Typically, the amount of tax due is self-assessed. This means that taxpayers calculate their own tax base and the amount of tax they must pay. However, tax authorities may verify compliance with tax obligations through verification activities and tax and customs audits. While we may not be notified of the audits if no irregularities are identified, the audits must be conducted with the taxpayer's participation.
But what area is most frequently inspected?
VAT
The European Commission's VAT Gap Report 2023 shows that the VAT gap in Poland is €1,694 million (as of 2021). This may seem small compared to France (€9,552 million) or Italy (€14,600 million), although in Spain, for example, the gap is "only" €662 million.
Regardless of comparisons, the size of the VAT gap means that approximately PLN 7,351 million has not been transferred to the state budget. This represents approximately 1.3% of the 2023 state budget. It is therefore not surprising that tax and customs audits are primarily focused on the value added tax. Despite the introduction of numerous tools aimed at closing the VAT gap, such as split payment, the Single Audit File (SAF-T), and STIR, it remains a significant problem.
Putting an end to so-called tax carousels has been a priority for the tax administration for many years. Catching the organizers is extremely difficult. Typically, only a portion of the entities are directly involved in the fraud. The remainder are taxpayers unaware of the entire mechanism, who appear at the next stage of the goods trade. They become a much easier target for inspection than the actual criminals. The basic mistake that can occur among such taxpayers is a lack of due diligence. Officials often deny the right to deduct VAT, citing a lack of due diligence. Consequently, the entrepreneur, who typically did not cooperate with the carousel organizer and was unaware of their participation, is forced to pay the tax, becoming an unwitting victim of the criminals.
Transfer prices
In addition to value added tax, income tax is also subject to audits. In this case, transfer prices, i.e., the prices of transactions concluded between related entities, are often audited. Based on information contained in IT systems, tax authorities can easily determine the type of relationships between taxpayers. Transactions between them should conform to market conditions.
The arm's length nature of transactions is easier to demonstrate for taxpayers who conduct transactions for amounts that require the submission of transfer pricing documentation. This documentation includes an analysis confirming that the terms of transactions between related entities do not differ from those between unrelated entities.
Tax authorities also have easy access to information on transactions for which transfer pricing documentation has not been prepared, despite such an obligation.
The selection of entities is by no means random. With such a wealth of data, the office can precisely target selected transactions. This doesn't mean, however, that in every case of a transfer pricing audit, the tax settlements are incorrect. However, in each case, it is important to ensure that the transactions are arm's length.
Withholding tax
In income tax, alongside transfer pricing, withholding tax is also a frequent subject of audits. This is largely due to the introduction of the pay&refund mechanism. It obliges entities paying certain amounts to foreign contractors exceeding PLN 2 million to collect and pay the applicable withholding tax to the Polish tax office. Only after payment is made is it possible to apply for a refund of all or part of the tax, depending on the applicable double taxation treaty. Benefiting from an exemption or a reduced tax rate is possible if it is demonstrated that the amounts were paid to the beneficial owner and the taxpayer exercised due diligence.
For tax authorities, this is a prime target for inspection, as the taxpayer must demonstrate that they have verified their contractor and, therefore, can take advantage of tax preferences. This burden is, in a sense, shifted to the taxpayer. At the same time, tax authorities are very meticulous in verifying due diligence during contractor verification.
Tax breaks
The Polish tax system is highly case-specific. It also provides access to numerous tax reliefs. Unauthorized use of these reliefs by unauthorized entities and overstatement of their amounts significantly depletes the state budget. Mistakes can often result from complex regulations and misunderstandings. This is particularly true for the popular research and development relief and the IP-BOX relief. Tax authorities may also verify, for example, the eligibility of a single parent to file a joint tax return with a child, or the fulfillment of the conditions for the thermal modernization relief.
Due to the potential for higher tax deductions, individuals running a business are more likely to be subject to audits. However, the law does not preclude conducting audits on individuals who do not run a business.
This article is for informational purposes only and does not constitute legal advice.
Legal status as of February 19, 2024
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