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Tax Cost & VAT Correction Triggered by Lack of Liability's Settlement
correct tax deductible costs if they do not settle their liability resulting from an invoice / agreement within 30 days from the payment deadline. This would be 90 days from recognition of the amount as tax deductible cost, in the case that the payment deadline is longer than 60 days). The correction is made in the period on which this 30th/90th day falls. The discussed obligation relates also to tax depreciation / amortisation write-offs.
correct input VAT in case the liability is not settled within 150 days from the payment deadline. The correction is made in the settlement period on which this 150th day falls. If the taxpayers do not comply with this VAT correction, the tax authorities may impose additional VAT liability equal to 30% of input VAT resulting from the unsettled invoice(s).
Taxand Poland details the effects of these new settlement amendments.
New regulations have been introduced to eliminate payment gridlocks through imposing additional obligations at the side of the debtors who do not settle their liabilities in due time.
However, new rules were also implemented regarding the moment of recognition of costs for tax purposes. Historically, costs were generally recognised tax-wise on accrual basis. As of 2013 expenses may be recognised on an accrual basis, as well as on a cash basis.
Moreover, the amendment to the Polish tax law introducing the rules presented above does not provide for the definition of the term "settlement of liability". Definitively, cash payment of liability does not trigger the correction. Practical doubts may arise however in the case of non-cash forms of settlement of liabilities, eg mutual set-off, in-kind payment, redemption or confusion (a situation whereby a receivable and a payable from the same title appear at the level of the same entity, which leads to its settlement, eg in case of a merger).
New provisions should also be carefully analysed in the case of:
- contracts providing for payments made in instalments or financial lease agreements (the settlement of liability spread over time seems to be subject to correction in the part of the liability which has not been settled yet);
- specific settlements / transactions which should generally not be treated as "delayed payments" (eg amounts retained on escrow accounts on Real Estate acquisitions, guarantee deposits, interest accrued to the initial value of the asset, related-party transactions of advisory and management character, etc.).
What is also important, in the case of tax deductible costs correction, is that no transitional provisions have been implemented. This raises a question as to whether the new regulations also relate to liabilities arisen before 2013 which will be paid in (or after) 2013. Even if the discussed provisions are to be used only in the case of costs recognised for tax purposes as of 2013, it is not clear whether they apply eg to assets subject to tax depreciation / amortisation acquired in 2012 in the case of which the recognition for tax purposes (through tax write-offs), begins in 2013 and onwards.
The discussed provisions will create an additional administrative burden for entities carrying out their business activity in Poland. Entrepreneurs are obliged to run an additional register tracking the payment deadlines of particular liabilities, to settle them within the period which would allow for avoidance of the discussed obligatory corrections.
Still, depending on the tax position of a given taxpayer and the type of the given transaction / settlement, case by case analysis gives some space for structuring of transactions, or the introduction of new wording in the agreements or modification of the existing agreements. This is designed to limit the possibility of the application of the correction regime.
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