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New withholding tax obligations from 1 January 2019: how to act with the due care?

New withholding tax obligations from 1 January 2019

As of 1 January 2019, WHT tax remitters are required to act with ‘due care’, when applying the reduced WHT rate, WHT exemption or not remitting WHT (under specific provisions of the CIT Act or relevant double tax treaties). The due care obligation applies to all payments (regardless of the amount i.e. regardless of the PLN 2,000,000 threshold, above which WHT must be collected at the standard rate set out in the CIT Act) subject to WHT according to the amendments to the CIT Act. As the term ‘due care’ is not defined in the CIT Act, tax remitters may find it difficult to comply with the new obligation in terms of interpretation and applying it in practice.

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New withholding tax obligations from 1 January 2019: how to act with the due care?

Reasonable verification requirements for WHT non collection or application of WHT reduced rates

The amended section 26(1) of the CIT Act requires from WHT remitters to exercise due care, taking into account nature and scale of their business activities, when verifying whether they meet the statutory requirements for applying WHT rate lower than the standard WHT rate. In accordance with the amended provisions, the degree of due care depends on two factors only - nature and scale of WHT remitter’s business. This means that measures taken by the WHT remitter should be proportionate. Consequently, in particular WHT remitters acting on large-scale should adapt their internal procedures of verification of requirements to apply WHT reduced rates.

When defining the due care standard, it is worth to refer to other tax regulations. In particular, in the area of VAT, it is an established view based on a large number of court cases that the measures taken to comply with the due care obligation should be reasonable. This means that the tax authorities should verify whether the taxpayer took all measures that can reasonably be expected under the circumstances. On the grounds of WHT, it is justified to assume that WHT remitter acts with due care if he takes reasonable and possible measures to verify the recipient of a payment subject to WHT, as well as the terms of the payment. Such reasonable measures should be defined in advance, and performed in advance. The standard of due care should be regarded as stricter if the payment is made to a related recipient.

On the other hand, the regulations on the prevention of money laundering and terrorism financing (AML) require institutions that make payments to take reasonable steps to verify the ultimate beneficial owner and capital structure of the recipient of the payment. Similarly to the AML regulations, it would be appropriate for WHT remitters to set up an internal procedure for verifying the terms of payments, including documentation, and to delegate duties related to WHT to competent employees.

Understanding business reasons

WHT regulations require acting with due care when verifying the requirements for application of WHT exemption, WHT reduced rate or not collecting WHT. Verification of conditions should not only be based on the provisions dealing with withholding tax directly, i.e. the provisions on the subject of taxation, the status of the recipient of the payment and the withholding tax rates, but cover facts and circumstances as well. In the case of payments subject to WHT, tax authorities may apply the General Anti-Avoidance Rules (GAAR) or Specific Anti Avoidance Rules (SAARs). Before making a payment subject to WHT, the tax remitter should eliminate the risk of application of anti-abusive rules by tax authorities. Therefore, when making a payment subject to WHT, the WHT remitter should know and understand the business reasons for the transaction in respect to which the payment is made, as well as the ownership/capital structure of the payment recipient.

Liability of the tax remitter for not collecting WHT

According to Article 30 of the Tax Ordinance, the tax remitter is liable for the uncollected WHT or for the WHT it has collected but not paid to the tax authorities. This rule does not apply if the WHT remitter’s failure to collect the tax was not due to the remitter’s fault. However, we underline that the WHT remitter’s liability cannot be eliminated if, for example, the taxpayer and WHT remitter are related parties. This means that the WHT remitter should exercise a special degree of due care when making payments to its related parties. Therefore, as it is not possible for the WHT remitter to transfer his liability to the taxpayer that is the WHT remitter’s related party, it is necessary for the WHT remitter not only to obtain but also to verify the data and documents received from the taxpayer to be able to benefit from a WHT exemption, a reduced WHT rate or WHT non collection.

The law provides for severe penalties for failure to exercise due care when verifying the requirements for application of WHT exemption, reduced WHT rate or WHT non collection. The WHT remitter risks payment of the standard WHT rates as set in the CIT Act (most often 20% or 19%), plus late-payment interest. Moreover, the WHT remitter may have to pay additional penalty under the Tax Ordinance (known as the “additional tax liability”), which is most often 10% of WHT base, i.e. the payment subject to withholding tax. Regardless of the penalties provided for in the CIT Act and the Tax Ordinance, individuals responsible for WHT may be subject to high penalties under the Penal Fiscal Code.
 

Wojciech Majkowski, Director, Corporate Tax Advisory Team at KPMG in Poland
Iwona Krzemińska, Supervisor, Corporate Tax Advisory Team at KPMG in Poland
Marcin Szałwiński, Consultant, Corporate Tax Advisory Team, KPMG in Poland
 

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