Communication 4/2017: PIS government meets its VATerloo
In the second half of January, Polish media publicized the first whole-year results of sealing the tax system undertaken in 2016. They showed that fewer tax inspections were carried out that year than in 2015 (by 3.1%), but they still resulted in contributions to the state budget that were nearly 80% larger.
There were two primary sources of the increase. First, there was an increase, by more than twofold, of payments resulting from the correction of VAT declarations (from PLN 175.3 million to PLN 357.1 million). Even more important was a very substantial increase in the amount of VAT that tax offices refused to reimburse to the taxpayers on the ground of attempted tax fraud (more than five-fold jump, from PLN 167.9 million in 2015 to PLN 1.03 billion in 2016).
These statistics show that last year inspectors of Fiscal Control Office tried to focus their attention on those taxpayers who may be more likely to pay their tax arrears voluntarily. Tax authorities have also become more sensitive to fraudulent VAT refunds involving "fictitious invoices.” The latter trend is also confirmed by the dramatic increase in the amount of excess VAT (surplus of input tax over tax due) withheld by the tax authorities in 2016 in order to gain time to clarify doubts. According to the Ministry of Finance, just by 27 October 2016, it amounted to PLN 3.23 billion. It suggests that over the whole year over PLN 3.5 billion of VAT reimbursement was held back.
However, despite this – as Katarzyna Jędrzejewska from Dziennik Gazeta Prawna called it - "impressive fiscal charge,” the Deputy Finance Minister and General Inspector for Fiscal Control Wiesław Jasinski, resigned last week. The heads of Goods and Services Tax Department, Income Tax Department, and Tax System Department of the Ministry of Finance were also sacked.
Why did the "impressive charge" bring about their resignation? The answer can be found in more recent data from the Ministry of Finance. As reported the next day after the resignation of Jasinski, in 2016 the estimated budget revenues from VAT were PLN 126.6 billion. It represents an increase of PLN 3.5 billion, or 2.76 % of tax revenue, compared to 2015. However, GDP also increased in 2016 – and by a bit more: 2.8%. Therefore the VAT gap, as a proportion of GDP, has risen from the previous year.
This trend is even more pronounced when we take into account preliminary figures showing the consumption – on which VAT is levied - growing even faster than GDP, at a rate of about 3.0% (more on this in FOR Communication 3/2017). Contrary to the promises of PiS politicians in the election campaign, the VAT gap does not disappear nor decrease, but is still growing. As a consequence, VAT receipts were more than PLN 2 billion lower in 2016 than those set in the budgetary law for 2016 (the budget for 2016 assumed PLN 128.7 billion).
All this has happened despite new regulations introduced in the last quarter of 2016 to facilitate counteracting tax fraud. The so-called Fuel Package and the Standard Audit File for Tax (the credit for the adoption of the former goes to the former Minister Jasinski, while the implementation of the latter results from changes introduced by the previous government).
Several factors will counteract this trend in 2017. The first is due to a very necessary change introduced in December 2016 to the VAT Act, which reduces the tax settlement period from three to one month. Besides, it is possible that in 2017 the effectiveness of using the Standard Audit File for Tax will increase. The government is also working on the spirit and tobacco package of laws and the introduction of the so-called split payment of VAT, all of which are useful tools for counteracting VAT fraud.
Full communication in Polish can be downloaded here.
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