Volume 54, Number 2 April 13, 2009 Finance Ministry Highlights 2009 Tax Inspection Objectives by Michal Tarka
Finance Ministry Highlights 2009 Tax Inspection Objectives The Polish Ministry of Finance on March 30 issued a list of tax inspection authority objectives for 2009. According to the Tax Inspection Department, in 2009 tax inspections in Poland will focus on two key goals: identifying and counteracting fiscal offenses and tax fraud and acquiring budget proceeds by ensuring effective performance of tax obligations and other receivables constituting state budget income. According to the MOF, tax inspection authorities will focus on entities which frequently form organized crime groups that attempt to commit tax fraud because these entities create the greatest risk of large-scale state budget losses, mainly related to VAT and excise duty. The tax inspection authorities course of action is designed to eliminate from the market the entities that deliberately commit fiscal offenses and ensure efficient acquisition of proceeds due from other entities that operate legally in the business market. Tax inspections will also be focused on counteracting and minimizing the broadly understood gray market. Activities pertaining to the increased application of information technology (IT) solutions in tax inspection will also be continued in the following areas: applying specialized analytical software in inspections of entities with e-accounting the so-called e-inspection; detecting and identifying entities that conduct business activity via the Internet (e-commerce) and that failed to report tax liability or failed to declare income from this portion of their operations for tax purposes; and developing analytical methods applied in selection of entities for inspection and in determining business relations between entities. Inspections will focus on combating irregularities related to: excise duty avoidance, with particular emphasis on taxation of liquid fuel trading; COUNTRY DIGEST fraud related to the goods and services tax in intracommunity trading, including carousel frauds; extortion of GST using fictitious invoices; income tax avoidance by transferring income to related parties; identifying and combating the gray market, particularly in Internet commerce and services, as well as failures to disclose all income and income sources; and management of public funds and the State Treasury property. Any irregularities identified during tax inspections will constitute basis for the tax inspectors acting as financial authorities for preparatory proceedings to carry out proceedings in line with the provisions of the fiscal penal code and the criminal procedure code. Liquid Fuel Trading The actions of the tax inspection authorities will focus primarily on trading of liquid fuels by organized crime groups whose practice is to counterfeit and market fuels without paying taxes. Particular attention will be paid to the trading of products subject to excise duty exemptions and to the final use of products manufactured and sold as nonexcise products. The goals of inspections of liquid fuel trading will be twofold. First, all actions will target recovering any state budget receivables from excise duty (as well as VAT) lost as the result of crime group operations. Second, actions conducted with prosecution authorities will target eliminating the practice and breaking up the crime group. The tax inspection authorities have compiled the following list of trade categories in which excise duty avoidance can occur: trading of fuel oils and marine oils (which can be debloomed and resold as diesel oil); trading of heavy fuel oil (which can be mixed with other components and sold as diesel oil); trading of fuels of unknown origin; TAX NOTES INTERNATIONAL APRIL 13, 2009 1
COUNTRY DIGEST trading of special gasoline (which is designed for other uses but marketed as gasoline for driving purposes); trading of liquefied petroleum gas (which can be pumped from 11 kg bottles intended for commercial use and sold as power gas); and trading of various components that at the final phase are used to manufacture diesel fuels. Therefore, special attention will be paid to trading of products subject to excise duty exemptions and to the ultimate use of products manufactured and sold as nonexcise products. Carousel Fraud For the EU member states, including Poland, the frauds that are most serious and most difficult to combat are carousel frauds, particularly those committed with the participation of entities domiciled in the territories of various EU member states. It is estimated that carousel frauds cause vast budget losses for individual EU states because of both the illegitimate application of the 0 percent rate (in situations when the actual movement of goods did not take place; only invoices were circulated) and the failure to pay the output tax by entities performing the role of the so-called missing traders. To counteract VAT carousel frauds, tax inspection authorities will: undertake actions to identify entities that may participate in such a practice by conducting internal analyses, analyses of reports from the Tax Information Exchange Office in Konin, and analyses of the information received from the Eurocanet network; acquire and use information using the Standing Committee on Administrative Cooperation forms; and conduct extensive tax inspections in cooperation with tax administrations of other countries, applying the provisions of the Council Regulation no. 1798/2003 of October 7, 2003, on administrative cooperation in the field of value added tax. Fictitious Invoices The tax authorities will focus on business entities practice of using fictitious invoices in light of the large scale of that practice and the significant depletions in GST and income tax revenue that occur as a result. The primary goal of buyers of fictitious invoices is to reduce their VAT payable by deducting the input tax indicated on those invoices. In the case of corporate or personal income tax, the invoices are included in taxdeductible costs or a fraudulent VAT refund is obtained from the tax authorities. Offenses related to marketing of fictitious invoices exist in various forms, from less complicated offenses consisting of a purchase by a business operator of one or several fictitious invoices to reduce its tax burden, to setting up organized crime structures with the primary purpose of obtaining undue VAT refunds. The latter can be achieved by setting up a chain of related entities with participation of entities established as the socalled poles or acting as missing traders. The last link in a chain like this is the entity that exports mainly to countries where tax information exchange is difficult (like Russia or Ukraine). This criminal mechanism has remained principally unchanged; the only aspect changing is the goods that constitute the subject matter of fictitious invoices. So far, inspections indicate that fictitious invoices related to exports used to fraudulently claim VAT include, without limitation: scrap, textiles, CDs with interactive language learning courses, mobile phones, and electronics. On the other hand, fictitious invoices related to construction services or nonmaterial services such as marketing, consulting, advertising, or IT services are most frequently purchased by business operators who reduce their VAT payable (by deducting the input tax resulting from such invoices) and increase the tax-deductible costs, thereby decreasing the taxable income. Fictitious invoices are mainly issued by individuals who registered business activity but did not actually conduct it. In many cases, those persons submitted tax returns to the tax offices without indicating any tax liabilities to be paid, and if liabilities were indicated, they were minor. The purchaser had to pay a certain type of fee for issuing the fictitious invoices, usually amounting to 3 percent to 10 percent of the invoice value. There were also cases when fictitious invoices were issued by entities that actually conducted business activity but reported income tax losses and VAT amounts carried forward to subsequent months. To eliminate that practice, the MOF suggests gathering all information signaling any suspected occurrences of these tax offenses, particularly information obtained from the police and the public prosecutor s office from fiscal intelligence services (who monitor the Internet and other media from the point of view of entities offering sales of costs ), as well as information arising from previous inspections. Transferring Income to Related Parties Business entities, both local companies and international businesses, make an effort to ensure that their business structure, concluded transactions, acquisitions, financing, or distribution of cash surpluses bring about tax savings. The tax planning strategies implemented by these companies are not always in line with the valid tax regulations. It is not possible to determine the scale of this practice; however, inspection findings indicate that such activities have caused material losses to the State Treasury. 2 APRIL 13, 2009 TAX NOTES INTERNATIONAL
In consideration of this, tax inspection activities will focus on inspections of: foreign subsidiaries of corporations registered in the territory of the Republic of Poland, with a view to recognizing the same as an establishment as defined by the corporate income tax act or according to the respective double taxation treaty and later, if such a subsidiary meets the criteria of an establishment, with a view to verifying whether the income allocated to that establishment in Poland has been determined as if the transaction were concluded at arm s length; taxpayers who report income exempt from tax that has been earned from sources located abroad, with a view to determining whether it actually meets the terms of exemption or whether the entities that legitimately generate tax-free income include amounts related to the purchase and sale of the subject of the transaction (for example, securities or stocks) in their revenues and costs; and taxpayers who settle taxes on general terms and who transfer income on taxpayers who apply flat rate taxation forms. The mechanisms identified thus far organize sales in such a manner that an entity taxed on general terms only reports a portion of the earned income on which the tax was paid on general terms. The remaining portion of the income was transferred to the entities set up on an annual basis that operated in close relationship with the manufacturer and applied the flat rate taxation. In the beginning of a new tax year, a new entity would be created that, due to the value of its income (the threshold admissible under the law would be exceeded during the year), would be liquidated at the end of the year. Identifying and Combating the Gray Market The gray market phenomenon that exists on a large scale in the Polish economy is disadvantageous to the economy s development. Tax evasion results in numerous measurable unfavorable consequences for the state budget, local authorities, and other market players. Studies on the gray market indicate that most income is concealed by small businesses that keep simplified accounting and that are not subject to statistical reporting. They earn income by understating the actual revenues, overstating costs, and, consequently, understating the tax base; by employing staff illegally; by concealing the actual import volume by presenting fictitious invoices; or by corrupting administration personnel. Moreover, these may be entities that conduct business activity (trade, crafts, housing services, private tuition, and so on) but are not registered at all. According to specialists, about 20 percent of budget losses result from operations of unregistered entities and as much as 80 percent from unrecorded operations of entities that operate legally. COUNTRY DIGEST Therefore, it is necessary to undertake steps limiting the extent of the gray market regarding that latter group of taxpayers. It s important to effectively control taxpayers who deliberately evade taxes and avoid financial liability by liquidating their business and concealing their assets. The MOF believes attention should also be paid to taxpayers who benefit from flat rate taxation and report relatively low revenues. This is confirmed, for instance, by the findings of a coordinated inspection of funeral services. It was determined that the inspected businesses failed to report about 40 percent of their sales for tax purposes. The gray market may also be limited by inspections of taxpayers conducting seasonal activities (for example, food stands operating at the seaside during summer months). Practice indicates that some of these taxpayers are not registered at all or that they understate their revenues by failing to record sales with cash registers. Inspections of business activity conducted via the Internet have made it possible to develop methods that can identify businesses and select them for inspection by applying analytical IT tools and Internet monitoring. Selected employees have also been trained in using professional analytical software, and sector-specific e-trade monitoring has started at the central level. Such activities are necessary not only for the interests of the State Treasury but also to increase the taxpayer s awareness of the high probability that tax inspections will identify abuses. Inspections of income that does not correspond to the disclosed income sources will be conducted with particular emphasis on: improving qualifications of inspectors and employees involved in the inspections and proceedings; reducing the arduousness of proceedings carried out by tax inspection authorities regarding undisclosed income sources by proper planning and preparation of inspections, with a focus on avoiding unnecessary instigation of proceedings; developing cooperation concerning the control of income that does not correspond to the disclosed sources with other authorities and institutions, particularly tax offices, police, and the public prosecutor s office; and tax inspection authorities undertaking steps to obtain additional sources of information about income and expenses of taxpayers (including access to databases). Management of Public Funds The key issues in this area will be inspections designed to verify the expediency of decisions and legality of the appropriation and management of the state TAX NOTES INTERNATIONAL APRIL 13, 2009 3
COUNTRY DIGEST property and public funds. The fundamental tasks executed by tax inspections into appropriation of public funds in 2009 will comprise, without limitation: inspections of expediency and legality of management and appropriation of financial aid granted with state funds (the inspections will target beneficiaries of the funds and the entities managing the funds); inspections of legality and relevance of granting and extending loans with state budget funds to entities undergoing financial restructuring; inspections of reliable performance of the obligations arising from warranties and guaranties granted by the State Treasury and inspections of appropriation of the funds the repayment of which is warranted by the State Treasury; inspections regarding the management of State Treasury real properties and the correctness of privatization of State Treasury assets; and inspections of correctness and effectiveness of collection of receivables and recovery of public receivables. Fiscal Penal Proceedings In 2009 tax inspectors acting as financial authorities for preparatory proceedings in cases identified during tax inspection operations will focus on orienting the work of fiscal penal units to prosecute and bring to justice the perpetrators of acts that: exceed high and great value when they are committed; are committed in organized groups; and meet the criteria of an economic fraud. The proceedings would primarily concern the acts characterized as highly harmful to society by tax inspection authorities in 2009 and those that most frequently meet the statutory criteria of a crime in the form of tax fraud, tax evasion, or the issuing and use of fictitious invoices. Moreover, actions undertaken in 2009 will seek to more effectively execute the statutory objective of the fiscal penal proceedings to the extent of compensating for the financial losses of the State Treasury (article 114, section 1 of the fiscal penal code) by drawing attention to the possible broader practical use of institutions that already exist in the fiscal penal code for example, the subsidiary liability (article 24, section 1), the claim for return of benefits from third parties (article 24, section 5), the security of the payment of reduced tax dues with assets (article 131, section 1), and the submission of a motion for judgment, which will be considered by a court provided the required regulatory liabilities are paid on the specified deadline (article 156, section 3). Meanwhile, proceedings will also be held regarding cases related to acts of minor significance. Police penal order proceedings will be conducted to determine a simplified procedure for these cases. Michal Tarka, tax lawyer, Warsaw 4 APRIL 13, 2009 TAX NOTES INTERNATIONAL