Photographer: Bloomberg

Poland Is Cracking Down on Billions in Corporate Tax Dodges

Updated on
  • Era of ‘aggressive’ tax optimization is over, offical says
  • Effective tax rate of WIG20 companies rose 4 points Jan.-June

Poland is chasing chief financial officers who go too far in reducing their companies’ tax burdens as it plans to boost corporate-tax revenue by a third.

Pawel Gruza, a deputy finance minister who spent 15 years advising businesses how to minimize their tax load, intends to reverse a 30 percent drop off in corporate income tax over the past decade, he said in an interview. Rebuilding the tax base to its 2008 level would mean more than $3.5 billion in additional budget revenue per year.

Gruza has already overseen a 20 percent increase in inflows from value-added taxes this year, narrowing the budget deficit and shoring up the government’s financial-market credibility amid a boom in welfare spending.

“We should change the habits of CFOs, who must start taking to account risks they’ve been neglecting when applying optimization schemes,” said Gruza, a former consultant at Ernst & Young LLP. “The era of aggressive tax optimization is over.”

While Poland has had success in fighting VAT and excise-tax fraud in industries such as fuel distribution and electronics, inflows from corporate tax as a portion of gross domestic product remain at about half of the average of the OECD club of industrialized nations.

The government led by the Law & Justice party, which stands accused by the European Union of eroding the rule of law, won elections in 2015 after pledging to force companies, especially those with foreign owners, to “share” more of their profits with Polish citizens. Deputy Prime Minister Mateusz Morawiecki said last month that mounting EU criticism of democratic standards was backlash for the government’s pursuit of economic patriotism.

Excessive Transfers

Last month, parliament changed the corporate-tax code to limit the risk of excessive transfers of income abroad. It set a tighter cap on the cost of financing from parent companies abroad and for licenses sold to Polish units, while trimming the use of entities registered in tax havens. There’s also a new levy on revenue from commercial real estate.

The regulations come a year after the introduction of the General Anti-Abuse Rule, which allow the tax-man to interpret regulations with more flexibility in its search for tax evaders. This has already brought some results.

The effective income tax rate for the 20 companies on Warsaw’s benchmark WIG20 stock index increased 4 percentage points to 24 percent in the first half of the year, compared with the same period of 2016, according to data collected by Bloomberg. That’s higher than the 19 percent levy on company profits as some corporations paid back taxes for previous years and lenders faced an additional industry tariff.

Debt collector Kruk SA said in September that its effective tax rate may rise “significantly” next year, while U.K.-based loan provider International Personal Finance Plc said Polish tax changes may wipe out a fifth of its profits. Retailers CCC SA or LPP SA have in past years abandoned arrangements transferring trademarks or licenses to entities registered abroad.

Governments across the world are fighting to stop companies from hiding profit abroad as a new set of data, dubbed the Paradise Papers, focused attention on how corporations, hedge funds and wealthy individuals may have skirted taxes. No Polish companies have so far been named in the data dump.

Tax Carrot?

The increased inflows have already helped the government reduce its 2017 budget deficit forecast by about half from an originally planned 59 billion zloty ($16.2 billion), Morawiecki, who is also finance minister, said last month. The budget had been strained by 22 billion zloty of additional social spending as well as costs of lowering the nation’s retirement age.

The sustainability of the improved budget position is unclear, however, with Citigroup Inc’s unit Bank Handlowy SA estimating that about 5 billion zloty of this year’s improvement may have a “lasting effect,” while 18 billion zloty to 23 billion zloty may have “one-time” or “transitional” impact.

If corporate-income tax inflows reach a “European standard” of about 3 percent of gross domestic product, Gruza said Poland may consider reducing the tax rate, which it has maintained since 2004.

“But this is a decision for the political leaders, not for me,” he said.

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