By Dr. Monika Laskowska, Center for Tax Analysis and Studies, Warsaw School of Economics
On September 8, the Polish government accepted a new tax bill called the ‘Polish Deal’, announcing after public consultation on the bill a major amendment to include a special anti-avoidance measure called the minimum income tax for companies.
The bill will now go to Parliament. The new provisions, if passed through the full legislative process, would come into force from early 2022.
Scope of the minimum income tax regime
According to the bill, the minimum corporate income tax is designed as an alternative form of corporate income taxation.
Despite previous announcements, the scope of the new regime would not be limited to large companies.
The new minimum income tax would be imposed on corporate taxpayers in two separate circumstances. The first is when a taxpayer declares in a tax year tax losses from sources of income other than capital gains. The second circumstance is when a taxpayer declares taxable income from economic activity equal to less than 1% of tax revenue.
Both conditions also apply to permanent establishments in Poland.
The estimated tax yield of the new provision is around 450 million euros ($ 532 million), and it is intended to fill the fiscal gap left by dropping the tax burden on small and medium-sized entities proposed earlier in the Polish draft agreement.
Tax base for minimum income tax
Affected businesses would be required to calculate corporate tax under the alternative minimum income tax. The tax would be equal to 10% of a specified tax base.
The alternative tax base would be determined as the sum of the following items. It would cover 4% of tax revenue other than capital gains. Companies would then add to this amount the excess expenditure due to debt financing incurred in favor of associated companies, determined according to a special algorithm, plus deferred income tax resulting in an increase in gross profit or a decrease in loss. clear. The last item to add to the tax base would be expenses for specific business-to-business services or intangible assets.
Certain tax deductions would be allowed, such as for donations and qualified research and development costs.
The minimum income tax could be deferred and deducted from the ordinary corporate tax calculated over the following three years.
Generally, the new regime targets taxpayers who avoid tax. Thus, the draft recognizes certain “substance” based situations in which companies could suffer losses or record lower revenues under reasonable circumstances.
As a result, the draft includes several exclusions from the scope of the new regime. Exclusions would apply to start-ups during the first three years of activity, to entities in the financial sector, to companies with a 30% drop in their income based on annual data and to companies with a simple ownership structure. .
Repeal the limitation on the deductibility of service fees and royalties
The new bill introduces a long-awaited revocation of provisions introduced into the tax law in 2018 limiting the deductibility of intercompany payments such as royalties and certain service payments. They will be replaced by the minimum income tax regime.
The limitation provisions have been very controversial in terms of their wording. However, companies were able to protect their cost deductibility when they received a Prior Price Agreement (APA). This has created immense growth in the number of APA requests. According to statistics for 2021, more than 400 APA requests are pending.
Surprisingly, with the revocation of the limitation provisions, the new bill reduces the benefits of APA only for companies that complete the APA by the end of 2021. The right to deductibility will be retained for the period covered by the ‘APA.
The Polish government introduced the minimum corporate income tax without public consultation, resulting in erroneous provisions. For example, it is not clear whether deferring the deductibility of minimum income tax would limit the deduction for losses carried forward. In addition, the new provisions are based on a difficult to justify position of the Polish government that profit shifting is the sole role of inter-company transfers through royalties, payments for services or interest from debt financing.
While revoking the tax deductibility of intercompany royalties / services is a positive change, it will leave uncertainty for most companies that are unable to complete an APA before the end of 2021.