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Tax strategy: A step toward transparency or just more red tape?

Despite the difficulties this year, Polish lawmakers did not forget about their annual update of tax laws. Under the recently adopted regulations, the Treasury will seek to learn more about taxpayers by requiring them to draft, file and even publish a tax strategy. Is this a move toward transparency for the country’s largest companies, or another unnecessary formality?

What is a tax strategy?

A new obligation to publish a “tax strategy” has been added to the Polish Corporate Income Tax Act, but the law does not essentially define what a tax strategy is. According to other published sources, i.e. the Guidelines on Internal Tax Controls drafted by the National Revenue Administration (KAS), the tax strategy of an entity identifies its tax vision and mission and its long-term tax goals, reflecting their impact on the taxpayer’s business aims. The tax vision is a presentation of a desired future state, and the mission is defined as a manifesto of aims and the approach to achieving them. But based on the adopted regulations, the tax strategy seems to have little in common with these guidelines. Basically, the taxpayer will be obliged to disclose highly technical information, such as information on:

  • Processes and procedures applied for managing compliance with tax obligations
  • Performance of tax obligations in Poland and the number of notices provided on tax schemes
  • Certain transactions with affiliates
  • Planned or undertaken restructuring actions that could affect the amount of the taxpayer’s or affiliates’ tax obligations
  • Applications filed seeking interpretations of tax law
  • Tax settlements in countries or territories applying harmful tax competition.

This is an open-ended list, as the draft provides that the taxpayer should include this information “in particular” in its tax strategy. The justification for the bill introducing this requirement states, however, that taxpayers should supplement the information about their tax strategy with any additional data that in their view should be included. It may be assumed that taxpayers will not be inclined to be so forthcoming, and absent any express statutory duty will not disclose more than the minimum required by the regulations.

Information subject to confidentiality, such as a trade, industrial, professional or manufacturing secrets, is excluded from disclosure. This raises the question whether in certain instances planned restructuring processes, for example connected with business expansion, should be deemed protected as trade secrets and thus excluded from the disclosure obligation.

Moreover, the regulations providing for the duty to publish tax strategies will not apply at all to taxpayers who are parties to a cooperation agreement with the head of the National Revenue Administration (agreements available to large taxpayers, who can use them to coordinate with the tax administration certain issues related to their tax settlements).

Who will be required to prepare and publish a tax strategy?

The duty to disclose a tax strategy will be imposed on tax capital groups regardless of the scale of their revenue, and CIT payers whose revenue in the preceding tax year exceeded EUR 50 million. In the case of tax capital groups, the tax strategy will include information on the group as a whole and individual companies included in the group.

How should the obligation be performed, and what is the sanction for non-performance?

Taxpayers will be required to post information on their website on the tax strategy pursued for the given year (prepared in Polish or translated into Polish), within 12 months after the end of the tax year. If the taxpayer does not have its own website, the information should be published in Polish on an affiliate’s website. But no mechanism is provided for the case where neither the taxpayer nor an affiliate has a website. It seems that in that case, the taxpayer will not only have to prepare a tax strategy, but will also have to invest in creating and maintaining a website where it can post its tax strategy.

By the same deadline, taxpayers will have to notify the head of the relevant tax office of the address of the website where the tax strategy is published. Failure to comply with this obligation will expose the taxpayer to a fine of up to PLN 250,000.

An effort at transparency or a pure formality?

According to the justification for the bill, the main aim of the changes is to increase the tax transparency of taxpayers playing a major role on the Polish market, in particular due to the high level of revenue they generate. The published tax strategy information should also help tax authorities gain preliminary information on the measures taken by such taxpayers and the possible reasons for discrepancies in their tax settlements. It has been pointed out that a similar approach is found in only two other legal systems (Australia and the UK), and thus it is not a particularly common solution. The proponents stressed that the new mechanism is another instrument intended to help solve the global problem of tax avoidance and erosion of the tax base of the jurisdictions where income is generated. It also falls in with the trend toward increased civil awareness of the financial foundations of the state’s operations, and should have a positive impact on corporate social responsibility.

According to the proponents, the new obligations should play an important informational role, giving citizens access to information on the tax principles followed by the largest companies in the country. Such information should help citizens decide on using the services of such taxpayers or buying their products. Given these claims, it is puzzling that taxpayers who are parties to cooperation agreements should be exempt from the obligation to publish their tax strategies.

In our own view, the new obligations, at least in their present form, mostly add to the already extensive formalities that must be fulfilled by large taxpayers, rather than truly raise tax transparency. Much of the information taxpayers will have to disclose in their tax strategy is essentially data already in the possession of the tax authorities. The question also arises whether making certain information accessible to third parties (such as competitors) is truly necessary, or will have a negative impact on business operations.

When must the first tax strategy be filed?

The amending act does not contain any transitional provisions with respect to tax strategies. It would thus seem that taxpayers should post their first tax strategy notices for 2021, on or before 31 December 2022. But according to press reports, the Ministry of Finance has taken the view that taxpayers should prepare and publish a tax strategy for 2020, on or before 31 December 2021 (M. Szulc, “Openness of tax settlements full of traps,” Dziennik Gazeta Prawna, 7 December 2020). Thus taxpayers should already be planning how they will comply with the new regulations.

Sandra Derdoń, tax adviser, Wojciech Marszałkowski, adwokat, Tax practice, Wardyński & Partners