Why do we need a general clause to circumvent tax law?

The use of general tax circumvention clauses usually involves quite a broad discussion on the appropriateness of such arrangements in the tax system.

The authors of legislation in which such a solution operates argue that it is an effective tool that allows tax administrations to fight the consequences of taxpayers' efforts to avoid paying taxes at the appropriate level.

Opponents point out that the clause is a dangerous tool in the hands of the tax, due to the considerable discretion and the large area of abuse that may occur in connection with its practical application.

At the time of drafting this text, the provisions on the general clause apply in Poland from 2016 At the same time, the Ministry of Finance is looking for the main anti-tax avoidance specialist.

In this article, the author analyses the current provisions in the context of cases of the application of the general anti-tax ruling clause, seeking answers to questions about the real motivation of the tax administration to use this tool.

1. Polish clause not so new

The tax evasion clause is not a new solution in the Polish tax system, for the time being first was introduced into the bill with 29 August 1997 - Tax Ordinance 1 (hereafter, by law with 12 September 2002 amending the Act – Tax Ordinance and to amend some other laws[2].

According to the wording of the then general clause, it provided the basis for the possibility of omitting a given activity by the taxable person or the result of another activity established by the tax authorities:

• „the tax authorities and tax authorities, when settling tax matters, will disregard the tax effects of legal acts if they prove that no significant advantage could be expected from the performance of those activities than from the reduction of the tax liability, increase in loss, increase in overpayment or reimbursement of the tax’,
• „if the parties, when carrying out the legal act in question Under section 1, have achieved the intended economic result for which a different legal act or act is appropriate, the tax effects derive from that other legal act or act’ 3 .

As the commentators of tax legislation pointed out, the general clause on this content was introduced in line with the trend in the European Union, and its content was generally not different from those in other countries.[4].

The clause in this wording was in force quite briefly, it was considered to be an unconstitutional judgment of the Constitutional Court with 11 May 2004 5 . The Constitutional Court found that the clause was in breach Article 2 and Article 217 The Constitution of the Republic of Poland, i.e.

the principle of trust in the state and the law and the principle of careful legislation. As a result of this judgment in Poland, there was a view that the general clause against circumvention of tax law is unacceptable in the Polish legal system.

However, this view is not entitled, and especially the above judgment of the Constitutional Tribunal of 2004 does not justify such an argument.

In its judgment, the Constitutional Tribunal pointed out explicitly that the general standard of circumvention of tax law is possible, but the legislator must comply with specific legislative requirements in this case.

Due to the increasing phenomenon of tax avoidance in Poland, work on the introduction of a new general clause against tax avoidance continued in years 2013-2015. They were conducted by the Codification Commission of General Tax Law.

In the first half 2016 introduced a new anti-tax avoidance clause with a legal abuse clause relating to the tax on goods and services[6]. At the same time, the so-called ATAD Directive was introduced at the same time 7 , according to which Member States were required to introduce 2019 adequate regulation of tax avoidance tools.

2. Clause currently in force

The provisions of the General Anti-Tax Avoidance Clause, specifying the current content of the General Anti-Taxation Clause, apply from half. 2016, modified at the beginning 2019 These records are included in Section III A Anti-tax avoidance in Chapter 1 Tax avoidance clause.

The basic provision in this respect is Article 119a, according to which ‘the activity does not result in a tax advantage if the attainment of that advantage, contrary 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)’.

In the remainder of that provision, the tax authorities were given the competence to determine the tax consequences of the activity on the basis of the state of affairs which might exist if appropriate.

one of the key elements of the current clause is the concept of artificial mode of action. Given the previous cases of constitutional scrutiny of the general clause provisions, the legislator sought to define as precisely as possible all the wording on which the clause is based. Under Article 119c o.p.

has attempted to define the concept of artificial mode of action by adopting the definition a contrario, in which it indicated what type of action would not be considered artificial: ‘it is not artificial if, on the basis of the existing circumstances, it should be assumed that an entity acting sensibly and with legitimate objectives would apply this method to a dominant extent for legitimate economic reasons.

Reasons referred to in the sentence first, the objective of achieving a tax advantage contrary to the object or purpose of the tax law or its provision is not included.’

In addition, in order to indicate to the addressees of the provision certain cases which may result in the recognition of the activities of taxable persons as having the value of artificiality, the legislator has set out a list of situations the occurrence of which may show that the taxable person's behaviour was artificial[8].

According to the author, the mere formulation of this definition by indicating cases of actions which do not meet the conditions for covering a given situation with the scope of the defined term indicates that two important aspects raised during the discussion on the clause.

After first This shows how difficult it is to create a coherent, unambiguous definition of the key concepts on the basis of which meaningful decisions are to be taken on the application of the clause.

After second, such a descriptive way of formulating definitions not only does not define a clear conceptual framework, but further exacerbates doubts as to the real possibility of defining transparent rules of recognition, which actions of the taxpayer may be regarded as having an artificial attribute.

Consequently, since, in the current state of the law, despite many years of efforts to comply with all the rules of careful legislation, we are still faced with such vague provisions, in some cases the natural phenomenon is still being raised as to the appropriateness of bringing this regulation into the legal order.

Some of the allegations made to the current legislation have already been the subject of judicial decisions, but so far the ruling compositions have not decided to address requests for consideration of the constitutional nature of the contested provisions.

Provincial Administrative Court in Warsaw in judgment of 30 May 2018 considered that the conditions indicated under Article 119 o.p. – despite the use by the legislator of rather harsh terms – are sufficiently precise and guarantee the protection of the taxpayer from the arbitrary action of the tax authority[9].

Whether we agree with the ratio legis indicated by the legislator, or whether we are against the introduction of general clauses, the real state In 2020 is that the anti-tax avoidance clause is part of the Polish legal order and we face the need to face the consequences of tax law.

1. What is the current clause used for?

Most cases of the application of the current general anti-tax avoidance clause concern the proceedings for issuing safety opinions. It is in these proceedings that it is assessed whether, in the particular situation presented by the taxpayer, the said application should be found. Article 119a o.p.

On an example one of the proceedings which had its final In 2020, The author presents practical problems that may arise in connection with even the most reliable attempt to apply rules introducing a general clause against tax avoidance and specifying the procedure for issuing safety opinions.

This information was first published 2020 and relates to the refusal of a precautionary opinion requested In September 2016 10 .

That means over 3 years applicants expected this information to protect them from the application of the tax avoidance clause, in order to finally receive a reply that the planned activities to be carried out still In 2017 do not meet the criteria for issuing a safety opinion.

The applicants asked the Minister for Development and Finance to issue a safety opinion in relation to the planned restructuring activities, which were to include, inter alia, the allocation of the resources raised in the reserve to finance the separation of the organised parts of the undertaking and the transfer of those funds to a limited liability limited company which had previously operated.

The joint application by the companies identified the objectives that applicants wanted to achieve in relation to the planned activities – tax aspects were one of these objectives, but in addition to them, have yet to be given ten other reasons such as the desire to ‘wean’ the assets of the operating company in order to focus on the core business of the company, the unique function of the property company acting as a ‘quasi-fund’, the preferred model of generation succession by the shareholders or the desire to de formalise the distribution of profits existing in the capital companies.

The basic tax advantage was to consist of the non-taxation of the value of the share capital and of the reserve resulting from the transfer of an organised part of the company to a capital company, which would then be converted into a limited partnership (and therefore not a legal person).

The value of the capital raised was 26,000,000 PLN – The exclusion of this value from the tax base would therefore give a tangible benefit to income tax. This tax objective was indicated by the company as one for the benefit but not as principal or exclusive, the Head of the KAS disagreed with this assessment.

Finally, the head of the KAS considered that the main purpose of the planned activities was to obtain a tax advantage. In the Authority’s view, other reasons and objectives for carrying out the operation had to be considered as not significant at most compared to the possibility of achieving the tax advantage in question, and the conduct of those activities met the condition of the artificial mode of action in question under Article 119c section 1 Mr Kas expressed the opinion that it was doubtful that applicants would have decided at all to carry out the activities in question had they not been able to obtain a tax advantage.

What is the conclusion of the situation as to whether the Head of the KAS had the right to issue such information, as far as possible, of the rules on the issuing of safety opinions, empowers the authorities to examine in detail the factual and planned action in relation to the conditions for artificial action to achieve tax advantages.

However, he takes note of the time elapsed from the moment of the submission of the application to the final reply of the Head of the KAS.

However, it should also be noted that in the course of the application for a safety opinion, applicants brought complaints to administrative courts, resulting in decisions: WSA in Warsaw with 8 June 2018 and NSA from 31 January 2019 However, the period elapsed between the issuance of the NSA judgment (January) 2019) and the opinion is virtually one year.

From the perspective of the reality of economic turnover, this is a long time, of course during the whole procedure, seeing in which direction the tax authority's position is developing, applicants have already been able to take action, but from the perspective of taxpayers who are considering the possibility of requesting a safety opinion, the conduct of this procedure can act in a disincentive manner.

Surely taxpayers will take into account both the risk of a negative response and the prolonged duration of the whole procedure, which means not only uncertainty about the outcome but also additional costs. On the other hand, the fact that they have not received a safety opinion in a given factual condition which has been fairly precise and exhaustive presented in the course of the whole procedure, it can also be a valuable clue for taxpayers – this is a sign that behaviour similar to that presented in the proposal may in future be questioned by tax authorities.

In order to ensure that information is provided as objectively as possible, it should be pointed out that not all requests for a safety opinion end in refusal and not all proceedings continue as long as described above.

Following the statistics available on the government's website of the Ministry of Finance from the beginning of the current general anti-tax avoidance clause, it is worth mentioning that it has been issued nine positive safety opinions and also in nine where a safety opinion has been refused; for each year, these are the following:

• 1. 2020 (first half: number of positive opinions issued – 4, refusal — 6.
• 2. 2019: Number of positive opinions issued: 4, refusal — 1.
• 3. 2018: Number of positive opinions issued: 1, refusal — 0.
• 4. 2017: Number of positive opinions issued: 0, refusal — 2.

Given the duration and intensity of the discussions on the general anti-avoidance clause, this figure seems very small.

Perhaps, however, we are only at the beginning of the evolving institutional system for assessing the "artificiality" of taxpayers' activities and the coming years will bring a significant number of protective opinions and tax proceedings in which the clause will play an important role.

This may be evidenced by the fact that a staff team dedicated to anti-taxing is being expanded, although such a team does not have to deal exclusively with issues directly related to the application of the general clause against tax avoidance.

In addition, it is worth noting that legislative work is still ongoing to modify the provisions defining the clause itself and the way in which it is applied.

In such a case, it is the best time to closely follow the legislative action by both the legislator and the actual one by representatives of the KAS, who conduct proceedings concerning, inter alia, issuing safety opinions.

The active, substantive participation of representatives of taxpayers, business, science can make an important contribution to the development of the practice of applying the general clause, which can determine its direction for many years to come.

4. Summary

As indicated in the introduction to this Article, the purpose of this study is not to assess whether the introduction of a general clause against tax avoidance in Poland is the right move of the legislator. The clause applies and everything indicates that it will become a permanent part of the Polish tax system.

Presenting the subject matter of the general clause and first, The slowly emerging rulings on the issuing of a safety opinion should be noted that this is a solution around which there is a very extensive discussion from almost 20 years, and at the same time the cases of its use are few and really not very significant.

Since the fact that the activity in question is considered to be an artificial activity intended solely to obtain a tax advantage is that the taxpayer concerned does not receive a safety opinion means that it is unlikely that he will benefit from the solution which he submitted for consultation with the tax administration.

The damage in the author's assessment is those cases where the waiting time for a safety opinion is extremely long – as in the example set out in this article.

This means that there is uncertainty on the part of the taxpayer, which, however, can be reduced to some extent 11 , but above all it means that the subject of the general clause against tax avoidance has become to some extent a "cuckoo egg" which is being passed between the authorities of the KAS and courts.

However, this does not mean that there is no good will to make binding decisions on the application of the clause, and according to the author, it shows how difficult the practical application of this tool is. In his opinion, modifying existing anti-tax avoidance solutions is a necessary and inevitable phenomenon.

Material law is changing, the patterns of unfair taxpayers are changing, and tax administrations must adapt tools to changing needs in order to ensure fair and fair tax collection and verification processes.

At the same time, taking into account all the facts about the introduction and application of the General Clause, it can now be concluded that this tool is almost not used for this purpose (since the entry into force of the General Clause) In 2016 until today). At the same time, the effectiveness of KAS' tax recovery activities increased significantly.

In the end, the author is inclined to conclude that the general clause against tax avoidance in Poland is not a necessary tool to counter taxation in Poland.

Given the wide range of legislative and factual tools available to the KAS In 2020, including tools for automatic verification of data from taxpayers (including JPK, STIR, big data analysis) it can be noted that the rivalry of the tax administration with unfair taxpayers is taking place at this point in a completely different arena, where the speed of data exchange and analysis and responsible and consistent implementation of relevant IT tools are crucial.

In these areas, the development of tools should focus in the coming years.

The general anti-tax avoidance clause is a legislatively interesting solution and can support the fight against tax avoidance, but its application should follow first in another area, i.e.

in the field of action, at the stage when these activities are planned, after second – only in exceptional cases which (because of their innovation, lack of a reference point) cannot be analysed other than by reference to categories such as the ‘artificial nature of the activities of the taxpayer’.

If things go in this direction, then perhaps soon the discussion about the presence of a general clause in Polish tax law will lose its intensity.

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2 Journal of Laws, item 1387, ‘The Amending Act 2002”.

[3] Article 24b(1)(2) Amendment laws 2002

4 So, among others, L. Etel [in]: Tax Ordinance. Updated comment, LEX/el. 2020.

5 reference no. K 4/03, OTK-A Directive 2004/5, item 41.

7 Directive 2016/1164 to 12 July 2016 laying down rules to counter tax avoidance practices which have a direct impact on the functioning of the internal market, Official Journal of the European Union L, No. 193, p. 1.

8 under Article 119c section 2 It was pointed out that the occurrence of the following phenomena may ‘in particular indicate’ their assessment as artificial activities:

• 1) unjustified division of operations, or
• 2) involve intermediaries in the absence of economic or economic justification, or
• 3) elements leading to an identical or similar condition to that existing before the operation, or
• 4) reciprocal or compensating elements, or
• 5) an economic risk that exceeds the expected non-tax benefits to such an extent that it should be considered that a reasonable operator would not have chosen to do so, or
• 6) where the tax advantage achieved is not reflected in the economic risk or cash flow incurred by the entity, or
• 7) the pre-tax profit which is negligible compared to the tax advantage which is not directly due to the economic loss actually incurred, or

1. the involvement of an entity that does not have an actual economic activity or does not have a significant economic function, or that is established or resident in a country or territory as defined in the legislation issued on the basis of Article 23v(2) Act on 26 July 1991 on personal income tax (i.e. Journal of Laws of 2019, item 1387 as amended) or Article 11j(2) Act on 15 February 1992 on corporate income tax (i.e. Journal of Laws of 2019, item 865).

9 reference no. III SA/Wa 2226/17.

10 Information relating to the refusal of a precautionary opinion 23 January 2020, reference no. DKP3.8011.19.2019.