The ever-accelerating pace of change surrounding Polish tax regulations may be overwhelming for many businesses. Although the majority of amendments affect the local landscape, one should keep in mind that some of them may potentially impact cross-border settlements. In this context, particular attention should be paid to the provisions on hybrid mismatch arrangements, applicable as of 1 January 2021, as well as the long-awaited changes to the WHT collection mechanism. One should also keep track of the international deliberations on taxing the digital economy and global businesses.
CIT Act provisions on hybrid mismatches are the result of the implementation of an EU Directive commonly referred to as ATAD 2. Their aim is to prevent situations, where entities or transactions are qualified differently under two separate jurisdictions and as such enjoy preferential taxation.
This may occur, for example, when a given cost is deducted in two separate jurisdictions (double deduction) or deducted in one jurisdiction without corresponding income being reported in the other jurisdiction (deduction without inclusion). Thus, under the new rules, for transactions meeting the criteria set out therein, the taxpayer will be denied the right to recognize their expenses as tax deductible costs in Poland.
This means that taxpayers should thoroughly analyse their cross-border transactions against possible hybrid mismatches - a task which may prove particularly difficult given the specificity of foreign tax regulations.
Under the new regulations, it may also become necessary to recognize taxable revenue, even where the provisions exclude its recognition (e.g. in the case of accrued interest or mergers of companies). Additionally, the amended CIT Act brings a raft of provisions on dual tax residency or situations where the taxpayer's foreign permanent establishment was not considered.
Withholding tax: long-awaited changes are still to come
Despite many announcements in this regard, a draft act on the WHT collection mechanism still has not been presented by the Ministry of Finance. In turn, the entry into force of a part of related provisions (i.e. those introducing the 'pay and refund' mechanisms to transactions exceeding PLN 2m) has once again been postponed. Yet, according to the Ministry's announcements, the works on the solution are underway and should terminate in 2021. Similarly, in 2021, explanatory notes to WHT provisions are to gain their final shape.
This means that this year's works of the Ministry of Finance should be carefully analysed. According to the Ministry's declarations made so far, possible amendments would include, in particular, limiting the pay and refund mechanism to payments to related entities and passive payments (interest, royalties, dividends), extending the scope of the binding opinion for applying WHT exemption resulting from double taxation treaties and excluding dividends paid to Polish residents from the pay and refund mechanism.
Unfortunately, problems related to WHT settlements still persist and the questions on the types of payments which should be subject to WHT in Poland (the list is inconclusive), the scope of due diligence verification of payment recipients, application of the beneficial owner clause and the requirements in terms of business substance to be met to apply preferential WHT rates remain unanswered, yet are still of concern to entities making payments abroad.
Taxation of the digital economy
The COVID-19 pandemic has significantly accelerated the development of the digital economy. In fact, the emerging business models have been long detached from the company's physical presence in the given market, meaning that the currently applicable taxation rules become irrelevant. This is why the necessity to reprogram the international taxation system has long been at heart of the worldwide discussion. Still, reaching an international agreement in this area seems very difficult.
In 2018, the European Commission presented a draft directive on the taxation of digital services, however, faced with unanimity within the European forum, the project was suspended. Some countries (such as France, Spain, Italy, Austria, Czech Republic and the UK) attempt to introduce unilateral solutions in this regard. Poland has not yet decided to implement a tax on digital services, with the exception of a 1.5% fee payable to the Polish Film Institute on revenues generated in the territory of the Republic of Poland by entities providing on-demand audio-visual media services. The fee became applicable on 1 July 2020.
In fact, 2021 is to bring new developments in this regard, which is why works of the OECD should be closely followed. The programme of OECD's work is divided into two pillars.
Pillar One addresses various proposals for new nexus rules. It includes the allocation of taxing rights between jurisdictions covering users or markets in which products or services are sold by digital companies. In turn, Pillar Two calls for the imposition of the global minimum tax on groups with consolidated revenue exceeding EUR 750 million. The OECD's works on the program are expected to end by mid-2021. However, if an international agreement is not reached, the European Commission plans to come up with its own proposal. Thus, it seems that, regardless of the final shape the international negotiations will take, new regulations in terms of digital market taxation are surely to come.