New tax rules seek to find a way around payment gridlock by enforcing timely payment of B2B receivables. But watch out for more red tape.
In business-to-business dealings, payment gridlock can occur when customers do not pay a company’s receivables on time, in turn making it difficult for the company to find cash to pay its own suppliers—putting the suppliers themselves in the same fix as late bills pile up on all sides. New income tax and VAT rules in Poland are designed to break this vicious circle by strongly encouraging all taxpayers to pay their invoices quickly.
The Act on Reduction of Certain Administrative Burdens on the Economy of November 16, 2012, went into effect on January 1, 2013. The changes introduced by the act primarily seek to reduce payment gridlock and improve the financial liquidity of businesses by limiting the ability to deduct revenue-earning costs which the taxpayer has not actually paid. Among the acts amended are the VAT Act of March 11, 2004, the Personal Income Tax Act of July 26, 1991, and the Corporate Income Act of February 15, 1992.
Unpaid invoices no longer deductible
The amending act introduced Art. 15b to the CIT Act and a parallel provision, Art. 24d, in the PIT Act. These provisions impose on a taxpayer who is a debtor an obligation to file an adjustment of revenue-earning costs if the taxpayer fails to pay an amount due under an invoice (or contract or other document), previously deducted as a revenue-earning cost, within 30 days after the payment deadline set by the parties.
If the payment term is longer than 60 days, the revenue-earning costs shall be reduced by the amount due under the invoice (or other document) 90 days after the amount was included in the debtor’s revenue-earning costs if it has not been paid by that time. Then, if the debtor does pay the amount due after having reduced its revenue-earning costs, it will increase its revenue-earning costs again in the month in which it made the payment, in order to reflect the amount paid.
As explained by the Ministry of Finance, this rule means that if the parties set a payment term of, for example, 100 days, in order for the taxpayer to avoid adjusting its costs, it must pay the obligation within 90 days after recognizing the amount as a revenue-earning cost.
According to the explanation from the Ministry of Finance, the new regulations concerning adjustment of revenue-earning costs should be applied to amounts arising under an invoice (or other document) that were included in revenue-earning costs on or after January 1, 2013. According to the ministry (this issue is not directly addressed by the amendment), if the amount arising out of an invoice (or other document) was included in revenue-earning costs prior to January 1, 2013, the new regulations will not apply, even if the payment deadline falls in 2013.
If in the month in which the revenue- earning costs should be reduced the taxpayer does not incur tax costs, or if the tax costs incurred are lower than the amount of the relevant reduction, then the taxpayer is required to increase its taxable revenue by the amount by which it failed to reduce its tax costs.
Major changes in VAT
The amending act also introduces major changes concerning VAT. First, it modifies the rules concerning relief for bad debts. Second, it introduces an entirely new regulation concerning adjustment of input VAT. Following the change in regulations, the obligation for the debtor to adjust input VAT no longer depends on the initiative of the creditor (i.e. the creditor’s taking relief for the bad debt). The debtor is required to adjust input VAT whether or not the creditor has taken relief for the bad debt. Thus from January 1, 2013, there are thus two separate legal institutions functioning within the VAT Act in this respect: relief for bad debt and, independently from that, adjustment of input VAT by the debtor.
Easier to take relief for bad debts
The amending act has modified the rules for relief for bad debts. Under the amended Art. 89a of the VAT Act, a taxpayer may adjust the taxable amount and the amount of output VAT on the supply of goods or services in the territory of Poland in the case of a receivable whose uncollectibility has been substantiated. Under the new rules, the uncollectibility of a receivable is regarded as substantiated if the receivable was not paid or sold in any form within 150 days after the payment deadline specified in the contract or invoice. When filing the tax declaration in which it takes this adjustment, the taxpayer/creditor is required to provide notice of the adjustment to the head of the creditor’s tax office, stating the amount of the adjustment and the data concerning the debtor.
This means that the period required before output VAT may be adjusted has been reduced from 180 days to 150 days. Moreover, the taxpayer is no longer required to notify the debtor that it intends to make the adjustment or has made the adjustment.
These rules also apply to receivables that arose prior to January 1, 2013, if their uncollectibility was substantiated (under the rules introduced by the amending act) after December 31, 2012.
Sanction for failure to correct input VAT
Under the amended Art. 89b of the VAT Act, a taxpayer/debtor who failed to pay amounts due under an invoice documenting the supply of goods or services in the territory of Poland within 150 days after the payment deadline specified in the contract or invoice is required to make an adjustment of the deducted input VAT from the invoice, in the settlement period in which the 150th day after the payment deadline falls. Moreover, if it is found that the taxpayer failed to comply with this obligation, the head of the tax office or the tax audit authority will impose an additional tax obligation equal to 30% of the tax under the unpaid invoices which was not adjusted accordingly.
These rules also apply to overdue receivables that arose prior to January 1, 2013, for which the 150th day following the payment deadline falls after December 31, 2012.
The new regulations to combat payment gridlock are clearly a two-edged sword. On one hand, taxpayers who are creditors have an increased expectation that their debtors will pay their obligations on time, in order to avoid negative tax consequences. On the other hand, taxpayers who are debtors—which in practice means all businesses—must introduce additional mechanisms to verify their settlements with creditors.
In practice, this means an increase in administrative burdens for every business and even greater complications in tax settlements with the state. In consequence, some commentators fear that the new regulations will not solve the problem of payment gridlock, and in extreme cases could even force firms into bankruptcy.
Published in: American Investor, Spring 2013