Pressfoto pl.freepik.com On 1 July 2020 the provisions on the cooperation agreement have become applicable. We are discussing what characterises this type of contract – with whom the taxpayer can conclude it and what benefits may result from its signature.
Amending the provisions of the Collaboration Agreement has been introduced Act dated 16 October 2019 on the settlement of double taxation disputes and the conclusion of prior price agreements (Journal of Laws of 2019, item 2200).
Details of this type of contract are described in Chapter IIB Act dated 29 August 1997 – Tax Ordinance (Journal of Laws of 2019, item 900, as amended, hereinafter referred to as: Tax Ordinance).
It is an agreement which the Head of the National Tax Administration (hereinafter: Head of the National Tax Administration) may conclude with the taxpayer at his request in respect of taxes remaining in the jurisdiction of the National Tax Administration.
According to Article 20s section 2 the cooperation agreement aims to ensure that the taxable person concerned complies with the provisions of tax law in terms of transparency and mutual trust and understanding between the tax authority and the taxable person, taking into account the nature of the activity carried out by the taxable person.
An application for an association agreement may be concluded by a corporation tax taxable person with the value of the income shown in the testimony [1] the amount of income generated in the previous tax year exceeded the equivalent 50,000,000 EUR
An application for an association agreement may be concluded by a corporation tax taxable person with the value of the income shown in the testimony [1] the amount of income generated in the previous tax year exceeded the equivalent 50,000,000 EUR.
This amount shall be converted into Polish gold at the average euro rate announced by the National Bank of Poland on the last working day of the calendar year preceding the year of application. The contract may be concluded with a taxable person who has received a favourable opinion from a preliminary audit.
Preliminary tax audit
The provisions concerning the tax audit carried out by the Head of KAS are contained in the Chapter 3 Chapter IIB Tax Ordinance. The head of the KAS may carry out such an audit before the conclusion of the cooperation agreement, then we are dealing with a preliminary audit, or during the contract, then we are dealing with a monitoring audit.
A preliminary audit, as well as its scope, shall be decided by the Head of the KAS; it shall take into account the assessment of the tax risk identified with the taxable person who requests the conclusion of the cooperation agreement. At the same time, the taxpayer must be informed of the scope of the preliminary audit and the Head of the KAS is obliged to agree with him on a timetable for the activities of that audit.
What period does such an audit cover?
According to Article 20zj section 4 Tax Ordinance, includes 2 the tax years preceding the year in which the taxable person requested the signing of the cooperation agreement and the period from the beginning of the tax year in which the taxable person made the request until the date of completion of the audit.
However, a preliminary audit on the correctness of the fulfilment of the tax obligations by the successor of the taxable person who has concluded the cooperation agreement may cover a shorter period.
Cooperation agreement – important information
A cooperation agreement shall be concluded only in writing for an indefinite period. It shall include the arrangements of the parties necessary for the proper implementation of its conditions, including the detailed definition of the rights and obligations of the parties.
It should be noted that the successor to the taxable person concerned does not enter into the rights and obligations arising from the cooperation agreement.
The obligations of the taxpayer under the Collaboration Agreement are listed under Article 20u Tax Ordinance. These include:
- voluntary and correct implementation of obligations under tax law,
- to have an effective and adequate set of identified and described processes and procedures for managing and ensuring the proper implementation of obligations under tax law,
reporting to the Head of the KAS, without a call, relevant tax issues which, when sensibly assessing, may give rise to a dispute between the taxpayer and the tax authority, in accordance with the thresholds of materiality laid down in the interoperability agreement,
the immediate transmission to the Head of the KAS, without a call, of relevant information that may affect the taxable person’s tax advantage, in accordance with the interoperability agreement.
Article 20v Tax Ordinance lists the activities of the Head of the KAS under the Collaboration Agreement. According to this provision, the head of the KAS:
adapts the form and frequency of the activities verifying the correct performance of the obligations of tax law by the taxpayer to the current level of effectiveness and adequacy of the internal tax supervision framework and the existing cooperation with tax authorities,
carry out customs and tax checks on the taxable person,
agrees to undertake checks on the basis of the Article 274c Tax Ordinance and submission to the taxable person under the procedure Article 79 Act dated 16 November 2016 about the National Tax Administration (Journal of Laws of 2020, item 505)[2].
After discussing the obligations of the taxpayer and the activities of the Head of the KAS under the Collaboration Agreement, the question of its dissolution can be moved on. A taxpayer can do that at any time. On the other hand, the Head of the KAS may terminate the cooperation agreement in the following cases: When announcing a co-operation agreement, the Head of the KAS must indicate the reasons together with the justification.
The day of termination of the cooperation agreement shall be the day of submitting, in writing, notice to the other party of the termination of the contract concerned, unless a later date is due to the content of that notice.
At the same time, if the Head of the KAS terminates the cooperation agreement, the taxpayer cannot apply for another contract during the period two years from the date of the previous resolution.
On the date of termination of the Collaboration Agreement, the Head of the KAS may also terminate the tax agreement, which will be further discussed in the following section.
The Head of the National Tax Administration is obliged to keep records of taxable persons with whom a cooperation agreement has been concluded. According to Article 20za section 2 Tax Ordinance such records shall include the name and tax identification number of the taxable person with whom the contract was concluded and the date on which the cooperation agreement began.
The records shall be public and made available in the Public Information Bulletin on the website of the body office serving the Minister responsible for public finances. In the event of termination of the cooperation agreement, the information on the taxable person concerned shall be immediately removed from the records.
Tax agreement
The head of the KAS may also enter into a tax agreement with the taxpayer that is a party to the interoperability agreement in the scope of that agreement. The Agreement must be in writing and, in accordance with Article 20zb Tax Ordinance, may be concluded on:
- interpretation of tax law,
- setting transfer prices,
- Inadequacy Article 119a section 1 Tax Ordinance (in which tax avoidance is referred to,
- the amount of tax liability for corporate income tax forecast for the following year,
- other necessary to ensure the proper implementation of the interoperability agreement.
The tax agreement cannot be concluded in relation to the activities and events covered by the ongoing tax procedure, tax control, customs/tax control or proceedings before an administrative court or where the matter has been settled in substance in the decision or order of the tax authority.
According to Article 20zc section 2 Tax Ordinance in the event of a refusal to enter into a tax agreement, the Head of the National Tax Administration shall indicate the reasons for the refusal together with the justification.
Provisions shall apply mutatis mutandis to the Agreement on the Interpretation of Tax Law Article 14c section 1 Tax Ordinance [3].
Before concluding a tax agreement, the Head of the KAS may consult the following authorities:
- in the case of a tax agreement on the interpretation of the provisions of tax law, the Director of National Tax Information or the head of the tax office competent for the taxable person who is a party to the cooperation agreement,
- in the case of a tax agreement on tax avoidance rules - the Council on Tax Avoidance.
Like the co-operation agreement, the tax agreement can be terminated by the taxpayer at any time. On the other hand, the Head of the KAS may terminate the agreement in the following situations:
- if relevant to the case in which the agreement was concluded, new facts or new evidence, existing at the date of conclusion of the agreement, unknown to the Head of National Tax Administration,
- if the Head of the SAA finds that the agreement is incorrect in the light, in particular, of the case law of the Constitutional Court, the Court of Justice of the European Union, the resolutions of the Supreme Administrative Court or general interpretations,
- if the cooperation agreement is terminated.
The tax agreement shall be terminated on the date of submitting, in writing, notice to the other party, the notices together with the justification (this does not apply if the Head of the KAS makes an agreement with the Collaboration Agreement).
At the same time, the taxable person in the termination of the tax agreement may indicate a different date for the termination of the agreement preceding the date of the notice. Compliance with the terminated agreement must not harm the taxpayer.
The exception is the situation where the agreement was terminated as it came to light relevant to the case in which the agreement was concluded, new facts or new evidence, existing at the date of the agreement, unknown to the Head of the KAS.
Monitoring tax audit
As mentioned earlier, the Head of the KAS carries out a preliminary audit to the taxpayer, i.e. prior to the conclusion of the cooperation agreement, and monitoring audit during the duration of the cooperation agreement.
From the tax audit carried out, the Head of the KAS shall draw up a positive/negative opinion, or recommendations indicating what actions the taxpayer should take to remedy the irregularities identified in the audit, together with justification.
Opinions and recommendations shall be communicated to the taxable person without delay; the taxable person shall also agree with the Head of the KAS on the time limit for carrying out the activities undertaken in connection with the recommendations submitted.[4].
The tax audit on the regularity of the fulfilment of tax obligations shall include a risk analysis and examination of the documentation relating to the tax risk areas identified by the taxpayer.
The tax audit of the internal tax supervision framework shall include an assessment of the ability of the taxpayer to properly perform tax obligations. This shall be checked by verifying the level of implementation and functioning for tax matters:
- the risk management system,
- internal control,
- internal audit,
- supervision of compliance with legal provisions, internal regulations and voluntary standards,
- external surveillance mechanisms, including independent auditing of the tax function.
The tax audit activities shall be carried out by the head of the KAS, the staff employed in a separate organisational cell of the office serving the KAS head. At the same time, tax audit activities may be carried out under the authority of the Head of KAS by employees and officers of the National Tax Administration units.
Importantly, the staff and officers carrying out the above audit activities cannot participate in the carrying out of the tax control, customs-tax control and tax proceedings against the taxable person covered by the above audit for the period three years from the day it ended.
It is also worth mentioning the independent audit of the tax function. This audit shall include verification of the regularity of the performance of tax duties and the effectiveness and adequacy of the internal tax supervision framework implemented. It is carried out on behalf of the taxpayer by an independent tax auditor. Such an independent auditor may be a tax advisory company, an audit firm, a tax adviser or an auditor. But it cannot be an entity:
carrying out audit activities, tax or legal advice services to the taxpayer,
a national associated entity or a foreign related entity within the meaning of the Double Taxation Dispute Settlement Act and the conclusion of prior price agreements with: (a) the taxpayer, (b) the entity providing tax advice or financial audit activities to the taxpayer concerned, (c) the provider of tax advice services or financial audit activities to the entity providing such services to the taxpayer.
The independent audit of the tax function shall produce a report containing the outcome of that audit and shall be signed by the independent tax auditor carrying out the audit. At the same time, the report shall be transmitted without delay to the taxable person together with the audit documentation containing the tests and procedures carried out during the report.
[1] Article 27(1) Act dated 15 February 1992 on corporate income tax (Journal of Laws of 2019, item 865, as amended).
[2] Both of these provisions concern the checking activities of counterparties.
[3] „Individual interpretation contains exhaustive a description of the facts or future event presented in the request and an assessment of the applicant’s position together with the legal justification for that assessment. A legal justification may be waived if the applicant’s position is fully correct.’
[4] It is also worth mentioning that if the taxpayer complies with the recommendations of the preliminary audit, the audit may be resumed for the period necessary to verify that the taxpayer complies with those recommendations.
Author: Michał Zdanowski
Tax consultant At Russell Bedford Poland.
Graduate of the Faculty of Law and Administration at the University of Warsaw, Graduate of the Postgraduate Tax and Tax Law Studies at the University of Warsaw. During his studies he gained experience in law and tax law firms. Since September 2013 is associated with the law firm Russell Bedford Poland. It specialises in documenting transactions between related parties.