Benefits of the split payment mechanism

The legislator introduced several formal incentives for the buyer to apply the split payment mechanism[1] (Further to the MPP), although they appear insufficient and the authors believe that they should be extended, it is first and foremost a formal recognition of the split payment for due diligence in the verification of transactions and counterparties, which would result in a lack of possibility for tax authorities to question the VAT deduction from such an invoice in the event of an unconscious share in the supply chain in which the fraudulent activity occurred.

It would also be desirable to exclude the criminal liability of those responsible for tax settlements if the split payment was applied.

In practice, however, it may turn out that this is not the formal benefit for the buyer, but rather the payment in MPP by customers and the need to liquidate funds from the VAT account will be the main determining factor for the universal or limited application of this payment method.

1. No additional tax liability for joint liability

two The fundamental benefits for the buyer from the use of MPP arise from Article 108c(1) of the Act of 11 March 2004 on tax on goods and services[2] (Next the VAT Act), which provides that the amount of tax corresponding to the amount of tax resulting from the invoice received paid using the MPP shall not apply:

1. Article 112b(1)(1), Article 112b(2)(1) and Article 112c the VAT Act, i.e. additional tax obligation (so-called VAT sanctions) 20%, 30% and 100%);
2. Article 105a(1) the VAT Act, i.e. the joint and several liability of the buyer in certain circumstances, together with the supplier for the settlement of VAT due in respect of certain goods listed In Annex 13 dou.p.t.u.3 (such as fuel, rapeseed oil, steel products, hard drives and SSDs).

These incentives apply, where the buyer makes a split payment, to an amount not exceeding the amount corresponding to the amount of tax resulting from the invoice received. In the case of partial payments in the MPP, protection will take into account the amount corresponding to the part of the amount of tax paid in the MPP.

The benefits to the buyer shall also apply when only the amount corresponding to the amount of VAT is paid in the MPP and the amount corresponding to the net value is otherwise regulated (e.g. by offsetting).

Provision Article 108c(1) the VAT Act The authors believe that it excludes the application of VAT penalties for any amount of arrears not exceeding the amount corresponding to VAT on invoices paid in the MPP, even if the source of the backlog is irregularities in areas other than the deduction of VAT charged from the invoice paid in the MPP (e.g.

the absence of proof of due tax). In fact, it is not even necessary for a tax default to apply an additional tax liability.

The reasons for imposing VAT sanctions may be different and cover both the presentation in the declaration of the amount of the tax liability lower than the amount due and the increase in the amount of the refund of the tax difference or the amount of the excess of the input tax over the due transferred to the next accounting period.

It is therefore an institution relating to the outcome of the entire VAT settlement for the period in question, not to the specific elements of that settlement, such as the VAT deduction from the invoice. Article 108cust.

1 the VAT Act does not entail the non-application of sanctions to the wrong deduction of input tax from a specific invoice paid using MPP.

The literal interpretation of the provision therefore allows it to be argued that the amount of tax resulting from invoices paid in the MPP during the relevant accounting period only determines the maximum amount of understatement of an obligation or an excess of input VAT which does not result in administrative sanctions.

However, it is expected that the tax authorities will take a different position using a restrictive interpretation Article 108c(1) the VAT Act, In other words, they will link the lack of sanctions to the situation where the taxable person unduly deducted VAT charged from the invoice paid in the MPC.

This was probably the intention of the legislator, since the above-mentioned favourable interpretation of the rules would allow the benefit of the advantage in the absence of sanctions in relation to the incorrect VAT settlement of transactions which would not be totally linked to payments in the MPP.

This doubt does not concern the exclusion of the principle of joint liability of the buyer and supplier for his tax arrears, since in this case the consequences for the buyer in terms of joint liability entail a specific amount, defined as ‘part of the tax proportionally attributable to the supply made to that taxpayer’. The protection may therefore only apply to the amount which would potentially be jointly and severally liable if the purchaser makes payment for an invoice documenting the specific delivery in the MPP (up to the amount corresponding to VAT from the invoice).

The legislator has introduced significant restrictions on the protection of taxpayers paying in MPPs against administrative sanctions and joint liability, excluding in certain circumstances the application of the abovementioned benefits (Article 108c(2) the VAT Act). They will not concern a taxable person who knew that the invoice paid using the MPP:

• 1) has been issued by a non-existent entity,
• 2) ascertains the activities which have not been carried out,
• 3) state the amounts incompatible with reality,
• 4) confirms the activities to which the provisions apply Article 58(83k).c. (predicting nullity of a legal act contrary to the law or intended to circumvent the law and nullity of a declaration of will made by the second page with its consent for appearance).

It should be noted that the above-mentioned conditions of non-use of benefits to the buyer resulting from the use of MPP largely coincide with those of the above-mentioned under Article 88(3au).p.t.u. for invoices which deprive the taxpayer of the right to deduct input tax.

On the one hand, it is difficult to deny the right of such restrictions. If, in similar cases, the taxable person does not have the right to deduct VAT from the invoice, the more so should not be protected from administrative sanctions or joint liability if such a deduction is made and at the same time pays the invoice due using the MPP.

Significant difference between the provision Article 88(3) a Article 108c(3u).p.t.u. is that including second the case is not sufficient that the invoice meets the conditions set out in the provision, and the taxpayer should also know about it, i.e. knowingly participate in fraudulent activities.

The authors' assessment of this is to have this knowledge at the time of payment with MPP, although this is clearly not due to the regulations. It should not be relevant for the protection of the buyer using MPP that he subsequently obtained such information (e.g. already during the tax audit).

The approach of tax authorities to applying these rules in specific practical situations during tax checks may be a problem.

Disputes between taxable persons and tax authorities, which, as before, have challenged the deduction of VAT itself, can now be expected to challenge the application of protection, arguing that due diligence and good faith in the verification of counterparties and transaction conditions are not being properly exercised.

The payment itself in split payment does not mean that the purchaser will pay due care (see more point 3).

It may be even more difficult to avoid being held jointly responsible for the settlement of VAT due on the supply of the goods listed. In Annex 13 to the VAT Act by the buyer who paid for it using MPP.

Please indicate that one the conditions for applying the rules on the joint liability of the buyer are that ‘at the time when the goods in question were supplied In Annex 13 to the law, the taxable person knew or had reasonable grounds to believe that the total amount of tax on the supply of those goods to him or part of it would not be paid to the tax office (Article 105aust.

1 point 2 the VAT Act)”.

Therefore, the taxpayer, in order to exclude joint liability in such a situation, in connection with payment in the MPC, should prove from one of the parties that knew that the VAT due would not be paid (which resulted in the application of the rules on joint liability) and the other parties did not know of any irregularities on the supplier's side or of the supply defect (i.e.

conditions excluding the application of protection against joint liability).

It can be assumed that, in order to avoid joint and several liability, taxpayers will focus – as before – on proving first from these conditions, i.e. that they did not know and could not assume that the VAT due would not be paid by the supplier to the account of the tax office.

In this respect Article 105a(2) the VAT Act it cites slightly more extensive circumstances that should be met in order to bring the buyer into joint and several liability: ‘The taxpayer had reasonable grounds to believe that all or part of the tax on the supply of the goods to him would not be paid to the account of the tax office if the circumstances surrounding the supply of the goods or the conditions under which it was made deviated from the circumstances or conditions normally prevailing in those goods, in particular if the price for the goods supplied to the taxable person was, without economic justification, lower than their market value’.

2. No increased interest on late payment

According to Article 108c(2) the VAT Act payment using the MPP of the amount corresponding to VAT from purchase invoices may also protect the taxable person from the obligation to pay increased interest on late payment.

Interest at increased rate 150% The standard rates) are generally calculated where the tax arrears have been disclosed by the tax authority in the course of tax control, customs-tax control or tax proceedings, and where the correction of the declaration has been made by the taxpayer in the course of checking, tax control or tax proceedings carried out by the authority[4] (Article 56b o.p.).

The above rules on increased interest rates do not apply to VAT arrears where an additional tax liability is established. Under Article 112b or112c the VAT Act This is to rule out the imposition of double sanctions on the taxpayer. Article 108c(2) the VAT Act excludes use Article 56b o.p.

to tax arrears arising for the settlement period (month, quarter) in which at least 95% the input tax shown in the declaration results from invoices paid using the MPP.

Under certain circumstances, taxpayers will not be able to benefit from this benefit if in VAT settlements a significant proportion of the input tax (more than 5%) is due to transactions settled under the reverse charge mechanism, both for domestic purchases (electronics, scrap, construction services purchased from subcontractors) and in WNT, import of services or import of goods.

It would be reasonable to calculate the amounts to meet the payment condition in MPP 95% the amount of input tax only for domestic purchases. Calculation of the required threshold would then be a little more complicated, but possible based on VAT return data, but would not eliminate the possibility of benefiting from a reduction for some taxpayers.

The provisions introduce an additional restriction to prevent the benefit of lower interest if its VAT liability exceeds twice the amount of input tax shown in the VAT return (Article 108c(4) the VAT Act). The protection against higher percentages also does not apply, as does the protection of administrative pre-sanctions and solidarity, if the taxpayer knew that the invoice paid in the MPP:

• 1) has been issued by a non-existing entity,
• 2) identify activities which have not been performed;
• 3) state the amounts incompatible with reality,
• 4) confirms the activities to which the provisions apply Articles 58 and 83 of the Act of 23 April 1964 Civil Code5(hereinafter: k.c.).

In this case, too, it is important to know the taxpayer making the payment in the MPP about these invoice conditions, the counterparty of the transaction he documents. It should be noted that with regard to the benefit at issue for the buyer, i.e.

the absence of increased interest on late payment, it is sufficient to comply with the above-mentioned conditions excluding this benefit in relation to one purchase invoice, and then the taxable person in general is entitled to this benefit in respect of arrears, which will occur during that period (although the exclusion of the VAT amount from this one the invoice would not reduce the amount of input tax paid in MPP below 95% the total amount of input tax shown in the declaration).3.

Due diligence

Despite the submission of the MF declaration in this respect, the provisions of the amendment the VAT Act initiating the MPP, there was no finding that its application means to exercise due diligence or to give rise to its presumption, which would protect taxpayers from questioning the deduction of input tax in situations where they were unconsciously involved in fraudulent transactions.

In practice, tax authorities often deny taxable persons the right to deduct input VAT if the acquisition of goods or services by those taxable persons involved fraud or abuse in VAT, even at an earlier stage of trading, where the taxable person making the input VAT deduction did not act as a party to the transaction and had no such awareness.

It follows from the caselaw of the CJEU that the right to deduct input tax cannot be taken away from a taxable person who did not know that the acquisition of a commodity or service was organised in connection with the fraud or abuse committed by another entity, if that taxable person, by due diligence, could not know that the transaction is for fraud or abuse of VAT[6].

The right to deduct input VAT is therefore retained by taxable persons who have carefully checked their direct counterparties and the transaction carried out and did not know or could not know, with due diligence, of irregularities in the VAT clearance of entities involved in transactions involving the same goods or services.

In practice, it is a major problem for the taxpayer to prove that he acted in good faith and did not know of any intent to cheat at an earlier stage of the transaction chain, and the tax authorities, as well as some administrative courts, are very strict in their view of the conditions that should demonstrate due diligence in the verification of the counterparty and the transaction.

The MPP could therefore be a very helpful tool, providing a hard formal safeguard for honest taxpayers against questioning the VAT deduction of invoices thus regulated.

However, already in the explanatory memorandum of the draft amendment the VAT Act 7 It was only mentioned that the use of MPP would ‘be one more robustly” to demonstrate due diligence. We're judging it as inadequate.

MF addressed this issue directly in the published 25 April 2018 „a list of due diligence grounds, which was issued as an internal letter (p. ‘Method for the assessment of due diligence by purchasers of goods in domestic transactions’) addressed to tax authorities rather than as tax explanations or general interpretation. However, in the opinion of the authors, this document does not address this issue in a precise manner, sufficiently protecting honest taxpayers. The methodology indicates that ‘If the payment to the supplier of the goods is made using the split payment mechanism, then the taxpayer must be considered to have exercised due care if he has positively verified the formal conditions and there are no other circumstances that could clearly indicate that due diligence has not been respected’. This means that taxpayers applying payment in MPP should also examine formal requirements such as:

• 1) verification of the registration of the counterparty in the KRS/CEiDG,
• 2) verification of registration for VAT purposes,
• 3) the appointment of persons representing the counterparty.

Moreover, it will always be possible for the tax authorities to rely on "other circumstances which could clearly indicate a lack of due diligence", which leaves a great deal of uncertainty on the part of taxpayers due to the assessment of the nature of the provision and thus may lead taxpayers to consider the use of MPPs as unprofitable from the point of view of demonstrating due diligence. Split payment is just one from additional arguments which the taxpayer will be able to present in defence of his or her care, and the tax authorities will examine and interpret the circumstances at their discretion.

4. Reduction of VAT liability payable

Provision Article 108d the VAT Act allows the amount of the VAT liability to be reduced if it is paid entirely from the VAT account. Tax payers who:

• 1) pay the VAT liability to the tax office in full from the VAT account,
• 2) they pay a VAT liability before the date of payment.

The amount by which the tax liability can be reduced depends on when the taxpayer pays the VAT liability to the tax office and on the NBP reference rate. Earlier payment of VAT results in a higher reduction.

It should be stressed that, in order to benefit from this reduction, the taxpayer does not have to pay the fees resulting from purchase invoices using the MPP. The taxpayer may not make any payment in the MPP.

It is only important that the taxable person has sufficient funds (received from his clients in the MPP) in order to cover the amount of the tax liability and make this payment before the date of payment of the tax resulting from Article 103 the VAT Act (essentially for a given month to 25. the day of the following month).

The amount reducing the VAT liability shall be calculated using the formula:

where:

• S — amount of the VAT liability reduction (rounded to full PLN),
• Z — amount of VAT liability resulting from the declaration (before reduction),
• r — NBP reference rate at 2 working days before the day of payment of the tax,
• n — the number of days from the date on which the account was charged, excluding that date, until the deadline for payment of the tax, including that date.

The calculation of the account for the previous payment of the VAT liability from the VAT account provides the following numerical example.

Z = 1,000,000 PLN (VAT liability amount for November 2018)15 December 2018 – payment of the commitment for November 2018

n = 10 (25 – 15)

r = 1.5% (NBP reference rate applicable13 in month 12 of 2018)

S = 1,000,000 × 1.5% × 10/360

S = 417 PLN (VAT reduction amount)

As the above example points out, the reduction is small in amount and entails a significantly increased workload on the part of the taxpayer, who must prepare and send a VAT settlement in advance and additionally have sufficient resources on the VAT account to cover the total amount of the obligation.

The rules do not specify how a taxable person should technically enforce a reduction in the tax liability, whether by reducing the amount of the obligation paid to the account of the tax office or by paying the full amount resulting from the declaration, and the office will reimburse the amount reducing the obligation.

On the one hand, to the legislation are talking about "lowering the tax obligation", which would support first the solution and the other parties, subject to reduction, to payment of the VAT liability in full from the VAT account. This issue was unfortunately not addressed by the MF in the tax explanations from 29 June 2018[8].

In turn, the justification for the draft amending law the VAT Act as regards the MPP, it is stated: ‘In order to benefit from the reduction in the payment of the VAT liability before the applicable date, the taxable person is obliged to pay the amount of the tax liability resulting from the tax return, i.e.

the full amount, before the applicable date’[9].

It should also be pointed out that, in connection with the regulations in question, although they assumed this first drafts, this has not changed the provisions on the expiry of the tax obligation (Article 59(1) o.p.).

Nevertheless, it should be assumed that due to the obligation Article 108d the VAT Act the tax liability for the VAT period in question expires in its entirety, despite the application of the possibility of reducing it under that provision if the tax authority has received a full payment from the VAT account before the statutory deadline for payment of VAT.

Therefore, it should be applied first solution.

In addition, in the VAT clearance declaration (as appropriate, VAT-7 and VAT-7K) a new item has been introduced which concerns the declaration by the taxpayer whether it benefits from a reduction in the tax liability due to previous payment, but without the amount of the reduction being indicated.

The absence of an obligation to provide the amount of the account may result from the fact that the taxpayer does not always make a declaration on the same day and pays VAT on the account of the tax office. This will only be information to the tax authority that the taxpayer has expressed his intention to benefit from the reduction, but its implementation and the accuracy of the calculation of the reduction amount will require an analysis of the contribution made.

With regard to the application of the provisions on the reduction of the VAT liability in connection with its previous payment from the VAT account, the taxable person wanted to make sure that a partial payment of the VAT liability from the VAT account could be made up to the amount of the funds collected on it.

This issue is directly regulated in the legislation because Article 108d(1) the VAT Act requires the payment of the liability in full from the VAT account.

Thus stated the Director of KIS in an individual interpretation of 18 May 2018[10], recognising that there is no possibility of applying a reduction on the basis of Article 108d the VAT Act.where only a part of the amount of the VAT liability resulting from the declaration is paid before the VAT account date (up to the amount of the funds held in that account), while the remainder will be paid out of the taxable person's account: "The above regulation therefore excludes the possibility of exercising the right to reduce the amount of the liability when the taxable person does not have sufficient resources in the VAT account to cover the liability in full.

It is not possible to cover the liability in part from the VAT account and in part from another account belonging to the company, while retaining the right to reduce the amount of the liability in question under Article 108dust. 1 Amending Act’.

The controversial issue is to benefit from a reduction in the VAT liability when payments are made from the VAT account in several tranches (at different dates but before the applicable date of payment) or from several taxable person's VAT accounts.

According to the authors, provided that the total amount of the VAT liability is finally paid before the date of payment of the tax, the taxpayer should be entitled to benefit from the relief. The provisions do not require that payment of the VAT liability be made on a one-off basis or with one VAT account.

Many companies (especially multi-branch companies) have more than one settlement account, often in different banks. Therefore, they may have funds from contributions from purchasers in the MPP on different VAT accounts.

At the same time, the provisions do not provide for the possibility of transferring funds between VAT accounts in different banks. The taxpayer then has to pay the VAT liability in parts, with several VAT accounts.

It would not be reasonable to remove, in such a situation, the taxable person who has benefited from the advance payment of an obligation.

Unfortunately, in this respect, the negative position was presented by the MF in the tax explanations from 29 June 2018: „It was also possible to reduce the amount of the VAT liability if the payment of the total liability is made on a one-off basis from the VAT account.’ We believe that the MF has over-interpreted the rules and taxpayers would have a chance to settle the dispute in this respect in judicial and administrative proceedings.

Another question which is doubtful in the assessment of the authors is to treat the amount of reduction of the VAT liability granted to the taxpayer on the basis of Article 108d the VAT Act, as income for the purposes of income tax settlement.

This kind of provision is generally within the definition of revenue in income tax legislation and no provision explicitly excludes such relief from these definitions.

In this regard, the Ministry of Finance adopted a favourable position for taxpayers, which shows that the reduction in the amount of the tax liability in this situation does not constitute revenue for income tax purposes.

In tax explanations from 29 June 2018 It was considered that ‘the application of a reduction in the amount of the tax liability in the VAT liability for the previous one-off payment in full from the VAT account does not give rise to income for the purpose of income taxes on this basis.

This solution is aimed at VAT taxable persons without distinguishing a specific group of entities of that tax." Although the legal basis for the above finding is doubtful, taxpayers can safely comply with this position as expressed in the explanations of the MF due to the protective power resulting from them.

Article 14n section 4 in conjunction with Article 14k-14m o.p.

The practical problem with the application of the ‘content’ for the advance payment of the VAT liability will arise if, for some reason, a correction of the VAT settlement for the period in question appears to result in the amount of the liability being understated and a tax arrears arise.

In addition to the payment of the amount underwriting the VAT liability, the taxable person will also be obliged to pay the reduction previously obtained with interest. It does not matter whether the correction of the accounts is carried out by the taxpayer or by the tax authority.

5. Protection of the buyer in factoring

A question of doubt as to the possibility for the purchaser to benefit from the protection of goods or services Article 108c(1)(2) the VAT Act (i.e.

the absence of a VAT sanction, the joint and several liability for VAT due in the case of sensitive goods and the absence of an increased interest rate) is the situation where the debtor pays to the account of another entity other than the supplier, e.g.

in connection with the use of the financing of a factoring transaction, when the fact that the factor (bank) took over the claim resulting from the invoice. The payment is technically possible by means of a transfer message, i.e. the amount corresponding to VAT will be added to the VAT account of the factor.

However, the question arises as to whether the conditions that would allow the MPP to be considered to have been applied are met and only in this case the preferences are triggered.

The question arises from the fact that, in such a situation, the debtor taxpayer (the buyer of the goods or services documented by the invoice) does not pay the liability resulting from the invoice but the amount of the claim acquired by the factor.

Basic provision introducing MPP (Article 108a(1) the VAT Act) provides explicitly that such a possibility exists ‘when making payment of the amount of duty resulting from this invoice’.

This is another example of the lack of consideration of the legislator, and this issue is not addressed in the tax explanations from 29 June 2018 It is to be hoped that the MF in this case will apply a selective interpretation favourable to taxpayers, just as it has done in the case of the rules on the release of the factor from joint liability, in the event that it makes payments in the MPP to the factorant before it receives a payment from the debtor.

Another problematic example in the context of the benefits of applying the payment in the MPP is the situation where the buyer gives a specific invoice when making payments in the MPP, while the seller counts that payment against another oldest claim due.

If the parties have established application in this respect Article 451 k.c., it is the creditor who has the right to do so and these principles cannot modify the provisions of tax law. In this respect, disputes may arise between taxpayers under civil law, depending on the provisions of specific contracts.

Doubts arise from sound Article 108cust.

1 the VAT Act, which provides that certain sanctions are not applied the VAT Act „up to the amount corresponding to the amount of tax resulting from the invoice received paid under the split payment mechanism.’ Consequently, there is doubts as to whether a specific invoice, as indicated by the purchaser in the transfer notice, can actually be paid if the creditor has counted the payment against another claim.

Only a selective interpretation can provide arguments for the buyer's protection, since it was in fact intended to pay for the invoice indicated by him, and in addition the objective of the MPP system has been achieved, as the amount of VAT paid has affected the supplier's VAT account and has therefore not been exposed to the VAT system.

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