In search of tax effectiveness and cash flow improvements
As we all know, in 2020 more than ever the old saying “cash is king” mattered more than ever. It forced many tax departments to search for cash flow improvements through tax settlements. Although some opportunities emerged upon governmental solutions to counteract the economic effects of COVID-19, most were available during the first half of the year. A few of them will also still remain available in 2021, and others can be identified thanks to development in jurisprudence or opportunities resulting from currently binding provisions.
Below you will find a brief overview of some solutions that may be worth considering in terms of cash flow and tax effectiveness.
Setting-off a 2020 tax loss against a 2019 tax result
As a rule, taxpayers may reduce the income obtained from a given source of income by the amount of the loss from this source in the following five consecutive tax years, with the amount of reduction in any of these years not exceeding 50% of the loss incurred in a given year. Thus, a loss can, in principle, be settled over at least two consecutive tax years. Moreover, as of 2019, a one-off deduction up to PLN 5 mln in one of the five consecutive years is allowed. Under the provisions of the so called “Anti-crisis Shield”, tax payers suffering tax loss for the “2020” tax year due to COVID-19 are allowed a one-off deduction (up to PLN 5 mln) through adjustment of the 2019 tax base under the condition that revenues for 2020 were lower by at least 50% than the revenues obtained in the tax year immediately preceding this year.
Use of available tax reliefs
The CIT Act provides for certain tax reliefs or deductions which, depending on the case, can be adopted. In particular, tax payers for non-related party payments can benefit from the so-called “bad debts relief” for invoices overdue by more than 90 days. When calculating the advanced CIT payment for the period when the 90-day term after their due date lapsed, the tax payer can exclude the value of unpaid invoices from the CIT tax base. The subsequent increase will be necessary if the invoice is paid. Other reliefs concern R&D relief, upon which a taxpayer is allowed to deduct up to 100%-150% of the so-called qualified costs from its tax base. On the other end of reliefs supporting innovations, is the IP BOX regime when the tax payer can apply a preferential 5% CIT rate on the revenues derived from qualified intellectual property rights.
Review of intragroup costs in terms of their deductibility
Polish CIT provisions provide for limitations on deductibility of certain intragroup payments. This concerns specifically payments for intangible services or license payments unless they are i.a.directly connected to development or purchase of an asset or provision of services. The restrictions are applicable to the amount exceeding in a given year PLN 3 mln + 5% of the tax EBITDA. Taking into account the quite favorable statement presented by some of the courts (i.a., the Administrative Supreme Court), one may verify if the approach to treat certain costs as not falling within the “direct link” exclusion was not too conservative.
Another review could concern intragroup financial costs in terms of their deductibility – as of 1 January 2021 provisions implementing ATAD II will come into force. Upon implementation of ATAD II provisions, broadly defined IC financing costs, could be treated as non-tax deductible if they are related to a hybrid mismatch (which can occur, i.a., upon different jurisdictional tax treatment of a given payment, e.g., debt vs equity). Its worth noting that limitations will also apply to costs financing the expenses that even indirectly led to a hybrid mismatch. Due to their complexity and the necessity to analyze and understand foreign tax implications also related to a given stream of payment, there may be high uncertainty which intragroup financing costs could be treated as deductible. Therefore, is worth conducting a relevant analysis earlier to mitigate any potential negative effects and secure the costs deductibility.
Applying for VAT overpayment in terms of bad debt relief
On 15 November 2020, the European Court of Justice (ECJ) ruled that the Polish regulations concerning bad debt relief were inconsistent with EU law concerning certain conditions that were required to be fulfilled to effectively apply the relief. The judgment undermines the current line of interpretation presented by the Polish tax authorities and administrative court, which was negative for taxpayers. It therefore opens the way for entrepreneurs to recover VAT as a result of the possibility of taking advantage of the bad debt relief. The ECJ judgement was published in the Polish Official Journal on 7 December and tax payers have 30 days to apply for the refund (i.e., effectively until 6 January 2021). It should be noted bad debt relief can be applied only to receivables for which no more than two years have passed from the date of issuing the invoice, counting from the end of the year in which it was issued.
Real Estate Tax (RET)
Over the last few years, the Local Taxes and Fees Act (also including provisions on RET) has not been practically amended. Therefore, one may assume that the taxation established a few years ago is still correct today. However, this assumption is often incorrect in practice, the correctness of taxation is also affected by laws not directly related to the Local Taxes and Fees Act, whose amendment may also modify the method of taxation. Moreover, the scope of RET often depends on court judgments (even though the Local Taxes and Fees Act is not amended), and tax overpayments are a common
occurrence. As a result, lands / structures / buildings previously deemed to be subject to RET, may according to current jurisprudence be classified differently (e.g., they may be assigned a different tax rate) or even fall outside the scope of RET. Once identified, RET overpayment may entail substantial tax savings for the future, and a tax refund for up to six years back.