trade secrets would be destroyed if a cooperation agreement is not reached.
An element of the preliminary tax audit relied on by the head of KAS is an independent audit of the taxpayer’s tax function, performed by an independent tax auditor retained by the taxpayer, who will examine the correctness of the performance of the taxpayer’s tax obligations and the effectiveness and adequacy of implemented internal frameworks for tax oversight. The audit of the tax function will conclude in a report containing the result of the audit, delivered to the taxpayer along with the documentation.
Those authorised to serve as the independent tax auditor are tax advisers, auditors, tax advisory firms, and audit firms (with certain exceptions, e.g. affiliates or existing auditors or advisers of the taxpayer).
A cooperation agreement may be concluded if the preliminary tax audit results in a positive opinion. If it results in recommendations that are then implemented by the taxpayer within the time agreed with the head of KAS, the head of KAS may reopen the audit in order to verify the correct implementation of the recommendations.
If in accordance with recommendations the taxpayer is required to cure irregularities involving tax settlements, and the taxpayer files a corrected declaration within 14 days of receipt of the recommendations, paying any arrears within 7 days after filing the corrected declaration, then the taxpayer is charged a reduced rate of interest on delay.
If conclusion of a cooperation agreement is refused, the head of KAS must state the grounds for refusal together with a justification.
Apart from establishing the framework for the cooperation, the cooperation agreement will include an undertaking by the taxpayer to correctly settle its tax obligations, maintain internal procedures for compliance with tax obligations, report potentially disputed tax issues to the head of KAS, and notify the head of KAS of tax issues that could result in obtaining a tax advantage.
The taxpayer will obtain the following benefits as a party to a cooperation agreement:
- The form and frequency of verification of the taxpayer will depend on the effectiveness and adequacy of its internal tax oversight.
- The only entity authorised to conduct a customs and treasury inspection of the taxpayer will be the head of KAS.
- Verification activities with respect to the taxpayer cannot be conducted by tax authorities without the approval of the head of KAS.
- Tax authorities must obtain the approval of the head of KAS to request information and clarifications from the taxpayer’s contracting parties concerning transactions with the taxpayer subject to a customs and treasury inspection (i.e. cross-audit, Art. 79 of the National Revenue Administration Act).
- There is no obligation for a taxpayer who is a party to a cooperation agreement to report domestic tax schemes it is using.
- The taxpayer’s actions under the cooperation agreement are recognised as grounds for a finding of good faith on the part of the taxpayer eliminating the possibility of assessing an additional tax obligation against the taxpayer under Art. 58a of the Tax Ordinance (an additional tax obligation equal to 10% or 40% of unreported income or overstated losses, with the possibility of doubling, trebling or halving of the obligation).
Moreover, KAS officers or staff taking part in a tax audit in relation to the taxpayer are excluded from conducting tax inspections or customs and treasury inspections or tax proceedings against the taxpayer for a period of three years after completion of the audit.
Each party to the agreement—the taxpayer or the head of KAS—can terminate the agreement, but the agreement can be terminated by the head of KAS only if the taxpayer breaches the agreement or commits a serious or repeated violation of tax law.
The head of KAS is required to maintain a register of taxpayers which whom cooperation agreements have been concluded, published in the Ministry of Finance Bulletin of Public Information.
The head of KAS may conclude a tax agreement with a taxpayer who is a party to a cooperation agreement, covering the following tax issues:
- Interpretation of tax regulations—conclusion of such an agreement excludes the possibility of issuance of an individual interpretation of tax law by the director of the National Revenue Information service on the tax issue resolved in the tax agreement
- Establishment of transfer prices
- Unjustified application of the general anti-avoidance rule (GAAR)—conclusion of a tax agreement in this respect excludes the possibility of issuing a decision applying the GAAR against the taxpayer
- The projected corporate income tax for the following tax year
- Other issues essential to ensure proper performance of the cooperation agreement.
Conclusion of a tax agreement excludes the possibility of ordering a limitation on recognition as deductible revenue-earning costs of the costs of certain services, fees and payments to affiliated entities (Art. 15e of the Corporate Income Tax Act), insofar as the agreement determines the correctness of the calculations for such services, fees and payments.
It should be stressed that a tax agreement cannot cover tax issues that are the subject of a pending tax proceeding, administrative court proceeding, tax audit or customs and treasury audit, or were resolved on the merits by a decision or order by the tax authorities.
In the event of refusal to conclude a tax agreement, the head of KAS is required to indicate the grounds for the refusal together with a justification.
Both the taxpayer and the head of KAS have a right to terminate the tax agreement, with a requirement to provide a justification, but the agreement can be terminated by the head of KAS only in the following circumstances:
- Material new factual circumstances or evidence is disclosed which existed at the time of conclusion of the tax agreement but was not known to the head of KAS.
- It is found that the agreement is incorrect, particularly in light of rulings by the Constitutional Tribunal or the Court of Justice of the European Union, resolutions of the Supreme Administrative Court, or general interpretations by the Minister of Finance.
- The cooperation agreement is dissolved.
Notwithstanding dissolution of the tax agreement, in connection with compliance with the agreement the taxpayer who is a party to the agreement is subject to protection analogous to that arising out of compliance with an individual interpretation of tax regulations, except for the situation where the reason for termination of the tax agreement is disclosure of new circumstances not known to the head of KAS at the time of conclusion of the agreement—then the taxpayer is not entitled to protection, as if the agreement had never been concluded.
The head of KAS is authorised to conduct a preliminary tax audit prior to conclusion of a cooperation agreement and to conduct an ongoing monitoring audit while the cooperation agreement remains in force.
The monitoring audit includes examination of:
- The correct fulfilment of tax obligations, involving analysis of risk and examination of the documentation concerning identified areas of tax risk
- The effectiveness and adequacy of the framework for internal tax oversight, consisting of verification in the area of tax issues of the level of implementation and functioning of:
- Risk management system
- Internal control
- Internal audit
- Oversight of compliance with legal regulations, internal rules, and voluntarily adopted standards
- Mechanisms for external oversight, including independent audit of the tax function.
The tax audit ends with issuance of a positive opinion, a negative opinion, or recommendations indicating irregularities that should be cured by taxpayer within a time agreed with the head of KAS.
If a taxpayer subject to a monitoring audit submits a corrected declaration and pays any tax arrears within seven days after filing the corrected declaration, the taxpayer will not be charged interest on delay with respect to the tax arrears and will not be subject to fiscal criminal liability on this account.
The Cooperation Programme is undoubtedly a desirable institution of tax law which may improve the conditions of cooperation between the tax authorities and taxpayers.
However, as the group of taxpayers entitled to conclude a cooperation agreement is limited, the impact of the Cooperation Programme in improving the conditions for operating businesses in Poland may also be limited.
Moreover, the effectiveness of the proposed solutions can only be tested in the practice of applying the tax law, and the success of these solutions will largely depend on the approach taken by the tax authorities, primarily the head of the National Tax Administration.
Nonetheless, this is clearly a step toward improvement in the conditions for doing business in Poland, offering hope to large taxpayers of minimisation of tax risk.
The bill was approved by the Council of Ministers on 20 August 2019 and submitted to the Sejm on 23 August 2019 for further legislative work. According to the bill, if enacted, the Cooperation Programme will enter into force on 1 July 2020.
Mateusz Rowiński, Michał Nowacki, legal adviser, tax adviser, Tax practice, Wardyński & Partners