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VAT Rates in Poland Increase: Taxes Do Grow without Rain

29 Sep 2010

Polish taxpayers recently found the old Jewish proverb that "taxes grow without rain" to be true once again. After a very dry and sunny summer, the Polish government announced increases in the VAT rates, taking effect at the beginning of 2011. Poles will welcome the New Year with 23% standard VAT rate (an increase of 1%) and new reduced rates: 8% (an increase of 1%) and 5% (an increase of 2%). Rates for most goods and services will increase and, in some cases, will result in their shifting to a category to which a higher tax rate is applicable. However, for some basic food articles the applicable rate will be reduced to 5% (from the current 7%). Taxand Poland investigates the impacts and why this should not deter investors.

Together with the increase of VAT rates, other changes in Polish taxes are also planned, including limiting the deductibility of input VAT on the purchase or lease of company vehicles and the raising of some excise duty rates.

The increase in VAT rates has recently become quite a popular solution to tackling budget deficits in many countries throughout Europe, including Finland, Greece, Spain and Romania. The Polish government, having battled the financial crisis in its own way has finally decided to follow the path of fellow European counties in combating public debt.

According to the government's survey, the VAT increase should raise up to 5.5 billion PLN per year. However, if it is not enough - and presumably it will not be - VAT rates may be increased again. The worst case scenario would be an increase up to 25% from July 2012 (for the following 3 years).

Taxand's Take

The change of VAT rates can be seen as an adrenaline shot for public finance. Theoretically, VAT is neutral for the entities subject to this tax, as its economic burden rests with the consumer. In practice, however, it is not as simple as that.

Owing to the change of rates (and the resulting increase in prices) the consumer demand for goods and services affected may decrease. Therefore, producers will find themselves with a dilemma: whether to accept this effect or keep prices stable at the expense of their own margins.

The change also will bring about new administrative burdens for businesses. Accounting systems will have to be modified in line with the new rules. In most ,cases this process will involve relatively small changes to IT systems. However, the appropriate procedures will need to be implemented and tested before the upcoming New Year's Eve party. Also, taxpayers that operate with fiscal cash registers will have to program new VAT rates. It is advisable to implement solutions early to avoid potential problems at the beginning of 2011.

Some commercial contracts will have to be adjusted to the changed VAT rates. This is the case for contracts referring directly to current VAT rates. Furthermore, where the remuneration between the parties is agreed to as a gross amount, suppliers will note a difference in net value of their consideration with the change in VAT rates. Therefore, it is recommended that contracts with Polish entities be reviewed to modify or amend them accordingly. Should differences between the net prices (the old and the new one) be significant, the terms of agreements will have to be renegotiated.

What is positive about the change is that despite the consequences of the increase, the Warsaw stock exchange and the financial markets have remained calm after the announcement of the government's plans regarding taxation.

What is more, aiming to remedy the public finance, the government is considering speeding up the privatisation of large and tempting sectors of national industry. You will note that the recently published statistical report saw Poland's GDP grow by 3.5%.

These are good reasons for investors to stay optimistic and to consider Poland as a beneficial environment for foreign investment.

Your Taxand contact for further queries is:
Andrzej Puncewicz
T. +48 22 324 59 49

Taxand's Take Author