Penalties in tax law - not only in VAT

Sanctions in tax law are now a common form of enforcement of reliable accounts from taxpayers. By their nature, they are intended to safeguard the interest of the State by discouraging taxpayers to apply solutions resulting in a settlement which is detrimental to the State's treasury.

The system of sanctions under Polish tax law is developed by the legislator, in effect, alongside regulations defining the basic obligations of taxpayers. At the time of the creation of this paper, legislative work on the introduction of further provisions of a sanctioning nature continued.

Introduction

The concept of tax sanctions does not have a separate legal definition, nor is it clearly defined by the science of tax law, but the concept of tax penalties is in general use. In general terms, the sanction is a legal standard which determines the consequences if the addressee behaves contrary to the legal standard’s disposition[1].

These consequences are very often associated with the introduction of a standard of necessity for a given conduct under coercion or the introduction of certain repressions against the addressee, who has acted contrary to the content of the basic legal standard, e.g. by failing to fulfil one of the obligations laid down in tax laws.

Tax law contains a number of standards which impose a specific conduct on the part of the obliged person (taxable person).

However, not every standard of tax law that uses coercion constitutes a solution which should be referred to as sanctions, since, in fact, the tax obligation itself is an element of coercion — the tax obligation “creates for the taxpayer the obligation to pay tax and for the tax authorities the right to demand such payment, to accept it or to enforce it under legal coercive measures” 2 .

The essence of the sanctioning measures is, above all, their objective, which is to ensure the effectiveness of the tax rules governing the scope of tax obligations[3].

Analysis of types of sanctioned solutions under Polish tax law has already been the subject of several scientific trials 4 , It seems that the division proposed by J. Orłowski may be helpful:

1) tax sanctions of a monetary nature:

• a. an additional tax liability in the tax on goods and services;
• b. increasing the amount of the tax liability;
• c. Increase in tax rate;
• 2) interest on tax arrears and the extension fee;
• 3) tax penalties for the loss of powers;
• 4) criminal penalties in tax laws;
• 5) administrative or non-monetary penalties;
• 6) sanctioning annulment in tax law[5].

All of the above mentioned types of tax penalties are, in a sense, directly included in the tax system. In addition to this system, criminal-tax penalties remain which are equally important (sometimes even more ailments) for the taxpayer to whom they can be applied. This study is devoted to the subject of sanctions forming an internal part of the tax system.

Publicly, probably the most recognisable in Polish tax law are penalties in the form of interest for late payment provided for by the Act of 20 August 1997 Tax Ordinance[6] and an additional obligation in the case of a tax on goods and services.

Penalties in the form of an additional tax liability in VAT

The institution of the additional tax liability in the tax on goods and services was already known in the previous law on 8 January 1993 on customs duties on goods and services and excise duties[7].

Thereafter, during the period from 2008 to the end 2016 the VAT Act provides for two cases where an additional tax liability can be applied – as regards the correction of the VAT deducted by the debtor and the breach of the obligation to register sales via the register office[8].

In the current Goods and Services Tax Act[9] The subject matter of the additional obligation is regulated in Chapter V of the legislation (Article 112b(112c)) added by the Amending Act with 1 December 2016[10] with effect from 1 January 2017 The basic penalty provided for by these provisions is the rate of taxation 30% the correct amount previously verified and determined by the tax authority, if the following deficiencies were found on the part of the taxpayer:

1) the taxable person in the tax return has shown:

• (a) the amount of the tax liability below the amount due,
• (b) the amount of refund of the difference in tax or the amount of refund of input tax higher than the amount due,
• (c) the amount of the difference in tax to reduce the amount of tax due for subsequent trading periods higher than the amount due,
• (d) the amount of the tax refund, the amount of the input tax refund or the amount of the tax difference to reduce the amount of tax due for subsequent periods of account, instead of showing the amount of the tax liability to be paid to the tax office,
• 2) the taxpayer did not submit a tax return and did not pay the amount of the tax liability.

The design of the provision shows that this sanction is applied in two stages.

In the first The tax authority shall determine the amount of the tax liability underliement or the amount of the tax refund, the chargeable tax refund or the tax reduction for subsequent periods of account.

In the second The tax authority shall establish an additional tax liability corresponding to 30% amount fixed In the first step.

For the purposes of applying the sanctions provided for in this provision, it is necessary that a constitutional decision be taken by the tax authority, which covers the above activities of the authority.

It also provides for the possibility of applying a reduced additional commitment rate at the level of 20%, which is subject to the demonstration of a certain "good will" by the taxpayer, i.e. the submission of an adjustment to the declaration and payment of the tax liability after the tax authority has carried out the checks.

In addition to reducing the rate of the additional obligation, it is also possible to exclude the application of this sanction in full, as decided by the following circumstances on the part of the taxpayer:

1. the submission of an appropriate correction of the tax return or the submission of a tax return with the amounts shown and the payment to the account of the tax office of the amount due, together with interest on late payment before the date of the tax or tax control;
2. an irregularity arises (reduction of the amount of the liability or overpayment of the tax difference, etc.) as a result of:

(a) committed in the declaration of account errors or manifest errors,

(b) the non-recognition of due tax or input tax in the settlement for the tax period in question and the due tax or input tax has been recorded in the previous accounting periods or in the subsequent periods after the relevant accounting period, if this occurred before the date of the tax or customs-tax control;

It is worth noting that in the above mentioned two the application of the additional tax liability provisions is entirely excluded. The legislature has yet to foresee one the fact that there is in fact no additional tax liability — to individuals who are responsible for the same act fiscal misdemeanour or for fiscal criminal offence.

However, in this case, it was pointed out that this is not a complete exception to the provisions on this specific VAT penalty; it was pointed out that this part of the provision which provides for the determination of an additional tax liability does not apply.

Although the final effect may be the same from the point of view of the taxpayer – ultimately it will not bear the burden of an additional tax liability, the behaviour of the tax authority is different from that of the previous types of exemptions.

Of which third a verification procedure may be carried out and a decision taken to determine the amount of understatement that the taxable person has ‘done’, but on grounds of content Article 112b(3)(3) the tax authority, having found that a criminal-tax investigation is being conducted in the same respect, departs from the determination of the additional tax liability itself.

The legislator also provided for a stricter form of additional duty in the tax on goods and services, provided for cases where irregularities in the accounts arise from invoice operations which:

• 1) were issued by a non-existing entity;
• 2) identify the activities which have not been carried out, in part concerning those activities;
• 3) indicate amounts incompatible with reality, in the part concerning those items for which amounts incompatible with reality are given;
• 4) confirm the activities to which the provisions apply Article 58 (illegality) and Article 83 ((i) the Act of 23 April 1964 Civil Code 11 – in the part concerning these activities.

In such situations as the legislator considers to be particularly harmful (e.g. the use of blank invoices), the amount of the additional tax liability in the part concerning input tax resulting from the above invoices is 100%. These are, in fact, the same categories of invoices as indicated in the Act as invoices resulting in a lack of a basis to reduce the tax due and a refund of the difference or reimbursement of input tax[12].

Recognizing the consequences of the use of an empty invoice in the course of trade under the VAT Act, it is also worth noting the principle introduced by the legislator of the tax shown on the invoice that the issuing of an invoice on which the amount of the tax is given results in the obligation to pay it, regardless of the circumstances of the invoice.[13].

Therefore, even if the invoice issued proves to be a document which does not reflect actual economic events, i.e. an empty invoice, the issuer is required to pay the amount of tax shown in that document.

Admissibility of such a solution to taxpayers has been confirmed in both the case law of the administrative courts and the decisions of the Court of Justice of the European Union[14].

An interesting position was taken by the Supreme Administrative Court in its judgment In May 2018, indicating that the obligation to pay the tax shown on an empty invoice or issued unfairly is not sanctioned but preventive and restitution, resulting from the deduction mechanism for input tax[15].

Examples of other sanctions in Polish tax law

Rules on the nature of tax sanctions under Polish tax law have also been introduced into other laws, and so:

• under the Personal Income Tax Act with 26 July 1991 a flat-rate income tax of 75% tax bases on non-disclosed revenue or non-disclosed sources 16 ;
• both income tax laws provide for the possibility of applying a penalty rate in cases relating to the application by taxable persons of prices on non-market terms in transactions with related parties or entities established in the territory of countries applying injurious tax competition. The sanctioning tax rate in this case is 50% 17 . A penalty rate may be applied where the taxable person has not provided, at the request of the tax authority, the transaction price tax documentation required.

However, when taxpayers apply prices at a level different from the market level, the possibility of using an increased tax rate is not the sole consequence that tax authorities choose, since transfer pricing rules provide for far-reaching possibilities for the tax authority to estimate the tax base.

The essence of these provisions is that the tax authorities omit the conditions laid down between the parties (related entities) and determine the income and the tax due by estimation (with the exception of the conditions agreed by the parties), which is a manifestation of the taxpayer's obligation to bear the burden of an obligation to the extent deemed appropriate by the tax authority.

18 ;

• on the basis of both tax laws, provision has been made for the possibility of determining income by way of estimates, using an income-to-income ratio of the amount defined by law. Such a mechanism may be applied by tax authorities to taxable persons obliged to keep accounts if it is not possible to determine income on the basis of their records. The ratio of income share in income is from 5% (in the case of commercial activities) to 80% (in the case of lawyers or advocacy) depending on the type of activity 19 ;
• in the Act of 9 September 2000 a penalty rate of 20% for the purpose of concluding a loan agreement, incorrect deposit or establishing an incorrect use or amending it, if the taxpayer has withheld from the tax authority the fact that such operations have been carried out (not making a declaration) and then in the course of verification, control, by the tax authorities, it shall invoke such operations (most often in order to clarify the origin of the financial resources in question in order to avoid the imposition of a penalty rate of 75% under u.p.d.o.f.). A sanction rate of 20% the tax on civil-law activities may also be applied where the borrower who had the right to benefit from the exemption from taxation on the grounds that the loan was received from the nearest person is based on this fact, but has not fulfilled the condition that the transfer of the money to the bank account, the account in the SKOK or the postal transfer 20 ;
• in the case of a lump sum on recorded revenue, where the lump sum does not keep the required records, the tax authority shall have the power to determine the value of the unforeseeable income and apply a flat rate of five times the basic rates, not more than 75% revenue 21 ,
• ground Tax Ordinance in Chapter 6 The most common form of tax sanctions, i.e. the principle of the interest rate on late payment, which in principle applies to all tax obligations that are not regulated in time.

New tax sanctions – trend of change

As regards the ongoing legislative work, the introduction of new categories of tax sanctions is expected in the context of the development of systems to combat aggressive tax optimization and tax avoidance. This includes changes to the general tax circumvent clause and the introduction of a system for reporting tax schemes[22].

Project changes in Tax Ordinance it is envisaged to add a separate Chapter 6a in Chapter III entitled Additional tax liability. In the new chapter, the legislator seeks to organise rules on the establishment of additional tax obligations already in force and newly introduced. The list of events to be associated with the Authority's obligation to establish an additional tax liability includes, inter alia:

• - the application of the general tax avoidance clause;
• - Application of contractual advantage restrictive measures 23 ;
• - the application of transfer pricing rules for determining income by tax authorities;
• - exemptions from dividends in the case of activities of no real character;
• - failure to comply with the obligations of the payer in respect of non-tax collection or collection and non-payment, in the event of deficiencies in the declaration of verification of the counterparty in relation to the withholding tax payments made.

As a consequence of these new rules, if, for example, by applying the general circumvention clause, the authority finds that the taxpayer has obtained an unauthorised tax advantage, the main form of punishing the taxpayer will, of course, be to deprive the taxpayer of the benefit obtained, but in addition, it is possible to apply a penalty rate which may amount to 40% the tax advantage, but in certain cases it may even be tripled, which may mean that the authority can apply the rate at the level of 120%. Where an additional obligation is established on the ground the Corporate Income Tax Act, the additional commitment is to be fixed at a rate of 10%.

In some cases, the sanction rate may also be reduced, e.g. rates are to be reduced by half, as regards the basis for establishing an additional tax liability which is linked to the withdrawal of the effects of tax avoidance[24].

The legislator also assumes the possibility of waiving the determination of an additional tax obligation if the taxpayer acted in good faith (i.e. he remained in the wrong but justified belief that the tax advantage obtained by him in the circumstances was compatible with the subject matter and purpose of the Act).

It is interesting that, according to the legislator, the fact that a person does not conduct a business at all or is a taxable person operating on a small scale, from which professional advice is not expected.

In addition, 2019 the rules for the collection of withholding tax are also to be amended; in accordance with the new rules, taxpayers will have to submit a statement confirming that they have verified the counterparty to the required extent of the law, where false information is provided, a separate sanction of 10% the tax base.

Summary

When referring to tax penalties from the point of view of the taxpayer, it is very often a unique institution, it seems that its application is unlikely in its individual situation. However, as can be seen from the above analysis, the catalogue of repressive-sanctioned solutions available to the tax authority is quite a dispute and may, in principle, cover any kind of tax liability.

In addition to the above-mentioned solutions typically internal, which form part of the Polish tax system, it should be borne in mind that in the Polish legal system there is a practically separate branch governing the principles of liability for fiscal misdemeanour and fiscal criminal offence – tax law. Despite certain exemptions, it is still possible, in some cases, to bear responsibility under both tax laws and, subsequently, on the basis of separate proceedings under the Tax Penal Code.[25].

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1 L. Morawski, Admission to the Law Firm, TNOiK Home Organizer, Toruń 2006, p. 57. 2 B. Brzeziński and Others, Financial Law, C.H. Beck Publishing House, Warsaw 1996, p. 154. 3 Mr Majka, Sanctions in Tax Law, Toruń Tax Yearbook 2010. 4 Among others, H. Dzwonkowski, Tax sanctions, Chancellery of the Sejm.

Office of Studies and Experts, October 1997. 5 J. Orłowski, Concept and classification of sanctions in Polish tax law, Legal Studies 8 UWM, Olsztyn 2008. [6] i.e. Journal of Laws of 2018, item 800 as amended 7 Goods and Services Tax and Excise Tax Act, Journal of Laws of 1993, item 50.

With regard to this regulation, it is worth mentioning that the Constitutional Court examines the sanctioned under Article 27 At the time, the VAT Act in force was contrary to the Polish Constitution to the possibility of double punishment of the taxpayer for an error which led to a tax liability being underestimated (reference no.

K 17/97, OTK 1998 No 3 item 30). [8] Article 89b(6) Act on 11 March 2004 the tax on goods and services has been repealed on 1 January 2017, Whereas Article 111(2) the law is still in force. 9 Act of 11 March 2004 on tax on goods and services, i.e. Journal of Laws of 2017, item 1221 (Next the VAT Act).

10 Act of 1 December 2016 amending the Goods and Services Tax Act and certain other laws, Journal of Laws of 2016, item 2014. [11] i.e. Journal of Laws of 2018, item 1025.

[12] Article 88(3a)(1) point (a) and point 4 point (a)-c the VAT Act [13] Article 108 the VAT Act 14 Among others, the judgement of the WSA in Gdańsk 23 May 2018, reference no. I SA/Gd 166/18, NSA judgment of 15 May 2018, reference no. I FSK 1273/16, judgment of the WSA in Gliwice with 28 March 2018, reference no. III SA/Gl 319/17.

15 NSA judgment of 21 May 2018, reference no. I FSK 1199/16. [16] Article 25e Personal Income Tax Act with 26 July 1991, i.e. Journal of Laws of 2018, item 1509, Further u.p.d.o.f. [17] Article 19(4) Act on 15 February 1992 corporate income tax, i.e.

Journal of Laws of 2018, item 1036, Next the Corporate Income Tax Act and, respectively, Article 30d u.p.d.o.f. [18] Article 11 the Corporate Income Tax Act, Article 25 u.p.d.o.f. [19] Article 9(2a) the Corporate Income Tax Act, Article 24b u.p.d.o.f. [20] Article 7(5) Act on 9 September 2000 the tax on civil law acts, i.e.

Journal of Laws of 2017, item 1150. In the context of this sanction, it is worth mentioning that according to the position expressed by the NSA in its judgment of 25 January 2017, reference no.

II FSK 4068-4070/14, it was pointed out that the subsequent regulation of the basic PCC obligation would not exempt the taxpayer from the possibility of applying a penalty rate if the basic obligation had already been regulated during the ongoing review procedure.

[21] Article 17 Act on 20 November 1998 a flat-rate income tax for certain individuals, i.e. Journal of Laws of 2017, item 2157. 22 Draft Act amending the Personal Income Tax Act, the Corporate Income Tax Act, the Act – Tax Ordinance and some other laws were passed at the session of the Sejm 23 October 2018 and transferred to the Senate.

23 According to the new definition, these are provisions ratified by the Republic of Poland of double taxation treaties and ratified by the Republic of Poland of other international agreements concerning tax issues or other restrictive measures or refusing to benefit from such agreements.

24 In the provisions of the proposed chapter 5 Section IIIA revokes the effects of avoidance of taxation provides for rules for the conduct of separate proceedings by the Head of National Tax Administration at the request of the person concerned and for the adoption of a separate decision laying down the conditions for the withdrawal of the effects of taxation – this solution is intended to be an alternative to mitigate the effects of abuses in demonstrating good will to remove the effects of optimisation by the taxable person.

25 Act of 10 September 1999 IRS Code, i.e. Journal of Laws of 2017, item 2226.