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Unfavourable Changes to Polish VAT Law Increases Burden on Businesses
As announced in Taxand's Take of September 2010 for Poland, unfavourable changes have been introduced to the Polish VAT Law as of 1 January 2011. The most important amendments include an increase of VAT rates (from 22% to 23% and from 7% to 8%) as well as limiting the deductibility of input VAT on purchase or lease of a company's cars and fuel. Another amendment is planned to come into force on 1 April 2011. The new provision will probably introduce a tax on disposals of goods without remuneration. These changes increase the VAT burden on taxpayers. What's more, the way they have been (or are to be) introduced is rather chaotic and results in additional administrative duties as well as certain interpretation problems for taxpayers. Taxand Poland reviews the impacts of these rate changes.
The increase in VAT rates will affect the majority of goods or services. However, with regard to certain basic food articles, the rate has been lowered (from 7% to 5%). The legislature also introduced certain quasi-transitory regulations which were expected to cover the most common issues regarding application of VAT rates upon the turn of the year (e.g., prepayments). However, the discussed regulations do not solve all problems faced by the taxpayers (e.g., re-invoicing). The scope of application of certain exemptions as well as preferential rates have been changed, which together with the discussed increase of rates, create certain doubts among taxpayers as to which rate should apply to which goods / services. A separate amendment introduced a mechanism for future increases of VAT rates dependent on the ratio of Poland's public debt to GDP, so it is possible that the rates will increase (to 24% and 9%, as well as 25% and 10% in the coming years).
As a result of another amendment, the taxpayer is entitled to deduct only 60% of input VAT (but no more than 6K PLN - approximately 1.5K EUR) from the purchase / lease of passenger cars and other cars of which permissible total weight is no more than 3.5 tons. At the same time, no deduction of input VAT connected with fuel to the cars in question will be possible. The limitation of input VAT deductibility is to be effective temporarily, until the end of 2012. The discussed amendment is the legislature's reaction to the ECJ's judgement in the Magoora case which granted back the taxpayers the right to deduct input VAT within the scope that was valid at the moment of Poland's accession to the EU. The planned change in law was subject to required consultation procedures with relevant EU authorities.
The amendment to the VAT law regarding the tax of disposing of goods without remuneration (upon the purchase of which the taxpayer had the right to deduct input VAT) is currently subject to legislation procedure in the Polish Parliament. Apart from the fiscal reason, the amendment is aimed at adjusting Polish tax regulations to EU law with regard to such disposals (Polish regulations are more favourable in this respect). The change in law is planned to enter into force starting 1 April 2011 (the entry date has already been shifted twice during the legislative works). If introduced, the amendment will most probably greatly impede the cost-effectiveness of marketing activities. Currently VAT law states that this non-remunerated disposal of goods for purposes related to the enterprise's activity remains outside the scope of VAT.
As a result of the introduced (and planned) unfavourable changes in VAT law, which in its essence, is deemed to be neutral for the taxpayers, becomes at least burdensome. Certain amendments, such as these regarding limitation of input VAT deductibility with regard to vehicles, lead to actual non-neutrality of VAT in specific cases. The mere introduction of numerous amendments within a brief period, in various legal acts, causes additional administrative burden and interpretation problems for the taxpayers. The late announcement and subsequent final version of the amendments means taxpayers don't have long to analyse and adapt for the law changes adding further burden. Furthermore, a possible increase of VAT rates in the near future raises taxpayers' anxiety.
Currently, it seems a bit too early to assess if the increase in VAT rates and the limitation of deductibility of VAT will:
(i) have affected the price level on the market
(ii) been absorbed by the entrepreneurs.
Indisputably, taxpayers have been forced to bear additional costs in order to analyse the amendments, adapt their accounting systems and adjust their contracts (where necessary).
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