Application for tax interpretation on the basis of a group request from related parties

Ministry of Finance plans another amendment Tax Ordinance. This time it is about introducing a special type of group request for an interpretation of individual tax legislation. The purpose of the article is to indicate what information should be included in such a request made by related parties, how it will need to be updated or supplemented, and to discuss legal protection from this interpretation and the impact of changes to the rules on individual interpretations already issued.

Introduction

Traditionally, the Ministry of Finance justifies another draft tax change 1 the need to combat tax optimization – used, for example, by taxable persons who participate in the transaction chains and submit requests for interpretation concerning the individual assessment of their tax settlements, excluding links with other entities involved in those transactions.

According to the Ministry, the current regulation makes it impossible for the Director of National Tax Information to assess in depth whether the purpose of the intended transactions is to abuse tax law by taxpayers.

The project promoter states in the justification for the changes that the entities of the group may benefit from tax avoidance because of the protection resulting from individual tax rulings. It is therefore necessary to seal the system of issuing these interpretations.

It is worth reminding that by means of amendments Tax Ordinance of 10 September 2015 2 from 1 January 2016 the provision that the common request for an individual interpretation may be requested, inter alia, has become applicable two or more interested parties in the same factual situation or to participate in the same future event.

Interested persons indicate in it one an entity which is a party to the interpretation procedure and makes a statement under penalty of criminal liability for false testimony that the elements of the facts covered by the request for interpretation on the date of its submission are not the subject of the ongoing tax proceedings, tax checks, customs and tax checks and that in this respect the case has not been settled as to its substance in the decision or order of the tax authority.

If a false statement is made, the individual ruling has no legal effect. An individual interpretation or order in the case shall be served on the entity designated as a party and on the other interested parties a copy of the interpretation or provision.

The Minister of Finance may, inter alia, declare the expiry of an individual interpretation if it is contrary to the general interpretation given in the same legal state.

New type of request for individual interpretation

However, this provision proved insufficient in its scope for the Ministry of Finance, which decided in April to introduce a completely different type of proposal for specific entities in order to encourage changes in the abuse of protection for an individual interpretation.

In accordance with the proposal for amendments, where the factual or future event involves transactions or other activities involving a national entity, foreign entity or entity to become a national entity or a foreign entity, related entities, an individual interpretation will only be issued at the request of those national entities and foreign entities jointly called a group request.[3].

This provision will not be used for repetitive transactions or other activities carried out primarily with non-related entities where the conditions of those transactions or other activities concerning related entities do not differ from those applicable to non-related entities.

While the individual interpretation will be issued without undue delay, in the case of this group request, within the time limit 6 months after receipt[4]. The Ministry of Finance explains such an extension of the deadline with the need to analyse the enlarged facts or future events, often of a complicated nature.

However, did it take into account the fact that taxpayers would be insecure about the legality of the scheduled transactions? Under current regulations, the interpretation of individual tax legislation appears without undue delay, but no later than the time limit 3 months after receipt of the request[5].

What should be included in the group application?

In April, the draft amendment Tax Ordinance be exchanged in detail[6], the information to be included in the group application of related parties. Except exhaustive an indication of the facts or future event, in addition to: 1) the main advantages obtained and expected by associated entities, including tax benefits, arising both directly and indirectly from transactions or other activities; 2) transactions and other activities carried out, in progress or planned, on which it is dependent, both directly and indirectly, to achieve the main benefits; 3) the value of the undertaking, its organised part or the property rights covered by the facts or future event, where their market value or nominal value at the date of the group application is at least 10,000,000 PLN; 4) value of the main benefits in question Under point 1, subject to a factual or future event in the case in question Under point 3.

The project promoter also clarified that the indication of the values in question Under points 3 and 4, includes prices, market values, issue values and nominal values, if any; it is also necessary to indicate the period for which the values listed in those points are specified, where reliable determination of those values is possible only during that period.

The Ministry of Finance explains that it will be credible to determine or estimate the value that will deviate from the real value by less than 25%, i.e. the threshold at which the protection will be excluded. A group application should contain a description of the links that exist or are intended to arise between the related parties covered by that proposal, which are covered by the Personal and Corporate Income Tax Act.

In a group application, taxable persons should also indicate whether transactions or other activities covered by a factual or future event have been, are, or will be, solely with a related entity or with other entities.

It is also necessary to provide the number and date of the individual interpretation and to indicate the authority which issued it, where transactions or other activities covered by the facts or event of the future group request were previously the subject of the individual interpretation. In such a case, the body entitled to issue an individual interpretation may treat the group application as a complement to the facts or future event subject to that interpretation, if the circumstances of the case or the tax consequences of the transactions or other activities in question justify their cumulative recognition.

What is the tax advantage?

Current Tax Ordinance the definition of the tax advantage can be found in Section IIIA Anti-tax avoidance[7].

It is, within the meaning of the provisions of this Chapter: 1) the absence of a tax liability, the withdrawal at the time of the tax liability or the reduction of its amount, or the formation or recovery of the tax loss; 2) there will be an excess or right to refund or an increase in the amount of excess or refund.

The April draft proposes that this definition be transferred to a dictionary located in under Article 3, incentivising that this concept will also be present in the rules on tax interpretation. Rule 119e is to be repealed.

The Ministry of Finance informs in the justification of the project that taxable persons signing a group application, in order not to expose themselves to the consequences of a lack of protection due to the lack of all the main benefits, can take a precautionary approach and, in the case of those with doubts as to whether they are the main benefits, indicate them.

The Ministry also explains that the indirect result of the advantage must be understood to be a situation where the activity in question determines the existence of the advantage but is not the sole condition, since other transactions or activities must also be carried out to ensure that the advantage is realised. As an example, it indicates the choice of taxation in the form of a tax card preceding the divestiture of the company’s assets — the advantage in the form of inefficient taxation of that divestiture is achieved by combining these two activities.

Update of the group proposal and legal protection

The group request may be updated before and after the individual interpretation. In case of an update before the interpretation is given, time limit for its issuance (6 (months) runs again from the date of receipt of the update.

Applicants will be entitled to legal protection in connection with an individual interpretation made at that request if it is updated within the time limit 3 months from the date on which the applicant has obtained the right to indicate: the main benefits obtained and expected by the related entities, including tax, arising both directly and indirectly from the transaction or other activity; transactions and other activities carried out, whether in progress or planned, on which it is dependent, either directly or indirectly, on the main benefits, where it was not possible at the date of the group application to correctly identify those benefits, transactions or other activities; the values of the undertaking, its organised part or property rights subject to a future event, where their market value or nominal value at the date of the group application is at least equal to the sum of at least 10,000,000 PLN; value of the main benefits covered by the actual or future event[8].

At annual tax settlement, time limit 3 the months will be extended to the date on which the deadline for the submission of the annual statement, in terms of benefits, transactions and other activities or values relating to the tax year for which the statement is submitted.

The provisions on the indication of benefit and value and annual tax settlement will not apply in the case of an individual interpretation issued at the group request if, as a result of its update, that interpretation has been amended in terms of the assessment of the applicant's position or the legal justification of that assessment and the legal protection results from the assessment of the applicant's position or the legal justification of that assessment in the interpretation prior to its amendment. According to the Ministry of Finance, the update of the proposal does not result in an extension of protection.

After completing or updating the group application, the Director of National Tax Information of his own motion, without undue delay, but not later than within 6 months after receipt of completion or update: 1) revokes the personal interpretation and discontinues the procedure for the issuance of an individual interpretation, if there is a reasonable presumption that it may be the subject of a decision based on a Article 119a Tax Ordinance[9] or constitute an abuse of the law in relation to the Goods and Services Tax Act[10]; 2) amends the individual interpretation with regard to: (a) the description of the factual or future event presented in the request, or (b) the assessment of the applicant's position or the legal justification for that assessment, where such a change justifies the completed or updated factual or future event.

Taxable persons shall not be protected by an individual interpretation issued at the request of a group: from the date of its issue, if the main benefits (including tax) or transactions and other activities are not indicated in that request; the values of the principal benefits or values of the undertaking, its organised part or property rights covered by the facts or future event differ at least by 25% from real values. The protection will not be granted if the interpretation is abrogated due to a reasonable presumption as to the elements of the factual or future event presented that they may be the subject of a decision based on Article 119a Tax Ordinance or constitute an abuse of the right to the VAT Act and also after the expiry of the period for which the values have been determined, unless the elements of the group application are updated within that period.

Termination of individual interpretations

The bill also included a provision that states that within the time limit 6 months from the date of its entry into force, the entity at the request of which an individual interpretation was issued before that date, the subject of which was a factual or future event involving transactions or other specified activities under Article 14t(1) Amended Act under Article 1, will be able to provide the Director of National Tax Information with information on the extent indicated under Article 14t(3) and 4 This bill. This information is intended to complement the facts or future events subject to an individual interpretation.[11].

The consequences of non-use of this option shall be determined by another provision, according to which the individual interpretations referred to above will expire on the date of entry into force of the Act, if within the time limit 6 the information referred to above will not be provided months after its application[12].

The Mancaments related to the Regulation indicated the Chief Administrative Court in its comments on the draft 13 , stating that: “these provisions may in themselves constitute a reason for constitutional objections.

In accordance with the applicable rules, the Director of National Tax Information may, of his own motion, declare the expiry of an individual interpretation if it is contrary to the general interpretation given in the same legal condition, as it provides for Article 14e(1a)(2) Tax Ordinance.

The finding that an individual interpretation is terminated is made in the form of an order for which the complaint is based (Article 14e(3) Tax Ordinance).

The latter provision should apply at least to those entities which, under the scheme, Article 2(1) The project will decide to provide the Director with additional information required by the new legislation, but, for example, the completion of the proposal will exceed the above mentioned deadline. 6 months.

For this group of operators, a procedure should also be introduced to fill in the shortcomings of the requests, e.g. in the pattern of resolution envisaged. Under Article 3(2) project’.

According to KGHM 14 : „However, the addition of the requests does not guarantee an interpretation consistent with that presented by the Authority in the original interpretation. In the opinion of the Company, this approach may violate the principle of legal certainty and legal certainty and the principle of the protection of acquired rights" (...). The newly designed regulations provide for retroactive action and will consequently result in a violation of the abovementioned rules.’

The company proposed in its opinion that "the newly designed rules should apply only to interpretations issued after the entry into force of the amendments.

Such an approach will ensure the protection of the rights acquired by taxable persons, who, often on the basis of interpretation, in confidence in the position of the tax authority, have entered into certain transactions (the effects of which could now be assessed differently by the provision in question).

At the same time, the Company's proposal will in no way limit the possible behaviour of the authorities in countering aggressive optimizations (...)".

The bill is to enter into force after 14 days after the announcement.

It is worth noting the position of the tax office in connection with the parliamentary interpelling on changes concerning individual tax rulings, in which Bożena Kamińska, who reported it, indicated that "many entrepreneurs believe that this draft of changes will destroy economic activity in Poland.

Importantly, the State Treasury, including KGHM, PGE and PGNiG, do not hide their concerns in addition to private entities, and that ‘the definition of related entities is relatively broad and covers almost all parties to the transaction.

Consequently, almost every action involving at least two entities will require a group request for interpretation 15. Among other things, the MP asked: what are the reasons for the proposal for amendments to reduce the abuse of tax rulings?

Mr Gruza, Under-Secretary of State in the Ministry of Finance, explained that ‘The maintenance of the protective power of previous interpretations without the need to supplement them would lead to a group of entities having ‘old’ interpretations providing them with protection (...), complementing the facts or future events with additional elements would not lead to a repeal of the interpretation or a change in the assessment of the applicant’s position if the information provided does not indicate that the applicant seeks to abuse institutions for individual interpretations’.[16].

Summary

The Ministry of Finance has decided to renew once again Tax Ordinance, This time, in order to review even more related party transactions. Hence, the proposal to introduce a new so-called group request for individual tax rulings for these entities.

According to the Ministry, in the current state of the law, the protective power of these interpretations is abused by taxpayers, especially when it concerns, for example, the transformation of enterprises or the sale of key assets, and it is difficult for tax authorities to assess the entire chain of transactions and the role of entities in the group.

one with the most problematic and at the same time burdensome for taxpayers the change is the one which concerns the addition of already issued individual interpretations within six months after the amendment. If the entities that received those interpretations do not provide the information referred to in the amending act, the interpretations issued so far will expire on the date of entry into force of the law and their protection will cease to apply.

Related parties will also have to wait longer, compared to the standard three-month deadline, for interpretation with a group application, to be issued no later than within the time limit 6 months after receipt. The waiting time for the assessment of the applicant’s position, together with the legal justification for that assessment, will therefore be extended.

The project promoter explains that, in the absence of an update in due time, protection will not be granted from the date of the interpretation given at the group request and not, for example, from the date on which the update should be carried out.

The Ministry itself notes that doubts may arise as to the indication in the group application of assets with a total value of at least 10,000,000 PLN – because in most cases tax legislation does not make the effects of transactions or other activities dependent on the value of their items.

However, as the ministry clearly points out in the justification for the changes, the institution of individual interpretations, in addition to its primary protection function for taxpayers, is also a valuable source of information for tax authorities

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1 Project from 10 April 2018 amending the Act – Tax Ordinance, listed in the Government Legislative Centre. [2] Article 1(18) Act of 10 September 2015 amending the Act – Tax Ordinance and some other laws, Journal of Laws of 2015, item 1649. 3 Project from 10 April 2018, op. cit., Article 1(4). [4] Ibid. Article 1(2).

[5] Article 14d Act of 29 August 1997 – Tax Ordinance, i.e. Journal of Laws of 2018, item 800 as amended 6 Project from 10 April 2018, op. cit., Article 1(4). 7 Act of 29 August 1997 – Tax Ordinance…, op. cit., Article 119e. 8 Project from 10 April 2018, op. cit., Article 1(4). 9 Act of 29 August 1997 – Tax Ordinance…, op.

cit., Article 14b(5b). 10 Act of 11 March 2004 on tax on goods and services, i.e. Journal of Laws of 2017, item 1221 as amended 11 Project from 10 April 2018, op. cit., Article 2(1). 12 Project from 10 April 2018, op. cit., Article 2(2). 13 The position of the NSA, made in public consultation, RCL, 17 May 2018., letter No BO-60-12/18.

14 The position of KGHM from 20 April 2018, the public consultation, RCL, 17 May 2018. 15 Intercourse No. 22582 to the Minister of Finance from 24 May 2018 16 Response from 28 June 2018 Paweł Gruzy, Undersecretary of State at the Ministry of Finance, for the parliamentary interpelling No. 22582, letter No SP4.054.2.2018