New verification obligations related to the payment of withholding tax duties 2020

This article is intended to present regulations on the collection of the so-called withholding tax which have been amended by the Polish Income Tax Act 1 in the context of the obligations arising from these changes on payers making payments to recipients. The topic of the publication is the activities which the payer will undertake to verify the circumstances of the transaction, the status of the recipient, its reliability, the grounds for the application of exemptions under Polish legislation and double taxation agreements.[2].

1. Introduction

From 1 January 2019 the rules for the collection of withholding tax are formally applicable, which in many cases means an increase in the obligations on payers who pay non-residents[3].

The date of entry into force of the key regulations was postponed twice – for first together, this was to happen 1 July 2019, However, two days before that date, a further regulation was issued which was deferred the date of application of the new rules on the levying of the source tax at the beginning 2020 4 Known regulations will remain valid to date, but to a limited extent they are intended to cover payments made by payers to the same customers up to the amount 2,000,000 PLN Within one tax year.

For such payments not exceeding the equivalent 2,000,000 PLN, the payer may apply the existing rules, i.e. having a tax residence certificate for the payee, apply the provisions of international tax avoidance agreements.

When the payer makes payments to the one a taxpayer whose value in the tax year exceeds the equivalent 2,000,000 PLN, will be obliged to apply the new rules. In the context of this threshold, it is worth noting that two issues:

1. the method of calculating the payments made — all payments made during the year, in all currencies (in the case of foreign currencies, conversion must be made using the NBP rate on the last working day preceding the day of payment); and if the taxpayer applies a tax year shorter or longer than 12 months, a corresponding conversion should be made in proportion 1/12 to 2,000,000 and refer to the number of months of the tax year started;
2. in accordance with the new provisions, the ‘presumption’ applies that the amount of the limit has been exceeded in the absence of the opposite information[5]. The amount of the limit should be taken into account for all claims payable at source, including those benefiting from exemptions and restrictions[6]. one it is therefore the correct determination of the value of the payments made to the benefit of the payers making payments to the taxable amount at source. one the taxpayer in the tax year. If the value is exceeded 2,000,000 PLN, the payers making such payments should, in principle, apply the basic flat-rate income tax rates resulting from the national provisions of the Income Tax Act, without the possibility to apply exemptions, reduced rates or the possibility of non-collection of taxes resulting from double taxation agreements[7].
3. Preferential tax conditions at source

However, the revised rules provide for situations where, after the additional conditions are met, payers can apply preferential conditions of withholding tax resulting from international agreements (so-called UPOs). For taxpayers who wish to benefit from preferential WHT tax conditions, they are generally available two the possibilities to apply the provisions:

1) making a declaration in which the taxable person confirms that:

• • have the documents required by tax law for the application of the rate of tax or exemption or non-collection resulting from specific provisions or double taxation agreements;
• • Whereas, after verification, it is not aware that there are circumstances that exclude the application of the rate of tax or exemption or non-collection of taxes resulting from specific provisions or double taxation agreements; 8
• 2) requesting an opinion on the payer’s application of the flat-rate income tax exemption[9].

The taxpayer’s use of each of the above options requires additional activity to demonstrate that the conditions for the exemption have been fulfilled in a given situation. In case of first of the possibility – i.e. the application of preferential rules by the payer on the basis of his own statement, the extent necessary for the verification activities to be undertaken is significant. In case of the second option, it is to bear an additional cost – the fee on the request for an opinion is to be 2,000 PLN.

1. Obligations of the payer to apply preferential rates on the basis of a declaration

The payer, who intends to apply the rate resulting from the double taxation agreement (or does not collect the tax under this agreement) was obliged to exercise due diligence in the verification activities undertaken.

The task does not facilitate the fact that the legislator has not specified the concept of due diligence, while indicating that it should be ‘appropriate to the nature and scale of its activities’.

Such a provision means that tax authorities may in future assess whether the payer has exercised due diligence by adopting different criteria depending on, for example, the size of the entity concerned, its participation in the capital group, the international nature of the activity, etc.

The provisions on the expected verification activities and the degree of due diligence required are vague and leave a great deal of scope for the use of a discretional assessment, while for the payers who pay WHT dues it is important to provide concrete indications on what actions they should take to carry out a sufficiently "decent" verification.

Since November 2018 Work is ongoing on the creation of tax explanations to clarify new concepts and indicate how to deal with the correct implementation of the obligations on payers. In the draft tax explanations from 19 June 2019 10 authors come in some ways with help, indicating what actions, in particular, taxpayers should take. With the assistance of the MF and its own experience in cooperation with entities from different jurisdictions, an example of a list of activities that may be particularly helpful in verifying recipients of receivables:

• 1. Verification of documents in terms of their reliability (compliance with the facts);
• 2. Verification of the tax residence of the recipient of the claim (residential certificates, VAT certificates, compulsory insurance certificates in the jurisdiction concerned);
• 3. Verification of counterparty status as taxable person – also from the point of view of the actual business activity of that entity (entry in the relevant register, confirmation of submission of clearing declarations);
• 4. Verification based on publicly available information on recipients of receivables (professional press, online publications, public and private registers);
• 5. Especially careful verification of transfers to tax jurisdictions that can be used in treaty shopping or direct shopping practices;
• 6. Verification of the address of the recipient of the claim (checking whether the address is real, whether it is just a post box or a virtual office address);
• 7. Verification of whether local facilities exist at the address indicated to the recipient, whether the recipient has the equipment, the human resources necessary to handle the type of activity it carries out;
• 8. Verification of whether the company has other business locations adequate to the needs of the industry in which it operates and the scale of its activities;

1. Verification of the origin of the company's statutory documents and documents relating to the conduct of the company's affairs in terms of authenticity and origin (whether they are drawn up and signed in the country where the recipient of the claim is located);
2. Verification of persons who are members of the governing bodies (management board members, directors, etc.) in terms of the functions they perform in other units, whether they perform similar functions in many units, or provide services for the establishment and operation of foreign companies;
3. Verification of whether the recipient of the claim has a fair compliance with reporting and reporting obligations in the jurisdiction in which it operates (check of Companies House registers);
4. Verification of whether contact persons, both board members and administrative staff, maintain current contact according to the data indicated (phone numbers, email addresses).

The above mentioned activities are, of course, an open, sample directory.

The catalogue of actions that the payer may take seems quite broad, but in practice it may be difficult to fulfil even the basic obligations in this respect, as the recipients of claims often function in a completely different legal and administrative reality from the one we know from Poland or Europe.

For example, an association hosting a film festival pays royalties for lending the rights to display films sent to authors from India, Iran, Turkey, Mongolia and other countries for the show may have real problems with obtaining any documents indicated in the above list.

The same type of problems may be encountered by a Polish payer who pays for the use of know-how related to purchased industrial equipment from a Vietnamese or Korean manufacturer.

In the context of such a situation, it remains to be hoped that representatives of the tax administration will follow the declaration of the Ministry of Finance that ‘tax authorities shall apply the rules taking into account the rationality and real possibilities available to the payer for collecting and presenting evidence, analysing the situation of the taxpayer and carrying out other obligations arising from the explained provisions’.

From the information provided by the Ministry of Finance, it can be concluded that there may be a tendency in the future to expect due diligence in some cases: - the higher the amount of receivable paid, the more thorough verification will be expected by tax authorities; - in the case of payments made between related parties, due diligence standards can be expected; - the reference point for the assessment of due diligence by the tax administration may be the provision of the Act from the 29 August 1997 - Tax Ordinance, which provides for cases in which it is not possible to exclude the liability of the payer due to the absence of a tax[11].

4. Actual debtor

In the context of the assessment of verification activities, the payers should also draw attention to whether the payment is made to the ‘real owner’ of the claim. The actual owner's clause was amended with the amendment that entered into force 1 January 2019 According to the current definition, it is an entity that meets the following cumulative conditions:

• (a) it receives a claim for its own benefit, including its own use and bears the economic risk of loss of that claim or part thereof,
• (b) is not an intermediary, representative, trustee or other entity legally or effectively obliged to transfer all or part of the claim to another entity,

(c) conducts an actual economic activity in the country of establishment where the claims are received in connection with the economic activity carried out[12].

The updated definition of the actual owner of the debt corresponds to the international tax law applicable for many years to the concept of beneficial owner. This concept was introduced into the tax system in order to implement the assumption that tax advantages (provided, among other things, by UPO regulations) should be granted only to those entities which are actual recipients of receivables and not merely intermediaries.

The adoption of such a concept means that payers making payments should also draw attention to the nature of the recipient of these claims, particularly in the context of the condition of actual economic activity. In order to verify this condition, attention should be paid to such elements as:

• - the existence of an organisationally separate undertaking belonging to the recipient of the claim, having adequate facilities;
• - whether the facilities are commensurate with the scope of the activities carried out;
• - whether an entity functions in structures that can be created in isolation from economic reasons;
• - whether the taxpayer has its own resources to carry out basic tasks in the field of its own business.
• 5. Summary

As shown in the above examples, there is a great deal of possibility to carry out verification activities, but they do exist in this respect. two major difficulties.

After first, it is not possible to indicate a universal procedure manual for the verification of conditions, which would constitute a specific "minimum test", useful in most business situations – too much depends on the individual nature of the transaction involved.

After second, The sample verification activities indicated by the administration or commentators are still in many cases too general to be easily used in the current business environment.

In the context of existing doubts, a second parties with a significant degree of liability on the payer for the choice of appropriate treatment for the payment of withholding tax duties, it seems appropriate to postpone the new rules until the beginning of the following year.

At the same time, tax clarifications are still under way, which already contain some guidance, and after they have been completed, they have the opportunity to be an even more useful tool for payers.

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