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Tax optimisation

Tax optimisation vs. tax evasion: the differences

The multiplicity and complexity of taxes in Poland is very high. Of course, Poland is no exception here: tax systems in many countries are characterised by a high degree of complexity. This is because of the design of modern tax systems is meant to prevent tax evasion. However, there are at least three reasons why it will always be possible to reduce the tax burden without compromising legality.

Differences in tax systems

The first reason is that differences occur in the tax systems of various countries, such as in terms of their tax rates. The existence of so-called 'tax havens' makes it possible for a taxable person to manage their affairs in such a way that taxes are lower, despite the fact that income (or other taxable base) remains unchanged.

Such measures are most frequently referred to as optimisation measures as they are meant to avoid excessive taxation. These activities are perfectly legal, although they meet with considerable criticism. These are not cheap solutions and require the involvement of a sizeable capital. It should be mentioned that recently the euro area countries have been undertaking some intensive activities aimed at reducing, as far as possible, the opportunities to shift taxes across countries. In the near future, we should expect a legislative offensive on the part of the tax authorities. The first announcements have already been heard in Poland.

Design flaws in the tax system

If, contrary to its intention, the legislator adopts a provision allowing a reduction in tax liabilities, taxable persons may utilise such a loophole for their benefit. Some time ago we had in Poland a notorious (and gigantic) tax loophole created by a regulation on donations to individuals. The tax system is so complicated that it is difficult to avoid such errors in the legislation. However, the very fact that the provision was adopted and (as it turned out afterwards) allowed a lot of leeway in reducing the tax burden or to spread it over a long time, was excuse enough to use the opportunity while the regulation was still in effect.

Currently, there are many solutions that make it possible to minimize current tax burdens in accordance with the letter of the law. These solutions are often available for a short time only, as the legislator systematically removes all loopholes as they appear.

Intentions of the legislator

Since the function of taxes is not purely a fiscal one, but they also operate as a form of regulating measure and a stimulating factor for social and economic processes that are important for the legislator (i.e. the State). Some tax solutions are included in legal regulations that allow all taxable persons to achieve tax benefits, usually provided that they satisfy some specific conditions.

You should note that in the era when housing problems were widespread, there were also extensive tax breaks in force to stimulate the construction industry. Demographic problems in turn have contributed to the enactment of “family relief”. As we now deal with a readily noticeable social security crisis, it prompts the legislator to introduce some incentives for taxable persons so that they are more willing to put aside some of their current income now to provide for the future. On the other hand, the economic slowdown prompts the legislator to introduce some pro-investment solutions or measures to increase employment.

Is tax optimisation wrong?

When we talk about avoiding the paying of taxes, we normally refer to a person who is simply a tax criminal. Meanwhile, there is a huge difference between illegal behaviours, concealment of income or income sources, etc., which all constitute tax evasion – an act which is a criminal or criminal fiscal offence or a petty offence and tax optimisation measures.

In contrast to tax evasion, the concept of tax avoidance should be reserved for activities aimed at a legitimate and legal reduction of the amount of taxes paid, or putting a tax payment date off to a time which is more opportune for a taxable person.

So there is a fundamental difference between tax avoidance and tax evasion: the former is about legal activities within the limits of law, often desirable by the legislator, whereas the latter is a criminal offence or petty offence, which is prosecuted and punished ex officio.

Tax optimisation areas

While discussing tax optimisation areas, we should ask ourselves a question: what do we mean by tax optimisation?

No strict definition exists. The essence of optimisation is simply the use of solutions that in a taxable person's specific circumstances will allow them to legally pay less tax, pay it at a later date, or not pay it at all.

Important: tax optimisation activities require careful planning and predicting of the consequences of tax-related decisions before they are implemented. Most frequently, when a transaction or act is already completed, optimisation becomes impossible or very difficult, and its effects tend to be less spectacular. The domain related to the analysis of future events is referred to as tax planning. By means of tax planning we prepare ourselves to optimisation our future liabilities.

Here is a simple example:

You buy an old lamp at a flea market for 1000 PLN. It turns out, however, that it does match your interior in the way that you have expected. So you decide to put it to an online auction. Surprisingly, you obtain the price of 8000 PLN. In other words, the transaction has resulted in income being, to put it in simple terms, the difference between the purchase price and the selling price. If not more than 6 months have passed since the lamp purchase day, you will have to pay tax on that income. If you sell the lamp after 6 months, the tax will not apply.

If you are unaware of that rule before the transaction, you cannot later reverse the practical effects of your action once the transaction has been concluded. On the other hand, if you have such knowledge before, you can schedule your transaction in such a way that it takes place after the 6-month period. In this way, you will be able to legally avoid having to pay income tax on the 7000 PLN amount.

The auction example shows that the use of tax optimisation is possible for all taxable persons, regardless of income or the way it is earned. Remember, however, that effective optimisation requires knowledge, goal setting and planning. Only if you combine all these elements, will you be able to get the expected benefits within a specific time horizon.

As we have already mentioned, the legislator uses tax legislation to stimulate certain behaviours of taxable persons. The incentives can be short-term or long-term, and make it possible for taxable persons to get the benefits the value of which depends not only on the person's financial situation, but also on the use of an appropriate strategy, planning all activities in time and consistency in application of the selected measures.

Still, defining the areas of possible tax optimisation, is not only about implementing the legislator's stimulus plans. As taxable persons we are obliged to pay various types of tributes: income taxes, VAT, excise duty, local taxes, tax on civil law transactions, tax-like charges, etc. – in each of the above-mentioned tax areas, there is room for tax planning and implementation of optimisation measures with the use of the existing legal solutions.

Safety of a taxable person optimising their tax liabilities; rights of taxable persons

While talking to entrepreneurs or their accountants we often hear that they are concerned about the future impacts of their optimisation efforts. It is hardly surprising given the widely-known oppressiveness of tax authorities and publicised cases of high-profile conflicts, leading to the liquidation of successful companies that have been the subject of detailed analyses. But we should remember that one significant change has been implemented here. Now, we have an institution of individual interpretations issued for taxable persons' unique circumstances. We can obtain interpretations relating to both taxes, and other tributes, such as compulsory social security contributions. If we obtain an interpretation and adhere to it, we are on the safe side while dealing with tax authorities.

Tax optimisation solutions that we undertake are either obviously legal, and as such confirmed by numerous tax interpretations, or not – then we can apply for a case-specific interpretation, and when we do not agree with its findings, file an appeal with an administrative court. This is the last resort but sometimes it is really worth taking such action.

Administrative courts repeatedly speak on matters related to tax avoidance. Their position is that if a taxable person may choose between two legal courses of action, one of which will reduce or defer a tax liability, they have the right to do so, and tax authorities are not authorised to challenge such conduct.

But it is hard to overlook the fact that tax authorities are constantly trying to block such legal activities of taxable persons, especially when there is some kind of a mass rush leading to considerable tax savings on the taxable persons' side. However, if this is the case, the authorities' chances to win the case before court are virtually zero. This is because the correct way to impose tax burdens is to have the right wording in the laws, so legislators should shape legislation in such a way as to achieve their goals. Taxable persons are only required to comply with the applicable regulations.

Activities and measures to be avoided in order to fully and legally optimise tax liabilities

Optimisation activities are, as I have repeatedly emphasized, fully legal. However, there are many different measures that, in spite of having the same goal of reducing or deferring the obligation to pay, constitute an offence, a petty offence or at least an action that may be successfully challenged by the tax authorities. Therefore, while discussing optimisation activities that are fully compliant with law, we will also point out similar but illegal activities.

Here, it is worth quoting a quite important provision included in the Tax Code:

Article 199a. § 1. While determining the content of a legal transaction, a tax authority takes into account the unanimous intention of the parties and the purpose of the transaction concerned, and not only the literal wording of declarations of intent submitted by the parties to the transaction.

§ 2. If, under the pretence of doing one legal transaction, another legal transaction has been completed, the tax consequences shall be derived from the concealed legal transaction.

§ 3 If the evidence gathered in the course of the proceedings, in particular testimony of a party, unless the party refuses to testify, raises doubts as to the existence or non-existence of a legal relationship or a right to which tax consequences are related, then the tax authority applies to a common court to establish the existence or non-existence of such legal relationship or right.

We encounter opinions that the provision quoted above gives tax authorities a lot of freedom, as they are allowed to question a number of transactions, claiming that they are fictitious.

We do not agree with this opinion. Please note that where there is no concealed legal transaction, the tax authority will not be in position to question the 'real' transaction. If it does, such a position will certainly not be defensible in a court of administration.

Still, it is us, as taxable persons, who are obliged to ensure the legality of our conduct. We cannot expect sympathy if we actually undertake transactions that are fictitious or otherwise contrary to law. Typical examples of pseudo-optimisation activities that will be instantly seized on by tax authorities include:

a) buying “shady” invoices;
b) documenting transactions that have not taken place;
c) failure to document transactions that have actually been completed;
d) understatement or overstatement of the actual value of transactions;
e) understatement of the taxable bases;
f) preparation of internal costing documents that will inflate the actual cost figures;
g) understatement of the assessment basis for social security contributions;
h) artificially inflating those salary components that are not subject to income tax and compulsory social insurance contributions;
i) underreporting tax amounts on tax returns – with the intention to correct the return at a later date and supplement the missing amount with lower interest for late payment.

This is just a handful of the numerous “solutions” employed by some entrepreneurs. They have nothing to do with tax optimisation; they are simply tax evasion measures, which, if detected and proven, can cause serious legal problems.

Tax scale for personal income tax

 

Income up to 85 528,00zl – 18% minus the tax reduing amount 556zl 02gr

 

Income above 85 528,00 zł - 14 839 zł 02 gr + 32% surplus over 85 528 zł

 

Minimum employee wage 2015r.

 

1 750,00 zł

 

Important deadlines

 

On the 15th day of each month – immovable property tax payment by legal persons

 

On the 20th day of each month – income tax advance payment by employers and their employees, income tax advance payment by legal persons

 

On the 25th day of each month – VAT declaration submittal, VAT payment

 

On the 30th of each April – annual income tax return submittal, tax payment