SLIM VAT project

Clear. Simple. Friendly. These slogans became the basis of the tax policy presented by the Ministry of Finance in 2018 Its main objective was to simplify income tax law.

Following the proposed amendments to the Act of 29 August 1997 - Tax Ordinance 1 ((b) and income taxes from legal and natural persons came the time to slim down the law with 11 March 2004 on tax on goods and services 2 (Further: u.p.t.u.). This is to happen after the introduction of a package of changes in this regulation 1 January 2021.

The author in this study discusses the nature of these changes compared to the current regulations.

1. Introduction

The project to introduce changes in u.p.t.u as well as in banking law was published 18 August 2020 on the pages of the Government Legislative Centre 3 . The Ministry of Finance sent a message a month earlier 4 concerning the implementation of such a project under the name ‘SLIM VAT’, which announced its main elements.

It intended to introduce permanent changes to facilitate the operation of SMEs. According to the Minister of Finance Tadeusz Kościński, “In the MF we have audited the obligations of taxpayers in order to eliminate or reduce those that constitute barriers to the development of Polish entrepreneurship” 5 .

The name of the project is an acronym for words Simple, local and modern. It is intended to mean “simple service, adapted to the local specificities of the country in which it operates. It is also a modern tax, in which the implementation of further technological solutions and e-services of administration combines with the reduction of obligations on taxpayers" 6 . This may be a term for growth, given that the project assumes rather minor facilitations than revolutionary approaches, but one should commend a step in the right direction. Even if it is based solely on the chosen policy and its assumptions. They are included in four passwords:

• 1. Simple invoicing,
• 2. Facilitation for exporters,
• 3. Common exchange rates,
• 4. Financial benefits.

The above passwords shall be the subject of this Article. The VAT Act is one more frequently amended regulations in the Polish legal system. Over 25 years since its adoption in 1993 practically every year there were significant changes to taxpayers and many smaller ones.

It is difficult to see whether the project proposed by the Ministry can be classified as significant or less important. The truth is that tax laws constitute one with the most difficult departments of law, and their degree of complexity causes taxpayers to give up their attempts to read them and rely more on guides or summaries.

That is why any attempt to simplify tax law should be looked at with attention and hope.

The project, which was eventually made available for consultation and opinion purposes, in addition to the changes that introduced the VAT SLIM package itself, also included others in terms of:

• • solutions of a more precise and complementary nature to certain legal structures in the tax on goods and services,
• • travel tax refund system (tax free).
• 2. Simple invoicing

Amendments to this issue concern the recognition of an increase or reduction in the VAT base as a result of the issuing of corrective invoices. The draft addresses both the normalisation of the timing of the in-plus correction invoice and the facilitation of the in- minus correction invoice.

In the current state of the law, there is no uniform legal standard which dictates the moment when VAT resulting from the in-plus amending invoice is credited. Tax payers in this respect may rely solely on a case-law line which, as usual, is not uniform in this respect.

When analysing interpretations of tax authorities, one can see two basic approaches to this issue. According to one of which the in-plus adjustment invoice must be included in the settlement for the period of issue of the original invoice 7 , which gives rise to the consequence of paying the appropriate interest.

second The approach, which also appears in most judicial decisions, makes the timing of the correction invoice dependent on the grounds for its implementation.

According to that view, if a corrective invoice is issued for reasons relating to a transaction, such as a miscalculation, that invoice should be settled within the time limit of the original invoice.

However, if there is an increase in the price after the invoice is issued for other reasons, such as the increase in transport costs or the value of the goods sold, it is settled on an ongoing basis. In principle, an adjustment invoice is issued because of the circumstances which occurred after the original sale.

The proposed project is intended to clarify and provide greater certainty to taxpayers in this respect. To u.p.t.u. are to be introduced in Article 29a(17)(18), saying:

„17. Where the tax base increases, the correction of that base shall be made in settlement for the period during which the reason for the increase in the tax base occurred.

1. In the case of exports of goods, an increase in the tax base referred to in section 17, no earlier than the tax return for the period of account during which the export was shown.’

As can be seen, therefore, the Ministry of Finance has decided to implement into the Act a standard which so far only exists in tax interpretations and jurisprudence. In the explanatory memorandum to the bill 8 there are also possible interpretations of the proposed solution, which follow the approach developed and described above.

However, it is worth mentioning that in the event of an error in the original invoice, it will also give rise to the obligation to increase the tax base of the cleared correction invoice in the declaration for the period during which the original invoice was produced. Therefore, it cannot be considered that since a later error has been found, a corrective invoice should be cleared, since the basis for its issue is ‘originally’ linked to the original sales invoice.

In the case of in minus adjustment invoices, it was decided to waive the burdensome obligation to wait for the buyer to confirm receipt of the corrective invoice.

Until now, such an invoice could be issued on the basis of Article 29a(10) 9 , subject to reservation section 13., determining the possibility of lowering the tax base in the declaration only if the purchaser has adequate confirmation of receipt of the corrective invoice 10 .

In many cases, this led to a shift of such a reduction to subsequent settlement periods due to the delay of counterparties in sending confirmations or delays in delivering them.

To this end, it has been revised Article 29a(13) 11 , amending the obligation to have a confirmation of possession of the documentation that ‘that he has agreed with the purchaser of the goods or services to reduce the taxable amount for the supply of those goods or the provision of those services as set out in the corrective invoice and that invoice is in accordance with the documentation at his disposal’ 12 .

This may considerably speed up the inclusion of a reduced tax base in declarations, as the conditions described in the amendment will meet e-mail exchange between the taxpayer and the counterparty, for example 13 . In the same period, this obligation will also appear on the buyer's side, as amended Article 86(19a) 14 .

3. Common exchange rates

The draft amendment also introduces the possibility of harmonising the application of foreign exchange rates to goods and services and income taxes. In the practice of economic activity, there have been situations so far where the taxpayer had to apply different rates for the purposes of these taxes.

This is, of course, due to different approaches in this respect to the provisions in the Income Tax Act and the U.P.T.U.

According to the law of 15 February 1992 on corporation tax (hereinafter: u.p.d.o.p.) 15 foreign currency revenues shall be converted into gold in accordance with the average rate announced by the National Bank of Poland on the last working day preceding the day of receipt of income 16 . In u.p.t.u.

regulations, the method of currency conversion is defined in Article 31a. Differences between the two legal acts arise particularly when the taxable person issues an invoice before the tax obligation arises.

According to u.p.t.u., conversions to gold “is made at the average rate of the foreign currency declared by the National Bank of Poland on the last working day preceding the day of issue of the invoice” 17 . However, in this case, u.p.d.o.p. recognizes such income when the service is provided or when the goods are delivered 18 .

Example

The company sells goods in foreign currency. Issue of goods to the counterparty 15 September, the issuing of an invoice – 21 September. According to tax regulations, the course for the needs of u.p.t.u. will occur on the day before the invoice is issued, i.e. 20 September.

In income tax the tax obligation arises when the goods are issued, so the company will have to apply the rate with 14 September.

This, of course, is a situation which is not practical and burdensome for taxpayers, and which also gives rise to the likelihood of a mistake in the conversion of foreign exchange invoices, which may be particularly important for taxpayers whose activities are carried out in foreign currency.

The standardised rules are intended to be more transparent and to shorten the time needed to convert invoices according to the rates indicated in the relevant tax laws. According to the draft amendment, the taxpayer will be able to choose, for the purposes of VAT settlement, the rules for the conversion of the exchange rate in the income tax legislation. However, he will have to use the chosen conversion method for at least the period 12 consecutive months.

In Article 31a, after section 2, sections 2a-2d will be added as follows:

„2a. The amounts used to determine the tax base expressed in foreign currency may be converted by the taxable person into gold in accordance with the rules on the conversion of revenue resulting from the income tax provisions applicable to that taxable person for the purpose of clearing the transaction in question.

2b. A taxpayer who has chosen the conversion rules referred to in section 2a, is required to be used by at least 12 consecutive months from the beginning of the month in which he chose them.

2c. Where the conversion rules referred to in section 2a, the taxable person is obliged to apply the conversion rules referred to in section 1 and 2, by at least 12 subsequent months starting from the beginning of the month following the month in which he renounced the conversion rules referred to in section 2a.

2d. Where during the period of application of the conversion rules referred to in section 2a, the taxable person undertakes a transaction which is not calculated in accordance with those rules and is obliged to apply the conversion rules referred to in section 1 and 2”.

Thus, as is apparent from the project's assumptions, this solution is to rely on the voluntary use of it by taxpayers. It also provides for a situation in which the taxpayer cannot apply the rules laid down in the Income Tax Act.

This may occur when clearing, for example, the intra-Community acquisition of goods or the acquisition of services for which the purchaser remains liable for clearing. According to newly added section 2d., in such a situation, it must apply the rules referred to in Article 31a(1)(2) U.P.T.U.

4. Facilitation for exporters

The draft also provides for considerable facilitation for exporters of goods as regards the application of the rate. 0%, especially for long-term deliveries.

According to the sound Article 41(9a) ‘If the taxable person has received all or part of the payment before the delivery of the goods, the rate of tax 0% the export of goods shall apply to the payment received, provided that the export of the goods takes place within the time limit 2 months from the end of the month in which the taxable person received the payment and the taxable person received the document referred to in that period section 6”.

It is a document confirming that goods are exported outside the European Union. A catalogue of such documents is included in section 6a the said article, but it should be stressed that it is not a closed catalogue, as indicated by the ‘in particular’ section.

According to the tax authorities, in order to document exports of goods, the taxable person may use any document which clearly and unequivocally confirms such exports 19 .

The proposed amendment is important to extend the deadline for such confirmation from two to six months[20]. This will allow a larger number of exporters to apply the rate 0% without making unnecessary corrections to the declaration.

5. Financial benefits

Among the changes identified in the presentation of the project as financial benefits, there are several minor ones, namely:

• • extending the deadline to deduct VAT on an ongoing basis to four months,
• • increasing the limit for small-value gifts,
• • VAT deduction from invoices for the purchase of accommodation services for resale.

The extension of the deduction period is linked to the amendment of the general rule on the right to deduct input tax as set out in Article 86(1) it indicates the extent to which the taxable person may deduct the value of the input tax from the value of the tax due.

Time limits for exercising this right are included in Article 86(10b-10i) u.p.t.u., where, depending on the type of transaction and the status of the taxable person, the conditions under which compliance is compulsory to be able to exercise the right to deduct are introduced.

However, if the taxpayer, for various reasons, did not exercise that right during the relevant settlement period, section 11 This article gives him the opportunity (with reference to the time limits specified in section 10 and 10d and 10e) to do so in one of the two subsequent settlement periods.

In the event of non-use and this possibility, the tax reduction due can only be applied by correcting the relevant tax return, but not later than within 5 years from the beginning of the year in which the right to this reduction arose 21 .

The amendment proposed by the Ministry is to increase this period to one of three subsequent settlement periods. The amendment will therefore extend the time effectively for the taxpayers accounting for a month to deduct to 4 months. This will not apply to taxable persons making quarterly VAT returns. This aims mainly to offset the number of corrections to the declarations resulting only from the expiry of the period during which the taxable person was entitled to deduct VAT from the invoices.

The next change will be to increase the limit for gifts of low unidentified value, described in Article 7(4)(2) u.p.t.u. It is worth recalling that, although the supply of goods is considered to be a personal transfer or use of goods for the purposes of the taxable person or his employees, including former employees, shareholders, shareholders, cooperative members and their household members, members of the bodies constituting legal persons, members of the association, as well as any other donations, if the taxable person has been entitled, in whole or in part, to a reduction in the amount of tax due for the acquisition, import or manufacture of those goods or their components 22 , the exception is, however, the transmission of low value gifts.

In u.p.t.u. stands out two categories of such gifts, to the value 10 PLN, where their transfer is not included in the relevant records to identify them, and to the value 100 PLN, about the registered gifts.

The legislator decided to adapt this provision to changing market conditions, including inflation, and to increase the limit of gifts not recorded to the value 20 PLN. This is important that this value has not changed from 1 January 2009 However, no justification was given for why there was no change in the value of registered gifts.

The only information provided in the explanatory memorandum of the amendment law is that "the proposed change will allow for better promotion of Polish goods and services both in Poland and abroad".

The most interesting change among the categories described in this category is to allow the deduction of input tax for the acquisition of overnight services for further resale.

In the current state of the law, according to Article 88(1)(4) The reduction or reimbursement of the difference in tax due shall not apply to accommodation and catering services purchased by the taxable person, except for the purchase of finished meals intended for passengers by taxable persons providing passenger transport services.

Although the Ministry argues in its Communication that "change is a response to market needs" 23 , it would be closer to the truth to say that it was forced not to comply with EU law.

This was confirmed in the judgment of the Court of Justice of the European Union of 2 May 2019 on C-225/18 Lotos Group and the Supreme Administrative Court judgment 11 September 2019 24 . In this regard, the Lotos Group opposed the position of the tax authorities, which prevented it from deducting due tax on the purchase of hotel services which were subsequently resold to the Group's entities.

The proposed amendment consists in allowing the deduction of VAT charged on overnight accommodation services purchased by taxable persons for the sole purpose of further resale, i.e. service refakture. Other acquisitions of overnight accommodation services will not permit a similar deduction.

Moreover, ‘it is not envisaged to introduce such a solution for catering services at the same time. This is due to a different specificity of these benefits’ 25 .

This solution will not cover services purchased by tourism taxable persons, which are compulsorily accounted for in the VAT-margin system, for which special rules for exemption from deduction will apply on the basis of Article 119(4) U.P.T.U.

6. Summary

„VAT SLIM" is a package of solutions whose main objective is to facilitate VAT for entrepreneurs. The changes are primarily aimed at harmonising and simplifying the accounts. However, it is hard not to notice that the name has been given a bit of growth, and the proposed amendments are not as important as the Ministry of Finance is trying to convince us.

However, it should be stressed that the project described here is currently in the public consultation and opinion stage and may still be subject to unforeseen modifications. It is therefore worth focusing – rather than on the solutions themselves, which will certainly be awaited by taxpayers – on the direction of the changes that the legislator has taken. For even such a small step can be the announcement of major changes which will ultimately allow further simplification of tax law.

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1 T.J. Journal of Laws of 2020, item 1325.

2 T.J. Journal of Laws of 2020, item 106 as amended

3 Draft Act amending the Goods and Services Tax Act and the Act - Banking law (hereinafter: Amending Act), published by the Government Legislative Centre 18 August 2020

4 https://www.gov.pl/web/finanse/slim-vat--uproszczenie-i-unowoczesnienie-rozliczen-vat

5 Ibid.

6 Ibid.

7 For example, the interpretation of the Director of the Tax Chamber in Bydgoszcz with 28 September 2009, No. ITPP2/443-540/09/AW and interpretation of the Director of the Tax Chamber in Katowice 16 January 2009, No. IBPP2/443-1043/08/LŻ.

8 Reasons for the bill to amend the Goods and Services Tax Act and the Act - Banking law (hereinafter: justification for the amending act), published by the Government Legislative Centre 18 August 2020

9 Ibid.

10 The Act did not regulate the form of such confirmation, but had to make it clear that the amending invoice had reached the counterparty.

11 Justification for the Amending Act.

12 Article 1(3) A bill of amendment.

13 The justification for the project also includes forms of communication with the counterparty, such as commercial documents, including contractual annexes, commercial correspondence, proof of payment, etc.

14 „In the case referred to in Article 29a(13)(14), the purchaser of the goods or services is obliged to reduce the amount of input tax in the settlement for a period during which the conditions for lowering the taxable amount for the supply of goods or services set out in the corrective invoice have been agreed”, u.p.u.

15 Act of 15 February 1992 on corporate income tax, i.e. Journal of Laws of 2020, item 1406, Further: u.p.d.o.p. Provisions of the Act of 26 July 1991 on income tax on individuals (i.e. Journal of Laws of 2020, item 1426 as amended, Further: u.p.d.o.f.) are identical to the provisions of u.p.d.o.p.

16 Article 12(2) u.p.d.o.p.

17 Article 31(2) U.P.T.U.

18 Article 12(3a) u.p.d.o.p.

19 Cf. personal interpretation of the Director of KIS from 13 August 2018, No. No. 0112-KDIL1-3.4012.388. 2018.2.PR.

20 Article 1(6) A bill of amendment.

21 Article 86(13) U.P.T.U.

1. Article 7(2)) U.P.T.U.

23 https://www.gov.pl/web/finanse/slim-vat--uproszczenie-i-unowoczesnienie-rozliczen-vat

24 reference no. I FSK 2084/15.

25 Justification for the Amending Act, p. 16.