Withholding tax – what does "taxpayer’s due diligence" mean?
In this post, being one in our series discussing changes in the settlement of withholding tax effective as of 2019, we will try to answer questions regarding the obligation to act with due diligence by a payer of withholding tax. In which cases is the payer obliged to act with due diligence? What may tax authorities assess within the scope of stating whether the taxpayer has acted with due diligence?
Let’s recall that in accordance with the bill introducing amendments in CIT, PIT and the Tax Ordinance Act that has been passed by the Parliament – as of 1 January 2019, two regimes will apply to settlement of withholding tax (WHT). In case payments in favour of a single recipient exceed PLN 2M annually, the tax remitter, as a rule, will collect WHT on any surplus above this amount at the rate applicable in Poland, i.e. 19% or 20% (regardless of whether the payments are subject to exemption from WHT or to a reduced rate of the tax).
In all other instances, as well as in the situation where the tax remitter’s management has executed a specific statement or obtained a protective tax ruling in advance, it will be possible to apply the ordinary method of direct exemption from tax, omission to collect tax, or apply a reduced rate of the tax on the basis of double taxation agreements / EU directives.
In accordance with the new regulations, regardless of whether the payment exceeds PLN 2M in any specific year, tax remitters will be obliged to act with due diligence when verifying the conditions allowing application of a reduced tax rate or tax exemption. When assessing whether a tax remitter has acted with due diligence, the character and scale of the business activity conducted by the entity should be taken into account.
This is what the regulations say about the obligation to act with due diligence by the tax remitter, and not a word more … The concept of “due diligence” appearing in the regulations is a general clause that has no clearly determined legal implications in the statutes. In order to determine how this term should be understood certain criteria on which the fiscal authorities should rely upon when assessing whether an entity has acted with due diligence making international payments should be established Consequently there is a risk that the fiscal authorities will apply a very strict approach to the question of determining whether the tax remitter has acted with due diligence, and may require the tax remitter to perform an above-standard verification of an entity to which the payment is made. Such tendencies are already noticeable in terms of the tax on goods and services (VAT), where fiscal authorities very often question the right to deduct VAT and the use of the zero tax rate due to a failure to act with due diligence upon verification of counterparties upstream or downstream in the supply chain.
When trying to answer the question about the criteria that can be applied in assessing whether the tax remitter of WHT has acted with due diligence, two key issues need to be addressed.
Firstly, the obligation to act with due diligence is applied to verification of the application of a reduced rate or tax exemption. The basic condition for application of the preferential terms is that the tax recipient is the beneficial owner of the payments. It is worth noting that so far the discussion of the status of the beneficial owner most frequently concerns interest and license receivables. The new regulations also require analysing whether such a status exists with respect to a recipient of a dividend or so-called intangible services. Therefore, tax remitters who also make international payments will have to carefully check whether the tax recipient is their ultimate owner, and be able to appropriately substantiate the verification. For example, in such situation, fiscal authorities may demand the following documents:
- recipient’s certificates of tax residence;
- agreements providing the basis for the payments and calculations of the amounts disbursed;
- confirmation of payments in the disbursed amounts;
- agreements concluded by the recipient of receivables;
- articles of Association and financial statements of the recipient of the payments; and
- group’s structure.
It is also worth noting that as part of proceedings aimed at determining whether the verification performed by the tax remitter was appropriate (sufficiently diligent), the fiscal authorities may also question the corporate staff in this matter.
Secondly, when assessing whether the tax remitter acted with due diligence, the fiscal authorities will also take into account the character and scale of the activity conducted by the tax remitter. In the justification to the amendments, the legislative authority explain that different degrees of verification should be expected from natural persons who effect minor payments to their international counterparties, and from large entities that pay significant sums to their international recipients. Also, additional verification activities may be required due to the character of the activity of the tax remitter and the industry in which they operate. As announced by the Ministry of Finance, in the sectors that are particularly vulnerable to the risk of occurrence of tax irregularities (e.g. financial sector), it may be necessary to apply analysis and collect documents that are required on the basis of money laundering counteracting regulations.
An assumption by the fiscal authorities that the tax remitter has not acted with due diligence may have very far-reaching consequences. In such a case, the tax remitter may bear fiscal liability for uncollected tax. A tax remitter faces a particularly high risk of liability in the event of payments in favour of their affiliated entities (where the guilt cannot be shifted from the tax remitter to taxpayer). Furthermore, in case the fiscal authorities assume that the verification performed by the tax remitter was inadequate to the character and scale of their business activity, in addition to issuing a decision charging the tax remitter with liability for the non-collected tax, they may also impose an additional sanction tax at the rate of 10% on the tax remitter.
With the above in mind, it is very important for entities that make payments to international counterparties as part of their business activities to get appropriately prepared for the new regulations. It may be necessary to prepare and implement corresponding internal procedures regarding collection of appropriate documentation and appoint employees responsible for verification of the counterparties.
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