GAAR and tax treaties | In Principle

Regulations reintroducing a general anti-abuse rule into the Polish tax system—after an absence of over a decade—enter into force on 15 July 2016. The impact will be felt not only by Polish residents, but also by foreign entities planning to do business in Poland.

A general anti-abuse or anti-avoidance rule (GAAR) is nothing new for the Polish tax system. In 2003 the Parliament adopted a clause on transactions intended to circumvent the law, but in that wording it was quickly rejected by the Constitutional Tribunal as unconstitutional (judgment of 11 May 2004, Case K4/03). More than a decade later, the Parliament again decided to introduce a general anti-abuse rule.

New GAAR

Under the new wording, if a transaction is conducted primarily to achieve a financial benefit that under the circumstances is inconsistent with the purpose and objective of a tax regulation, the transaction will not result in achievement of a tax advantage if the taxpayer’s manner of acting was “artificial.”

In particular, the tax authorities will regard the taxpayer’s actions as artificial if they are characterised by:

• Unjustified division of operations
• Involvement of intermediaries without economic or commercial justification
• Elements resulting in achievement of a state the same as or similar to the state existing prior to carrying out the actions
• Elements cancelling or offsetting each other, or
• Economic or commercial risk exceeding the anticipated non-tax advantages to such an extent that it can be found that a reasonably acting entity would not have selected to proceed in this manner.

The GAAR will not apply, however:

• If the tax advantage or sum of the tax advantages achieved by the entity from the transactions does not exceed PLN 100,000 during the settlement period, or in the case of taxes that are not settled periodically, if the tax advantage from the transaction does not exceed PLN 100,000
• To a taxpayer which has obtained a protective opinion, to the extent covered by the opinion, until the taxpayer is served with a decision amending or overruling the opinion
• To a taxpayer whose application for a protective opinion was not decided on time
• To VAT, fees, and non-tax amounts owed to the state budget, and
• If application of other tax regulations suffices to combat tax avoidance.

The GAAR will be applied through issuance of a decision by the Minister of Finance establishing a tax obligation or assessing the proper amount of a tax obligation or tax loss for the given tax or other settlement period, including overpayment or refund of tax.

GAAR and international agreements

Few are in a position to predict the consequences and potential problems arising out of the introduction of Poland’s GAAR. One problem appears to be application of the clause in the event of a conflict with the provisions of tax treaties which Poland is a party to.

The justification for the bill introducing the GAAR states, “The experience of Poland and other countries demonstrates that treaties on avoidance of double taxation alone do not suffice for effectively combating tax avoidance. The standard in other economically developed countries is a general anti-avoidance rule or a developed line of case law combating tax abuses.”

Moreover, under the wording of the act, in the case of application in tax treaties of anti-avoidance clauses referring to the main goal or one of the main goals of concluding a transaction or creating a structure, or referring to obtaining income in connection with an artificial structure, the regulations of the GAAR shall apply accordingly.

This means that the new provisions are designed to fill gaps in tax treaties. But what about a situation where the provisions of a tax treaty conflict with the GAAR? This could occur for example in the case of taxpayers who intend to establish a company abroad for the purpose of taxing licence fee income there (this has to do with countries in which the treaties provide for taxation of such income in the country where the recipient of the income has its registered office). Could such a construction be regarded under the Polish GAAR as an artificial structure, resulting in taxation of such income in Poland?

The answer to this question may be vexing, because in the Polish legal system ratified international agreements are acts of a higher rank than statutes. Thus, in the event of a conflict between these regulations, the tax treaty provisions should take precedence.

Anti-avoidance rules in the eyes of the OECD

This issue has also been identified by the Organisation for Economic Cooperation and Development. As far back as 2003, the OECD Commentary to the Model Convention included provisions referring to avoidance of conflicts between international agreements and domestic clauses. According to the OECD, in most instances such a conflict will not arise because states are not required to recognise the benefits flowing from international tax treaties in the case of actions abusing the provisions of those agreements. The general rule is exclusion of the possibility of enjoying the tax advantages arising from a tax treaty if the taxpayer’s main purpose is only to obtain more favourable tax treatment which would conflict with the purpose and objective of the relevant provisions.

But the issue of conflict between these provisions appeared to be important enough that the OECD and the G20 countries decided to include it in reports prepared as part of the analysis conducted for the BEPS (base erosion and profit-shifting) project. These reports are designed to coordinate the actions of various states against tax avoidance by enterprises operating on the international market. According to this analysis, conflict between national regulations and tax treaties should generally not occur. The reason for this is the construction of treaties on avoidance of double taxation, which make cross-references in their definitions to definitions established by national law. This cross-reference means that application of tax treaties will essentially depend on the state of national law, which in practice should exclude the possibility of conflict between these provisions. But the OECD points out that provisions concerning the possibility of applying anti-avoidance rules should be included in the OECD Model Convention, and in consequence also in specific tax treaties between countries. Introduction of such provisions either in the title, preamble or main text should ultimately resolve the problem of conflict between these provisions.

It should be mentioned that in treaties between certain countries, provisions have already begun to appear enabling direct application of national anti-avoidance rules, e.g. by indicating that the application of such clauses is not inconsistent with the other provisions of the treaty. In such case the state applying its national GAAR can be sure that it is not violating its treaty obligations.

Summary

It can be assumed with great likelihood that until the wording of tax treaties is amended, the issue of conflict between treaties and the GAAR will arise. It seems that to resolve the problem it will be necessary to apply a purposive interpretation of both the GAAR and the treaties. It follows from a purposive analysis that the common goal of the GAAR and the tax treaties is to combat tax avoidance, and thus the provisions of both should be interpreted with this aim. In this situation, the safest route for the taxpayer will be to reflect the provisions of the GAAR in its planned activity, at least until a consistent line of case law develops in the administrative courts. This should enable avoidance of the risk of negative tax consequences.

Mateusz Jopek, Tax Practice, Wardyński & Partners