Foreign tax on goods and services as income and tax cost

The revenue cost structure is based on a specific general clause under which the taxable person is able to deduct all costs, provided that he demonstrates their direct link with the activity and that their bearing on them has or may have an impact on the amount of revenue obtained or the preservation or safeguarding of the source of income. What constitutes the case law and what is the position of the tax authorities regarding the cost of obtaining the value added tax revenue contained in the invoice from a foreign counterparty?

Introduction

The cost of obtaining revenue shall be any reasonable and economically justified expenditure related to the economic activity which aims at achieving, securing and preserving the source of revenue.

As a general rule, expenditure meeting the following cumulative conditions shall be considered as revenue costs 1 :

• 1) have been incurred by the taxable person, i.e. they must ultimately be covered by the taxpayer's assets,
• 2) are definitive (actual),
• 3) are linked to the economic activity of the taxpayer,
• 4) have been incurred in order to obtain revenue, preserve or secure their sources, or may have a different effect on the volume of revenue achieved,
• 5) have been properly documented,
• 6) are not listed in the non-taxable expenditure directory.

According to Article 16(1)(46) the Corporate Income Tax Act and Article 23(1)(43) u.p.d.o.f. shall not be considered as the cost of obtaining input tax revenue, except that the tax cost may be charged:

1. where the taxable person is exempt from the tax on goods and services or has acquired goods and services in order to produce or sell goods or services exempt from the tax on goods and services,
2. in the part where the taxable person is not entitled to a reduction in the amount or reimbursement of the difference in the tax on goods and services in accordance with the provisions on the tax on goods and services (if the tax on goods and services paid does not increase the value of the fixed asset or intangible asset).

The legislator – although not introducing a definition of a legal concept – differentiates between the tax on goods and services and the value added tax. The concept of value added tax means value added tax imposed on the territory of a Member State, with the exception of the tax on goods and services imposed by the Act of 11 March 2004 on tax on goods and services 2 (Come on. the VAT Act).

The wording ‘goods and services tax’ is a determination of the value added tax applicable only in Poland. It does not apply to foreign value added tax included in the price paid to a foreign counterparty. Consequently, the exemption from the cost of obtaining revenue is only subject to the tax on goods and services within the meaning of the VAT Act

The case law on the recognition of value added tax revenue as a cost for several years was not uniform. The tax authorities held that value added tax does not constitute a tax revenue or cost because value added tax is the same as that on goods and services. In turn, the courts presented the opposite position.

According to the tax offices, only if the taxable person did not have the right to refund value added tax could the tax have been at the expense of obtaining income, i.e. the tax cost should be recorded in gross amount.

From 2015 there has been a breakthrough in the view presented by tax authorities. The Ministry of Finance has published its position[3], according to which the value added tax represents the cost of obtaining revenue and its return is the tax revenue.

At present, the value added tax included in the invoice on a foreign counterparty is the cost of obtaining revenue regardless of whether the taxpayer requests its return to a Member State or country third, Or not.

The same position is presented by the Provincial Administrative Court of Gdańsk in the judgment of 27 September 2011[4] and e.g. Director of the Tax Chamber in Katowice in an individual interpretation from 2 December 2015 5 .

It should be noted that the inclusion in the costs of obtaining value added tax revenue is subject to compliance with the general rules on the eligibility of expenditure for tax costs. The amount of value added tax cannot be considered as a tax cost if the purchase itself does not constitute a tax cost, e.g. expenses of a representative nature will be incurred.

The current line of judicature follows in a different direction than the Ministry of Finance.

According to the case-law, the VAT charged in EU countries does not constitute the cost of obtaining income from corporate income tax and the VAT refund obtained from invoices documenting purchases made in other EU countries does not constitute revenue subject to Polish income tax. [...] Unless there is no doubt that in EU countries, the value added tax is the same as the tax on goods and services, there is no such certainty for non-EU countries.[6].

In line with the position presented in the existing interpretations of individual tax rules, in the context of the recognition of the recognition of value added tax, reference should be made to the possibility of classifying the resulting exchange rate differences with tax revenues/costs. The Income Tax Act clearly identifies situations where exchange differences arise which affect the amount of the tax base, namely:

• 1) the value of the income due in foreign currency on the date of its formation for tax purposes is different from that due on the day of actual receipt,
• 2) the value of the tax cost in foreign currency on the date of its account is different from its value on the date of payment,
• 3) the value of the funds (cash value) in foreign currency at the date of their acquisition (the impact on the bank account) is different from their value at the date of their outflow.

Consequently, exchange rate differences arising from:

• 1) payment of the amount of value added tax in purchase invoices received from a foreign counterparty,
• 2) receiving a refund of value added tax on a foreign tax authority,
• 3) payment of the amount of value added tax resulting from the obligation to the foreign tax authority.

This position is presented by the Director of National Tax Information in an individual interpretation of 19 January 2018 7 .

Value added tax as tax revenue

Tax payers who purchase in the territory of the Member States are entitled to reimbursement of value added tax. Return rules are set out in Directive 2008/9 to 12 December 2008 8 . Pursuant to the rules indicated therein, to be entitled to reimbursement in a Member State (i.e.

in the country where the tax was charged, a taxable person not established in that State must carry out transactions giving rise to the right of deduction in the Member State of residence.

Where such a taxable person, in addition to transactions giving the right to deduct the tax in that Member State, also carries out transactions not giving such a right, only that part of the tax which corresponds to transactions giving the right to deduct it may be refunded.

The Income Tax Act does not explicitly provide for the settlement of the return received. However, attention should be paid to the standards contained under Article 12(4)(6a) the Corporate Income Tax Act and Article 14(3)(3a) U.p.d.o.f. According to them, it is not considered to be revenue returned to other expenditure not included in the cost of obtaining revenue. As a consequence, the reimbursed expenditure included in the cost of obtaining revenue constitutes tax revenue.

Revenue from the refund received should be recognised at the time of its actual receipt[9]. It should be stressed that the receipt of a refund of value added tax should mean its actual impact on the bank account and not the date of receipt of the decision of the tax administration of the Member State. The value of income expressed in foreign currency shall be converted into gold at the average rate announced by the National Bank of Poland on the last working day preceding the day of receipt of income.

Given that the same rate of exchange will apply to the conversion of the amount of income and to the currency payment received, there will be no tax exchange differences[10].

The situation of entities which are obliged to pay value added tax in a Member State varies. A taxable person providing services or selling goods abroad and thus paying value added tax should show as income the amount payable with that tax (gross sales value).

The taxpayer is obliged to demonstrate in Poland the revenue for the value added tax due also when he is an active taxpayer of value added tax in another Member State (there is no establishment in the EU within the meaning of international tax law). This is the position presented by tax authorities.

Individual interpretation of the Director of National Tax Information from 22 March 2018 11

The taxable income in the Republic of Poland for the activity carried out by the Applicant in the territory of Denmark will be the revenues obtained from the services provided in the territory of Denmark as shown in gross value, i.e. without deduction of value added tax.

At the same time, the value added tax paid will be the tax cost[12]. However, the case law of administrative courts presents a separate view.

According to the case-law, there is no reason why under Article 2(11) the VAT Act the terms “goods and services tax” and “value added tax” may not be regarded as equivalent. „[…] These wordings should be considered synonymous, describing the same tax.

Whereas Article 2(11) the VAT Act builds a legal definition, while taking into account the reasons for its introduction and one of them is the attainment of meaning clarity.

When reference is made to “value added tax”, it belongs to the tax imposed on the territory of a Member State and, where the same tax is concerned, to the tax imposed, however the VAT Act, it is appropriate to refer to it as a “tax on goods and services”.

The abovementioned harmonisation procedures are intended to promote the harmonisation of the tax in Poland and in the Member States, i.e. making it homogenous (with the fact that it is a kind of a desire that cannot be fully realized).

The pursuit of this kind of unification is conducive to treating this tax, in both terms, as the same, as long as it is not reasonable to take account of the distinctness designated Article 2(11) the VAT Act […].

Legal definition included under Article 2(11) the VAT Act is merely a legal language, but it is not a material provision which, alongside the tax on goods and services, constitutes a new form of taxation – value added tax" 13 .

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