Tax optimization and tax evasion – limit of legal action in the light of the anti-tax avoidance clause and reporting of tax schemes

The aim of taxpayers to reduce or fully offset the tax burden is generally a natural phenomenon, as the objective of a rationally behaved taxpayer, especially an entrepreneur, is to maximise profit while minimising losses 1 . Highlights two measures to reduce the tax burden, i.e. tax evasion and avoidance.

Although both phenomena lead to a reduction or elimination of the tax burden, tax evasion is a law-abuse action, i.e. misleading tax authorities, which will consequently constitute an unacceptable attempt to reduce the tax obligation.

On the other hand, tax avoidance is the use of existing legislation to reduce the tax burden, which is identified with activities within the corporate fiscal policy that can shape their business structure so that the tax qualification of economic operations within that structure is as favourable as possible, i.e.

related to the lowest possible fiscal burden 2 .

1. Introduction

New regulations are a major change in tax optimisation, i.e.

Chapter 11a of the Act of 29 August 1997 Tax Ordinance[3] (hereafter: o.p.), which includes obligations to inform the Head of the National Tax Administration (hereinafter: Head of the National Tax Administration) about the implemented and planned activities which will contribute to the reduction of the tax burden.

The way in which legislation is formulated by the legislator leaves many interpretational doubts, leading to uncertainty as to the reporting obligation. These doubts are large enough that the Ministry of Finance has issued 31 January 2019 explanations[4] to existing legislation.

These provisions are implementing Directive 2018/822 to 25 May 2018[5], to support efforts to create fair tax conditions in the EU internal market.

It is increasingly difficult for Member States to protect their national tax bases from erosion, as tax planning structures have become particularly sophisticated and often use increased mobility of both capital and individuals within the internal market.

Certain doubts arise as to whether the combination of the obligation to report tax schemes with the anti-tax avoidance clause can contribute to the elimination or substantial reduction of tax avoidance activities? The purpose of this publication is to try to answer this question.

2. Tax evasion

In the doctrine of tax law, tax evasion means action by a taxable person limiting or eliminating tax charges, in breach of current law. This activity involves not paying due taxes – whether by refusal, or by concealing from the tax administration the true range of taxable facts[6].

Tax evasion is a specific offence under Article 54 Act on 10 September 1999 - Tax Penal Code[7].

According to section 1 that provision, a taxable person who does not disclose to the competent authority the subject matter or the basis of taxation, or who does not make a declaration, thereby exposing the tax to depletion, shall be fined until 720 the daily units or penalties for imprisonment, or both, together.

Implementation of the carnoscarp delict from Article 54 k.k.s. can occur in two cases, i.e. by ‘not disclosing the subject matter or basis of taxation’ or ‘not submitting a tax return’. The mark of the prohibited act shall be carried out at the time of expiry of the time limit for the act, i.e. disclosure or submission.

Reveal the subject matter and the tax base is as much as making it public to the tax authority in the legally provided form[8]. The subject matter of taxation is understood to be a factual or legal condition with which the legislator is bound by the tax obligation. The tax base is subject to either quantitative or valuable taxation.

Tax evasion is assumed to be a failure to disclose to the tax authority the facts of which the tax obligation arises.[9].

Another behavior, penalized as tax fraud, is included under Article 56(1) k.k.s., which provides that a taxable person who submits a declaration or a declaration to another authorised authority or to a payer gives an incorrect statement or conceals the truth or fails to comply with the obligation to notify the amendment of the data covered by it and thereby exposes the tax to depletion, is liable to a fine to 720 the daily units or penalties for imprisonment, or both, together.

Total VAT retention[10] aims to block the existence of a tax obligation and the absence of an obligation. Tax evasion can take different forms in practice, such as manipulating the cost of obtaining revenue or accepting payments without invoices. Tax evasion also shows money laundering points.

As Mr Gajewski points out, tax evasion is the most common occurrence of "in the absence of an indication for tax purposes of income from illegal sources"[11].

3. Tax avoidance

As already indicated in the introduction, tax avoidance is legal, i.e. there is no norm in the Polish legal order prohibiting tax optimization. It should be stressed that the way tax law is designed, i.e. its constitutional standardization, allows to derive tax duty only from the bill[12].

Consequently, the taxpayer cannot be required to pay a tax which is not directly attributable to the law. Therefore, the tax obligation cannot be derived from the presumption or analogy.

This is confirmed by the judgment of the Constitutional Court (hereinafter the Constitutional Court) of 11 May 2004[13], in which he stressed that ‘If, therefore, the addressee is carrying out legal acts which are lawful and their purpose is not prohibited by law, it is therefore difficult to regard as correct and appropriate such qualification as the objective achieved (also tax) treats as equal to the prohibited objectives’.

Moreover, the CCC pointed out that ‘a lack of a de lege year of legal norm which would be prohibited by the taxpayer’s behaviour to reduce (avoid) taxation.

The activities undertaken by the taxable person therefore remain valid not only from the point of view of civil law, but more broadly, they can be declared systemic legality, in the absence of a legal standard prohibiting them from being carried out.’ Another example is the resolution of the Constitutional Tribunal of 26 April 1994[14], In which he stressed that "an interpretation extending the tax obligation...

without the explicit wording of the law... would be incompatible with the concept of a democratic rule of law".

The Supreme Administrative Court, in its judgment of 20 November 2013[15], that "some doubts have not yet been seen in the case law, and in the case of those that have been noticed and explained, we are faced, contrary to the principle in dubio pro tributario, with settlements to the detriment of taxpayers.

While the sometimes far-reaching concerns raised by tax authorities and administrative courts in matters relating to the tax under consideration can be substantially justified by the low legislative quality of the contested legislation, in accordance with constitutional requirements unclear tax regulations must be interpreted for the benefit of taxpayers and, consequently, if such regulations are ultimately ambiguous, a solution that takes into account the interests of the tax liability entity rather than ruling in dubio profito’.

Another example is the sentence of the Provincial Administrative Court (hereinafter: WSA) in Białystok from 16 October 2013[16], In which it stated that ‘tax obligations cannot be assumed by any measure and determined by analogy or by applying an extension interpretation.

However, in the case of the different possible language interpretations of the same legal text, tax authorities should, in view of the principle of the trust of entities subordinate to the State and the law it provides, follow not so much the “in dubio pro fisco” principle but the “in dubio pro tributario” principle.

This is the case-law trend of the courts which is reflected in the provisions Article 217 Constitution of Poland[17], thus referring to the existing 600 years in Polish tax legislation the principle of “noullum tributum sine lege”.’ By the way, it should be noted that according to Article 8 Act on 6 March 2018[18] – The law of entrepreneurs, the entrepreneur may take any action, except those prohibited by law.

An entrepreneur may be required to conduct a particular conduct only under the law.

According to the caselaw cited above, and in the light of constitutional regulations, action to avoid or reduce the tax burden is legal.

Consequently, the taxpayer has the right to freely shape its civil and legal trade activities[19] – The powers of the tax authorities will only be to assess these measures from the perspective of anti-abuse regulation.

In the event of doubts as to taxation or its absence under the literal wording of the law, those doubts should be resolved in accordance with the principle in dubio pro tributario.

This principle, repeatedly highlighted in the literature, the jurisprudence of administrative courts and the Constitutional Court, is prohibited from going beyond the rules of linguistic interpretation in the process of defining the individual and the scope of tax law in question.[20].

Negative effects arising from legislative errors should be borne by the State and not the taxpayer.

4. Explanations concerning the provisions of Chapter 11a Tax Ordinance

Date 1 January 2019 entered into force the Act of 23 October 2018 amending the Personal Income Tax Act, the Corporate Income Tax Act, the Act - Tax Ordinance and some other laws[21]. In Section III, the O.R. added Article 86a-86o, i.e. New Chapter 11a - Information on tax schemes.

The above provisions imposed an obligation to notify the Head of the KAS of the activities implemented and planned to reduce the tax burden. The way in which the legislator formulates the legislation leaves many interpretational doubts, resulting in uncertainty about the reporting obligation.

In the light of these doubts, the MF has provided clarifications to existing regulations. The purpose of the explanations is to clarify the necessary concepts of regulation, which have been added by law with 23 October 2018 and how to deal with the proper fulfilment of tax scheme information obligations.

The rules governing tax schemes reporting institutions have not yet been in the Polish tax system, so it is important to provide a written interpretation of these rules.

The above explanations explain, inter alia, the questions concerning the definition of the tax authority to which information on tax schemes, the definition of the tax scheme and the conditions for reporting, the indication of the group of entities required to provide information, the manner and date of reporting, the scope of the information reported, the criminal and fiscal consequences of non-compliance by the obliged entities.

Since the comments received during the public consultation were very extensive, the MF decided that possible delays in the implementation of information obligations under the MDR rules would not give rise to adverse consequences for obliged entities, provided that these obligations were properly performed to 28 February 2019 In turn, in the event of proper implementation of delayed information obligations in the period from 1 March 2019 to 30 April 2019, These delays will be treated as minor cases.

This decision of the MF shows the extent of the problems faced by those obliged to comply with the reporting obligation. The Ministry of Finance also stresses that the entity that will comply with the MDR explanations will have the protection provided for under Article 14n(4) o.p.

The following are the most important changes as explained in the explanation for the project:

• • clarification that pension products such as Employee Capital Plans, Employee Pension Programmes, Individual Pension Accounts or Individual Pension Insurance Accounts are generally not covered by the MDR information obligation;
• • the decision that the mere fact of benefiting from tax concessions and preferences (R & D and Innovation Box) is not subject to reporting obligations under MDR rules. Reporting obligations may occur only if they are fulfilled
• • the conditions for considering the arrangement as a tax scheme;
• • selection 19% a linear PIT for revenue included in the source of non-agricultural economic activity (taking into account the reasons for the change in tax rules);
• • selection of the degressive depreciation method in PIT/CIT;
• • the choice of VAT treatment for real estate transactions by waiving voluntary VAT exemption;
• • reduction of depreciation rates in accordance with CIT/PIT rules.

It is worth noting that the doubts of entrepreneurs may arise from the fact that the explanations exclude these activities only from the selected premises, not informing at the same time whether these activities may be covered by the reporting obligation due to the fulfilment of other general exploratory features.

The explanations also ignore the qualification of Capital Funds Insurance, which may be met with further doubts by insurance companies.

The Ministry of Finance also clarified as part of the explanations the concept of other specific exploratory features, which in themselves are grounds for reporting, i.e.: the effect on deferred tax less than 5,000,000 PLN – It has been clarified that reporting obligations will not be subject to situations where the impact on deferred tax results from standard activities and is the result of differences between the balance sheet and tax law in the treatment of specific costs or revenues, such as the balance sheet valuation at the end of the reporting period, the valuation of assets and liabilities to fair value, the making of write-downs and the creation of reserves, etc.;

• an impact on the withholding tax more than 5,000,000 PLN – it is indicated that the sum of the potential value of the tax resulting from payments subject to withholding tax in the calendar year in question will be assessed;
• a non-resident income or income condition greater than 25,000,000 PLN – it was pointed out that only income (revenue) of non-residents, for which a limited tax obligation arises in Poland, is to be aggregated – therefore no goods transactions are to be aggregated.

Despite the extensive explanations made by the MF, there are still many interpretational doubts. They concern, among other things, the concept of changing the rules on taxation contained under Article 86a(1)(6) o.p. which do not appear in the transposed Directive 2018/822.

In addition, the definition of implementation still remains incomprehensible, included under Article 86a(1)(17) O.p., which was intended to describe the role of the promoter, but in the calculation it contains activities corresponding to the functions of the user or assister.

The high level of complexity and ambiguity of the provisions in question is not possible by providing explanations. In the current situation, the official document does not explain, but in many places replaces the bill.

This is incompatible with many constitutional values and, in particular, with the fundamental principles of trust in the state and legal certainty of tax law. In the margins, it should be pointed out that the action plan outlined above, i.e. First passing the bill and then issuing explanations to it is not isolated[22].

5. TEU case law and tax avoidance

In accordance with the Treaty on the Functioning of the European Union, the internal market is based on European freedoms, i.e. freedom of movement of goods, persons, services and capital[23]. They guarantee: no indirect and direct discrimination and no restrictions on access to the EU market.

In the context of tax avoidance, freedom of establishment is crucial, which guarantees the choice of place of business. The condition for exercising this freedom is to comply two Requirements: Legal establishment of an entity one from Member States and from head office, management or principal establishment in one of the Member States.

The obvious objective of introducing such facilitations in the internal market was to remove restrictions on the operation of the company outside the country in which it was established and thereby create a real borderless area, for the benefit of consumers due to increased competition and for businesses by facilitating the expansion of their activities[24].

The Court of Justice of the European Union has an impact on the understanding of the definition and scope of tax avoidance and, therefore, on the freedom of establishment, which are closely linked to this phenomenon.

An important ruling from the perspective of tax avoidance is the judgment of the CJEU of 12 September 2006[25], in which he stated that “the restriction of freedom of establishment can only be justified by the motives for combating abusive practices...

The aim of such a restriction should be to create an obstacle to behaviour consisting in creating purely artificial structures, in isolation from economic reasons, in order to avoid tax due on income generated from activities in national territory.’ The abuse element arises when the newly created company is an artificial structure whose sole purpose is to enable the taxpayer to transfer funds to a jurisdiction with a milder tax regime.

Therefore, the use of freedom of establishment to minimise tax burden does not constitute an abuse of tax law and is therefore an acceptable method of tax avoidance.

In another judgment of the Court of Justice of 6 December 2007[26] it held that ‘the freedom of companies to choose their registered office between different Member States does not in any way mean that they are required to adapt their tax systems to different tax systems of other Member States in order to ensure that the company that has chosen its registered office in one of the Member States, it will be taxed at national level in the same way as a company which has its registered office in another Member State." As the TEU rightly pointed out, Member States are free to determine the terms and levels of taxation of different forms of domestic companies operating abroad, subject to non-discriminatory treatment of companies operating in their territory. Member States are not required to lay down tax rules according to the rules of other Member States in order to guarantee in any tax situation that eliminates any inequality arising from national tax rules, since decisions taken by the company as regards the establishment of economic structures abroad may, as the case may be, be more or less beneficial to the company.

The Court of Justice of 14 December 2000[27], In which he stated that “there is a consistent pattern of the concept of abuse (not always called abuse), according to which the assessment of abuse is based on whether the law in question is compatible with the objectives of the legislation which are formally its source. When the enforcement of a law takes place within the limits set out by the objectives of a given provision of Community law, there is no abuse but only legal exercise of the law.’ The TEU takes the view that Community rules should be interpreted in such a way as to take account of the objective of those regulations and the objective pursued by the taxpayer, even if one of these objectives was a tax advantage, but only in the case of real business, not in the case of artificial structures.

6. Limit between avoidance and tax evasion

Tax avoidance activities are often referred to as “on the border”. While this term is common in nature, it reflects the risks associated with some tax reduction measures.

This risk is partly a consequence of the vague linguistic editorial of the law and the awareness of the tax authorities that the legislature which is the law did not foresee certain activities of taxpayers aimed at legally reducing tax obligations.

Tax authorities often take action to fill the legal gaps in the application of the law by adopting a professional interpretation, often beyond the language of the law. Such measures by tax authorities have intensified over the last few years[28].

This is easier since the introduction of the anti-tax avoidance clause, which is primarily preventive. Its task is to prevent artificial legal structures geared towards tax optimization.

As shown by Article 119a(1) o.p., an act does not result in a tax advantage being obtained if the achievement of that advantage, contrary in the circumstances to the object or purpose of the tax law or its provision, was the principal or one from the main objectives of achieving it and the mode of action was artificial (avoidance of taxation).

Definition of tax avoidance contained under Article 119a(1) o.p. is burdened with a number of important legal doubts[29]. In view of these doubts, it may not be possible to formulate a precise definition of "avoidance of taxation", which may lead to a number of interpretation difficulties, especially in international law.

In practice, it may be extremely difficult, and sometimes even impossible, to establish a precise line between avoidance and tax evasion. All the greater importance should be attributed to doctrine. According to K. Winiarski and K.

Stanik, the circumvention of tax law is a situation in which “the taxpayer’s giving a certain content of the legal act is determined to want to obtain a beneficial economic result by fraudulent action aimed at concealing a real economic transaction”[30].

Where tax authorities challenge the taxpayer’s activities, the tax effects shall be determined on the basis of the anti-tax avoidance clause Article 119a(5) o.p., i.e.

such a situation as would have been the case if the operations had not been carried out — where circumstances indicate that the tax advantage was the sole purpose of the operation or on the basis of Article 119 a section 2, according to which the tax effects of the operation are determined on the basis of the state of affairs which could arise if an appropriate act were carried out.

The definition of appropriate action has been developed in turn Under section 3 that provision, i.e.

an act that an entity would, in the circumstances in question, be considered appropriate if it acted reasonably and guided by legitimate objectives other than the attainment of a tax advantage contrary to the object or purpose of the tax law or its provision, and the manner of action would not be artificial.

Appropriate action may also consist in failure to act. The above-mentioned regulations constitute a legal form of tax sanctions, but this constitutes only a procedural sanction leading to a negative physical effect on the taxpayer, having nothing to do with the criminalisation of tax avoidance within the meaning of a tax penalty[31].

The tax evasion clause therefore does not equal tax avoidance against tax evasion and does not shift the border between these two With ideas.

Another regulation important for tax avoidance is introduced from 1 January 2019 the obligation to report tax schemes, i.e. Chapter 11a op. These regulations impose on the promoter[32] obligation to inform the Head of the KAS of the tax scheme implemented[33].

There is no doubt that activities reported by promoters may be contested by the tax administration as apparent. However, running an actual business eliminates the risk of interpreting the behaviour of the company (the taxpayer) as tax planning, resulting in security and security.

Consequently, the combination of reporting of tax schemes with the anti-tax avoidance clause will eliminate some of the tax avoidance activities that have functioned so far. However, as before, tax avoidance methods were used, which currently only have a historical value, e.g.

directors' salaries and dividends paid from Cypriot companies, so new solutions will now be sought.

According to the author, the dynamics of legal changes and legislative work on anti-tax avoidance go hand in hand with the search for new solutions to reduce the fiscal burden and reduce the risk of administrative authorities questioning these decisions as appearances.

7. Summary

From the perspective of the past few years, tax avoidance by taxpayers has come a long way, being one from the most important and dynamically changing tax law issues. Regulations to date, i.e.

The anti-tax avoidance clause, combined with reporting of tax schemes, aimed at reducing tax avoidance, whether at national or cross-border level, has had a measurable effect in the form of discouragement of taxpayers to take measures which are mainly the cause of tax optimization.

These regulations, although they have eliminated some of the optimization solutions to date, have not entirely eliminated tax avoidance, but have only slightly shifted the line between avoidance and tax evasion, thereby eliminating the area of a "grey zone" at the interface between avoidance and tax evasion.

Implementation Directive 2018/822, i.e. the drafting of unclear legal provisions by the legislator has contributed to the defective implementation of the obligation to report tax schemes.

The introduction of tax schemes to the Polish legal order of the institution, and the subsequent issuing of explanations to existing regulations, is contrary to the principle of the citizen's trust in the state and the law which they lay down, since tax rules should be formulated clearly and clearly, as this is a fundamental condition for correct tax legislation.

In the above-mentioned case law, the TEU takes the view that the abuse element arises when a newly created company is an artificial structure whose sole purpose is to enable the taxpayer to transfer funds to a jurisdiction with a more mild tax regime.

Therefore, the use of freedom of establishment to minimise tax burden does not constitute an abuse of tax law and is therefore an acceptable method of tax avoidance. A number of legislative changes in the area of substantive tax law have eliminated the possibility of using still recently widely used international tax avoidance schemes.

Nevertheless, it is still acceptable for taxpayers to take action to reduce fiscal burdens, but the intention to reduce taxation cannot be the main motive for the taxpayer’s behaviour