Businesses are not required to use the split payment mechanism. But the initiative left to them does force them to examine whether it would be worthwhile to take advantage of this new instrument. Lawmakers went to some effort to encourage taxpayers to say yes.
The split payment mechanism recently introduced into Polish law is the latest attempt to solve the problem of VAT fraud. Under split payment, all or part of the payment for purchased goods or services is made by the buyer paying the net amount to the supplier’s current account, or through some other arrangement, while the amount corresponding to all or part of the VAT is paid into a special VAT account of the seller. A detailed description of the split payment mechanism can be found here.
Below we show how lawmakers have tried to break down businesses’ scepticism about using this new mechanism.
Mitigation of sanctions
The parliament left it to the discretion of businesses whether to use the split payment mechanism or to continue to transfer funds as before. But the desired effect of plugging gaps in the tax system will only be achieved when the split payment system becomes widely used and the overwhelming portion of funds representing the amount of VAT is circulated between VAT accounts created for this purpose.
To encourage taxpayers to use the split payment mechanism, lawmakers adopted a number of provisions placing acquirers of goods and services opting to use the mechanism in a more advantageous situation from the perspective of tax law than those not using the mechanism. Specifically, with respect to entities applying the split payment mechanism, up to the amount corresponding to the VAT under the invoices they receive, the following provisions will not apply:
- VAT Act Art. 105a(1), on joint and several liability. A taxpayer using split payment to pay for goods listed in Appendix 13 to the VAT Act (steel products, fuels, and other “sensitive goods”) will not bear joint and several liability with the supplier of the goods for potential VAT arrears.
- VAT Act Art. 112b(1)(1) and (2)(1), on additional tax obligations. The tax authorities will not assess against a taxpayer using the split payment mechanism an additional tax obligation (i.e. VAT sanction) in the amount of 30% in the case of an erroneous tax declaration or 20% in the case of filing an amended declaration following intervention by the tax authorities.
- VAT Act Art. 112c, on the 100% additional tax obligation. A taxpayer using the split payment mechanism will not be charged the VAT sanction of 100% otherwise applied when erroneous settlements by the taxpayer arise under invoices:
- Issued by a non-existent entity
- Confirming activities that were not performed
- Stating amounts not reflecting the reality
- Confirming activities covered by the provisions of the Civil Code on invalid and sham transactions.
The exclusion of certain regulations means that when the split payment mechanism is used, the tax administration will blunt its own weapons aimed at taxpayers who do not settle their tax payments correctly with the tax office (or fall victim to others not properly paying taxes). To maintain discipline, however, the new provisions contain certain restrictions. A business will not be entitled to these benefits when it knew that the invoice paid using the split payment mechanism was improper or presented false information.
This restriction bears an interesting relation to the other regulations and may generate practical issues for tax authorities, which bear the burden of proof in proceedings. This is because this provision uses the standard of awareness of the taxpayer’s “knowledge” rather than the standard more commonly encountered in the act and the case law involving incorrect VAT payments, that the taxpayer “knew or had justified grounds for assuming,” “should have known,” or “could or should have foreseen.”
Moreover, the justification for the bill introducing the split payment mechanism into the VAT Act indicates that payment using this mechanism will be “one of the stronger grounds” for showing that the acquirer exercised due care when concluding the transaction with the seller, which will have great relevance for the security of input VAT applied by buyers.
The issue of the split payment mechanism is also discussed in the controversial guidance published on the Ministry of Finance website entitled “Methodology for assessing the exercise of due care by acquirers of goods in domestic transactions.”
While indicating that use of the split payment mechanism will be taken into consideration by the tax authorities when evaluating due care is valuable information for the taxpayer, the statement that this is “stronger” grounds (i.e. stronger than other grounds) seems far-fetched. This is because firstly, the decision in this respect will be made by administrative court judges, and secondly, in the methodology guidance the ministry left an out for itself to wipe out the evidentiary strength of the use of the split payment method. Considering the multifaceted justifications for judgments, it may well be asked whether failure to use the split payment mechanism will be regarded by the tax authorities as incriminating for the taxpayer.
Waiver of increased interest
When the split payment mechanism is used, Art. 56b of the Tax Ordinance, i.e. the regulation on increased interest, does not apply if at least 95% of the invoices received by the taxpayer are paid using this mechanism.
Under Art. 56b of the Tax Ordinance, the increased interest rate on delay (150% of the “standard” rate”) applies to arrears in VAT and excise tax:
- If the thresholds defined in the act are exceeded and the taxpayer has made an error to the detriment of the treasury or files an amended declaration as a result of intervention by the tax authority, or
- In a situation where the tax authority finds that no declaration was filed despite an obligation to do so, or a failure to pay tax.
Exclusion of the provision on increased interest is subject to two limitations. A taxpayer is not entitled to the benefits from use of the split payment mechanism if it knew that the invoice paid using the mechanism is not bona fide, or presents false information, or if the tax arrears are equal to more than twice the input tax indicated in the declaration.
Immediate financial benefit
Additionally, if a VAT obligation is paid entirely from the VAT account earlier than the deadline for payment of the tax, the amount of the tax obligation can be reduced using a formula set forth in the act.
Quick tax refund, but only to VAT account
A provision has been added to the VAT Act under which if the taxpayer applies along with a tax declaration for refund of the difference in VAT to the taxpayer’s VAT account, the refund must be made within 25 days from the filing of the declaration. The regulations do not provide for the possibility of extension of this period by the tax authority in order to verify the refund. This solution does not eliminate the problem of prolonged waiting for VAT refunds, but does represent a form of compromise. It may prove beneficial to the treasury (as it will encourage more widespread use of the split payment mechanism) and for selected groups of taxpayers who use the split payment mechanism when acquiring goods and services.
The split payment mechanism is a painful topic for businesses due to the restriction on free access to cash, and in consequence, weakening of their financial liquidity. It is probably accurate to say that for many taxpayers—particularly those operating in a relatively stable economic environment—use of the split payment mechanism will not generate any material advantage. On the other hand, the unending problem of VAT fraud requires some response. If the split payment mechanism can serve as one instrument for protecting commerce, it is justifiable to offer businesses a choice between the split payment mechanism and the existing form of payment.
Wojciech Marszałkowski, Tax practice, Wardyński & Partners