As part of counteracting the erosion of tax receivables, the legislator has for some time been imposing on taxpayers new obligations to verify contractors. Their common denominator is to make the taxpayer (or remitter) “jointly responsible” for the correct tax settlements under the transaction. The taxpayer (or the remitter) should, in particular, verify the status of its counterparty or the transaction circumstances. In case of doubts regarding tax avoidance or evasion, one should act with caution, not taking advantage of reliefs, exemptions or failure to deduct input tax.
The concept outlined in this way is controversial. We are dealing with an effective transfer of the functions of state organs onto entrepreneurs. Nevertheless, it is an element of tax reality and one should arrange his settlements in such a way that they are not the subject of a dispute with tax authorities.
How can this be achieved? The means for this is the exercise of “due diligence”, which “builds” a justified belief in the correctness of the accounts (“good faith”).
These requirements are not new for taxpayers or remitters, they have been required to exercise “due diligence” for VAT or withholding tax for some time.
What is new in this respect in 2021?
Pursuant to the amended income tax regulations, taxpayers are required to prepare statutory transfer pricing documentation also in transactions with unrelated entities, if the beneficial owner of such entity has its place of residence, registered office or management board in a country applying harmful tax competition, where the transaction value exceeds PLN 500,000 in the tax year.
This imposes the need to verify if our contractor has a real owner in such an area.
This obligation is difficult to implement in practice. The legislator, instead of helping taxpayers, threw them a “concrete lifebuoy”. Namely, it introduced a regulation under which it is presumed that the beneficial owner is domiciled, registered or managed in the territory or in a country applying harmful tax competition, if the contractor makes settlements with an entity having its registered office or management in such territory in a tax year or financial year.
This regulation is quite confusing. Is it enough, therefore, that the contractor makes sporadic transactions with entities from Honk Kong for our obligation to prepare documentation to be updated?
Unfortunately, a frequent practice in recent years is the implementation of ambiguous regulations that are difficult to interpret, and then issuing explanations or other instructions to them by the Ministry of Finance. It should be expected that the ministry will specify the requirements to be met when verifying contractors.
However, without waiting for it, it is worth taking care of yourself to obtain information from the contractor that will later prove our due diligence. The regulations specify that when establishing the above circumstances, it must be respected.
The obligation to exercise due diligence also applies to payment obligations for “withholding” tax. It is worth noting that although the implementation of the “pay and refund” mechanism was postponed until June 30, 2021, this obligation is still in force. However, the year 2021 may bring some changes in this regard.
Firstly, the jurisprudence practice regarding the scope of this obligation is still being developed. There are, in particular, rulings of administrative courts, which indicate that full verification, specified in the provisions of the Act, should be performed only above the threshold of PLN 2 million (e.g. the District Administrative Court in Warsaw in the judgment of 23 June 2020, sign. III SA/Wa 2400/19). There were also judgments in which it is indicated that the verification issues should not concern the payment of dividends, because the right to apply the exemption is specified only in the provisions on participation exemption (e.g. the judgment of the District Administrative Court in Gliwice of January 8, 2020, sign. I SA/Gl 1083/19).
It should be expected that 2021 will bring further development of jurisprudence in this area, and in particular, it is possible that the Supreme Administrative Court will comment on these matters.
Secondly, the Ministry of Finance has announced that it will amend the withholding tax regulations. Most likely, some of them will relate to the issue of due diligence, in particular with regard to transactions with related parties.
Finally, there is the issue of VAT due diligence. The year 2021 will probably bring more jurisprudence regarding the scope of this obligation. As for the legislative changes, the Ministry of Finance does not announce at this moment that it will prepare drafts in this area. Nevertheless, the ministry has already got taxpayers used to announcing the proposed changes in an unexpected way.
One thing is for sure, no matter what will change in 2021, one thing will not change for sure. It is the duty of action and activity on the part of taxpayers and remitters. Good faith or due diligence do not come from passivity or the collection of documents itself, but from activity and reasonable verification of the collected data.