CRIDO TAXAND FLASH DECEMBER Tax authorities focus on the Members of the board of limited liability companies report issued by Crido

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1 ISSUES OF THE MONTH CRIDO TAXAND FLASH DECEMBER 2015 Tax authorities focus on the Members of the board of limited liability companies report issued by Crido Taxand and Crido Legal. TP: Polish Minister of Finance threatens companies which transfer profits abroad. Resolution of the Supreme Administrative Court in the case of Crido Taxand s client: Tax deductible expenses may be corrected on a current basis. The bank tax is not ready yet. Poland needs tax strategy. Valuation also may be challenged. Tax authorities prefer unreliability. TP: BEPS is really happening! Penal fiscal liability - is it worth to be interested in it? Will the business finance the decrease of the retirement age? 1

2 Tax authorities focus on the Members of the board of limited liability companies report issued by Crido Taxand and Crido Legal As previously announced, we present the report "Tax authorities focus on the Members of the boards report issued by Crido Taxand and Crido Legal prepared by the experts from Tax Litigation Team of Crido Taxand and Crido Legal. This is the first publication in the market analyzing verdicts that regard fiscal liability of people responsible for financial issues of business entities. The report presents statistical data indicating what were the positions of individuals held for penal-fiscal liability and what charges were levied. Moreover, the report shows what percentage of the accused convicted under a final and valid court judgement and what penalties were imposed against them. The report is intended to illustrate the practical dimension and the risk of penal-fiscal liability. Its results are not optimistic - in 95% of cases the court convicts the defendants guilty. Only 3% of all the accused were acquitted. Fortunately, the punishments were not too harsh. In 91% of cases the court sentenced financial penalty. There were also judgements of imprisonment, including lack of conditional suspension of punishment. However, they are in the vast minority. We would like to underline that final judgment of a court leads to an entry into the National Criminal Register. In fact, for members of the board it may be more severe punishment than a financial penalty. More information (including diagrams representing the statistical data) can be found in our report, which can be downloaded here (available only in Polish). TP: Polish Minister of Finance threatens companies which transfer profits abroad The announcement regarding intentions of the Ministry of Finance (MOF) for the year 2016 describing the range of control of transfer pricing was published on 18th December At first, the Ministry of Finance informs that one of the priorities in 2016 will be the verification of transfer pricing approach adopted in transactions with related entities. According with the announcement, the tax authorities will make use of experiences gained from tax audits which were already performed. Additionally, the Ministry of Finance plans to make structural changes to improve the performance and reallocate resources to transfer pricing teams. At the same time, the Ministry of Finance encourages to submitt voluntary correction of tax returns (resulting from transfer pricing adjustments). In that case, the companies would be able to benefit from a reduction in tax interests accrued on underpaid tax by 50%. Moreover, a submission of the tax return can be made without explanatory letter. The Ministry of Finance encourages the taxpayers who applied non-market prices in transactions among their capital groups between 2011 and 2015 to file the corrective returns for these years by the end of the first quarter Finally, MOF threatens the taxpayers by recommending them to stop the practice of transfer pricing adjustments performed by the end of 2015 which are aimed at lowering the profits obtained by Polish entities. MOF says that such transactions will be subjects to tax audits in II quarter of The announcement is consistent previous MOF s initiatives which were aimed at the limitation of transferring profits abroad. We hope that not all of the transfer pricing corrections will be automatically challenged as usually they result 2 CRIDO TAXAND FLASH DECEMBER 2015

3 from reasonable and well-documented intragroup policy aimed at achieving profit compliant with the arms-length principle. Link to the full announcement here (available only in Polish). Resolution of the Supreme Administrative Court in the case of Crido Taxand s client: Tax deductible expenses may be corrected on a current basis The Supreme Administrative Court (SAC) ruled, that the correction of classification of expenditures as tax deductible expenses, which were subsequently reimbursed in a form of subsidy should be made at the moment of obtaining the grant. The SAC in the resolution adopted by the adjudicating panel of seven judges pointed out that the expenditures classified as tax deductible expenses subsequently reimbursed by the earmarked subsidy exempt from income tax, should be excluded from tax deductible expenses at the moment of obtaining the subsidy. Therefore, the taxpayer is not obliged to submit the correction of prior tax returns, which would result in interest and penalties. In the grounds of the judgement, SAC pointed out, that at the moment of classification of expenditures as tax deductible expenses (subsequently reimbursed in form of subsidy) taxpayer operates in a compliance with the law. The tax return corresponds to reality and there is no mistake or law infringement. Meanwhile, the law infringement is a prerequisite for sanction which are penalty interest. At the same time, it is the nature of subsidy that it is a tax free, non-refundable aid. An obligation to pay penalties would constitute tax burden not provided by the EU law. The SAC resolution confirmed previous practice of administrative courts, relating to the moment of exclusion of expenditures on the acquisition of fixed asset from tax deductible expenses. SAC emphasized that there are no grounds to distinguish tax consequences of reimbursement by subsidy of expenditures once classified as tax deductible expenses or deducted in form of depreciation write-offs The resolution must be seen as a good news for taxpayers who are planning to obtain EU or domestic financing. On the basis of the resolution, they will be able to fully use in particular the funds available in the Financial Framework without the risk, that the will be obliged to refund part of the financing to the state budget in form of the penalty interest. We are glad to inform that the resolution has been adopted in the case of the client represented by Crido Taxand. Source: Resolution of seven judges of SAC of 14 December 2015, II FPS 4/15 The bank tax is not ready yet The bill on the taxation of certain financial institutions was considered in the first reading by the Parliament on 17 December. As a reminder, according to the draft of the bill, some financial institutions (including banks and insurance companies) will be taxed on the value of their assets at a rate of % or 0.05% per month. The tax will be charged on total assets exceeding 4 billion zlotys. At this stage, investment funds (along with closed-end funds) are not included in the scope of taxation. 3 CRIDO TAXAND FLASH DECEMBER 2015

4 In the course of the parliamentary works, the proposal of rejecting the bill on the taxation of certain financial institutions collected only 151 votes (out of 431). Thereby, the project was submitted to the Public Finance Commission for further consideration. The bank levy is to be introduced from 1 February Poland needs tax strategy Retail tax is planned to be a remedy for higher budgetary expenditures coming in the following years. There are also other goals to be achieved through the retail tax - improved effectiveness of income tax and higher budget receipts coming from direct taxation of foreign companies. Is it possible to resolve budget problems and to achieve market fairness just by introducing a tax addressed to a specific, limited amount of companies? I dare to claim that the problem lies not with foreign retailers not paying income tax in Poland, but rather that they do not want to pay it here. Poland does not offer attractive business solutions or simple and stable law (including tax law) which could encourage foreign companies to expand and concentrate the vital part of their business activities here and consequently to pay higher income tax in Poland. In fact, the main issue of polish tax system is the tendency of the government to look for problems where there are none (or those that exist are not significant). If indirect taxes are still a vital part of a budget (which should be natural in a still developing country) shouldn t we focus our efforts on maximizing the income from this area? Shouldn t we commit more energy to tighten up the legislation on VAT frauds which are a consequence of ineffective tax administration? Shouldn t we look for solutions to limit the so called informal economy in services taxed with VAT? There are many questions concerning taxation that cannot be answered only by introduction of the retail tax. Poland needs tax strategy. We need to clearly define our goals for several dozen of years and ways to achieve them. With no action strategy (including but not limited to taxation) there can be no effective ways to achieve assumed goals. It is why, before introducing new taxes, long-term strategy of development, including strategy for tax system, should be designed (provided that tax are designed to improve development). Retail tax may become one of possible ways to realize the eventual tax strategy, assuming that it will allow the government to achieve the long-term goals set during it s introduction (but it should be decided on the later stage). Valuation also may be challenged The dominant notion for many years was, that valuation made by independent entity is sufficient to prove that transactions with related parties were made on arm's length basis. In practice, tax authorities did not have appropriate skills to effectively challenging value resulting from valuation, in particular method or parameters/ assumptions accepted for value calculation purposes. As a result of intensification of investigations in the field of transfer pricing, tax authorities are more interested in valuations, which have been made for purposes of reorganization such as transfer of intellectual property (eg. trademarks) to related entities. It is not strange, given that the preparation of the valuation is an art and much depends on accepted (often subjective) assumptions. Hence the debate field is wide in that matter. 4 CRIDO TAXAND FLASH DECEMBER 2015

5 Example of challenging the valuation is judgment of Supreme Administrative Court of 3 December 2015 (ref. no. II FSK 2263/13). Although it concerns issue of recognition for CIT purposes of an adjustment resulting from additional valuation of sold property right value, but it concerned challenging of value resulting from valuation. Given that recent years were full of all kinds of intragroup restructurings, which were carried out on the basis of valuations, it is worth to consider whether the assumptions adopted there would defend themselves from the perspective of transfer pricing rules. As far as it concerns valuation of intellectual property conclusions from report on BEPS Action 8 may be helpful, as it is partly devoted the valuation of intangible assets (you may find the link to the report on our website cenytransferowe.taxand.pl in bookmark Prawo > Przepisy). Tax authorities prefer unreliability According to the report of Supreme Audit Office one of three investigation of tax authorities results in initiation of fiscal penal proceedings. Depending on a case, there may emerge allegations involving: keeping of unreliable or defective books, issuance of unreliable or defective invoices or bills. Due to our report Tax authorities focus on Members of the board the most common allegations from above group are keeping of unreliable books and issuance of dishonest invoices or bills. Allegation of defectiveness has marginal importance for tax authorities. What is the reason? Defective book is not always unreliable Reliable invoices and books are those that confirm real economic events. It is also important, whether on the basis of these documents it is possible to determine correct tax base. By contrast defectiveness, which only boils is infringement of regulations on keeping books or issuance of invoices. In practice, where books or invoices are reliable but defective, tax authorities put allegations of unreliability very hastily. In case of allegation of unreliability, as a rule it is a fiscal offense. Defectiveness of books is treated as fiscal misdemeanor. Unreliable and defective invoices are also treated as fiscal offense (in minor cases fiscal misdemeanor), provided however that fine is higher if invoice is unreliable. It is why tax authorities prefers to accuse of unreliability than defectiveness. However, there are some other reasons. Dishonest book green light for estimation According to the Tax Code, Conducting book carried in reliably and non-defectively is an evidence of records contained therein. The authority doesn t accept as proof books, which are conducted unreliably or defectively, unless the defects are not material to the case (such books still can be evidence). However, the authorities can use institution of estimation of the tax base, if they demonstrate that books are unreliable. That all makes, that the authorities prefers dishonesty than defectiveness both in fiscal penal proceeding and in control protocols. 5 CRIDO TAXAND FLASH DECEMBER 2015

6 Source: Information on the results of audit conducted by Supreme Audit Office, Supervision of the tax and fiscal control authorities over the correctness of settlements with state budget of entities with foreign capital participation, 17 April 2015 TP: BEPS is really happening! Recently, over and over again we remind you about BEPS program carried out by OECD and G20 and about an impact that it has on the Polish tax law - which is quite significant, both for the regulation of transfer pricing and the rules on thin capitalization or on a controlled foreign corporation (CFC). This time we would like to present you report prepared by Taxand network, which shows that actions that are BEPS consequences are carried out also in other countries. Therefore, we are presenting "Taxand Global BEPS Report" prepared for November 2015 summarizing the actions that have been taken or will be taken in almost 20 countries in connection with the implementation of BEPS. The attached report provides, among others, information as to which activities related to CFC, deductibility of interest expenses or transfer pricing documentation which has been taken by countries such as Germany, USA, France, Netherlands, United Kingdom and Russia. This study also provides information about effect that BEPS has in these countries on fiscal controls and on what you should pay special attention when conducting business in these countries, in order to reduce tax risk. We encourage you to read! We also posted summary of the implementation of BEPS activities in the different countries for you on our website cenytransferowe.taxand.pl (availlible in Polish only), in the section Prawo, where in the future we will publish updates of this report, presenting further progress in implementing the action in connection with BEPS in other countries. Penal fiscal liability - is it worth to be interested in it? We decided that some of the posts on our blog will be devoted to penal liability of people responsible for tax settlements of companies. We will discuss, among others, such issues as responsibility of members of the board and consequences of a conviction for them and for a company, the most frequently brought tax criminal charges, current trends in the proceedings. We will also explain how you can reduce the risks associated with penal fiscal code. We believe that this issue is hot - due to the rising number of penal fiscal cases, problem can affect anyone who is responsible for the financial or tax affairs of a company. Penal fiscal code: member of the board position connected with increased risk Board member not only is responsible for tax liabilities of a company on the basis of the Tax Ordnance, but also bears personal liability for fiscal crimes and misdemeanor. This is due to the art. 9 3 of the Penal Fiscal Code, according to which as an offender is responsible the one who deals with economic, in particular financial, issues of a company. The responsibility is therefore assigned to a person who makes decisions in matters of company s tax settlements. Apart from the board members, the issue may be applied to, for example, financial directors, chief accountants or people responsible for taxes in a company. The question which is important here is a scope of assigned duties and responsibilities, and not just a name of a position. 6 CRIDO TAXAND FLASH DECEMBER 2015

7 However, board members, as people responsible for running a company s business, having the largest autonomy in action and decision-making abilities, are most exposed to this risk. According to the report "Tax authorities focus on members of the board", prepared by Crido Taxand and Crido Legal, which will be published in mid- December, in 73% of cases, penal fiscal cases relate to responsibility of board members. Responsible for what? In practice, board member may be responsible for irregularities in company s tax settlements such as understatement of tax liability (or overstatement of tax reimbursement), tax returns not submitted to tax office, persistent lack of tax payment, unreliable books and much more. As a rule, the act must be committed intentionally (which means that member of the board intended to commit a crime, or he agreed to its committing), unless the law provides for the punishment for unintentional acts. As a result, not every error in a calculation of tax should lead to a conviction. Unpleasant consequences If there is a conviction, the court may order a fine, imprisonment or restriction of liberty. Among the most acute punitive measures for board members there are: the prohibition of running a particular business activity, performance of a particular profession or occupation of a particular position. A convicted person is also entered into the National Criminal Register, which may have an impact on functioning of a company itself (more on this in the next post on blog). How to reduce a risk? We cannot be protected from penal fiscal liability by any insurance, so it is worth to take care of order in tax settlements and the relevant internal procedures. A clear division of responsibilities between members of the board, assignment of responsibilities and duties to particular individuals, operating procedures within the finance departments - may be helpful among other actions to be taken. These documents shall be in writing in order to be able to be used as evidence in a potential penal fiscal proceedings. At the same time, not without significance is to contact a tax advisor and obtaining his opinion on the more controversial issues, and - last but not least - regular tax reviews. In the case of irregularities in tax returns that had been found before authorities got the information about them, it is possible to submit to the authorities a letter revealing the above mentioned irregularities (so called voluntary disclosure letter), together with the correction of a declaration or complement of the omitted action. Effectively submitted voluntary disclosure letter protects from penal fiscal liability. Larger transactions and issues of a systemic nature shall be covered by individual advance tax ruling. They will protect the taxpayer, in particular against changes in line of interpretation forced by tax authorities and courts. The issue of penal fiscal risk is so specific that it relates to specific individuals; in the interest of the company (measured by maximizing its value) may be taking a certain actions in order to minimize tax liabilities. This course of action may not always be compliant with the interests of the people responsible for taxes of the company; taking into account the perspective of these people will be one of the key challenges that will need to be coped with in the new, more demanding tax environment, which we will certainly face in the coming years. 7 CRIDO TAXAND FLASH DECEMBER 2015

8 Will the business finance the decrease of the retirement age? It seems that businesspeople will - at least partially - finance the lowering of the retirement age. The explanatory memorandum to the draft law amending the Act on retirement and disability pensions from the Social Insurance Fund (SIF), developed by the President and submitted to Parliament, directly enumerates ideas for increasing revenues of SIF. One of them is to eliminate irregularities in the labor market including the use of (socalled) civil law contracts and self-employment rather than contracts of employment in order to exclude or reduce social security costs". There have not been shown the amendments to the rules on social security system in this regard. Nevertheless, assuming that the tax payers are obliged to pay insurance contributions on the actual profit made (today they can pay on a constant basis, i.e. 60% of the projected average monthly salary) increase in the charge would be substantial. Based on our preliminary estimates, contributions to social and health insurance would increase monthly by: PLN - for the taxpayers who receive a monthly revenue of PLN , PLN - for the taxpayers who receive a monthly revenue of PLN , PLN - for the taxpayers who receive a monthly revenue of PLN Of course, the devil is in the detail it is important to monitor the expected changes in the regulations on the social security system in this regard. It is also worth remembering that the taxpayers create new jobs which effectively increase the income of the SIF. As a result, increase in the contributions paid by the taxpayer may ultimately have an opposite effect that the one intended it may have a negative effect on revenues of SIF. SHOULD YOU HAVE ANY ADDITIONAL QUESTIONS CONCERNING THE ABOVE ISSUES PLEASE CONTACT: Andrzej Puncewicz Partner andrzej.puncewicz@taxand.pl Paweł Toński Partner pawel.tonski@taxand.pl Crido Taxand Ul.Grzybowska 5A Warszawa crido@taxand.pl Crido Taxand Sp. z o.o. ul. Grzybowska 5a, Warszawa Tel crido@taxand.pl 8 CRIDO TAXAND FLASH DECEMBER 2015