Tax aspects of organizing consumer contests
Businesses seeking new customers and encouraging them to buy their goods or services often decide to hold various promotional campaigns. One of the most popular forms is contests. But in practice it is not as easy as it might seem to organize a contest. To relieve themselves of these difficulties, businesses often hire advertising agencies to organize contests. This is when the tax hurdles begin to mount, as both the ad agency and the company retaining the agency to organize the contest must resolve several important doubts of a tax nature concerning organization of the contest.
Who remits the tax?
In Poland, a consumer who wins a contest will obtain income in the form of the prize which is generally subject to income tax at a flat rate of 10% (although in some cases the exemption set forth in Art. 21(1)(68) of the Personal Income Tax Act may apply). However, it is not the winner himself, but the “entity providing the winnings” who is required to withhold the tax and pay it over to the proper tax office on behalf of the taxpayer (PIT Act Art. 41(4) in connection with Art. 30(1)(2))—that is, to act as the remitter of the tax. A key question for the entities involved in preparing the contest is whether in the case of organization of the contest with the participation of an outside ad agency, the obligations of the remitter of the tax are borne by the ad agency, as the entity actually handling organization of the contest, or the agency’s client, which often has no direct contacts with the participants during the contest. In other words, which of these entities should be regarded as the “entity providing the winnings”?
Under the position taken by the Polish tax authorities in the latest tax interpretations (nos. IPPB1/4511-478/15-4/ES, IPPB2/4511-201/15-4/MG and IPPB4/415-1057/14-2/JK3), the remitter of the income tax is always the entity commissioning the organization of the contest, as on the basis of the contract with the ad agency it is the client who bears the full economic burden associated with performance. This position applies as well when the ad agency, as part of its marketing services, both purchases and delivers the contest prizes.
It should be stressed that the remitter’s legal duties cannot be transferred to another entity by contract (tax interpretation no. IPPB2/4511-42/15-4/AS). The ad agency cannot undertake as part of its marketing service to withhold and pay the flat-rate tax on behalf of the contest organizer. Such a contractual provision would be invalid, and the payment of the flat-rate tax by the agency would not release the organizer of the contest from this obligation.
What if the winner is self-employed?
Sometimes the participants in the contest are individuals operating their own business (self-employed persons) and the contest is related to their business activity. In that situation, the organizer of the contest, as the potential tax remitter, should consider whether the prize received by self-employed persons in the contest will be subject to the 10% flat-rate tax, or perhaps the self-employed winner should include the value of the prize in his or her other business revenue? In the latter case, the organizer of the contest would not act as the remitter; that is, it would not have an obligation to withhold and pay over the tax on behalf of the contest participant.
The position presented by the tax authorities on this issue has changed over the years. Originally the prevailing view opposed application of the 10% flat-rate tax on winnings received by self-employed persons in contests related to their business activity (interpretation no. IBPBI/1/415-1165/12/ESZ). In recent years this position has changed in favor of applying the flat rate of tax (interpretation nos. IPPB1/415-380/14-2/EC and IPPB1/4511-503/15-2/ES). This view is shared by the administrative courts, which consistently hold that Art. 30(1) of the PIT Act, providing for the flat rate of tax, does not contain any subjective limitations preventing it from covering individuals conducting business activity (case nos. II FSK 232/13 and III SA/Wa 203/12).
Despite the recent unification of the position of the tax authorities and the administrative courts on this issue, in favor of applying the 10% rate, the Minister of Finance is taking a different line. In a document dated 30 November 2015 (no. DD9.8126.96.36.1995.JQP), the minister on his own initiative amended tax interpretations favoring use of the 10% tax. In the future, further official amendments of issued tax interpretations can be expected. And recently an interpretation was issued by the director of the Łódź Tax Chamber (no. IPTPB1/4511-442/15-3/AG) in which the authority followed the position presented by the Minister of Finance. But at the same time, the administrative courts continue to take a different view, confirming the possibility of applying the 10% rate (case no. II FSK 2075/13).
To avoid any doubts or negative tax consequences, the organizer of a contest targeted to small business owners should consider applying for a tax interpretation, which will resolve which rate of tax should be applied with respect to winners who are self-employed persons and whether in such a case the organizer of the contest will act as the remitter of the tax.
Is marketing a complex service?
As part of their service of organizing contests, ad agencies sometimes purchase and deliver contest prizes whose value is then added to the fee owed to the agency for this complex marketing service. Then the ad agency issues a single invoice and the client hiring the agency to organize the contest deducts the input VAT from the invoice in full, that is, also including the portion where the agency’s fee really represents the payment for the prizes purchased and delivered to the winners. However, this practice is incorrect, according to the latest tax interpretations (no. IPPP1/443-1247/14-2/AP) as well as the case law of the Court of Justice of the European Union (Loyalty Management, joined cases C-53/09 and C-55/09) and the Polish courts (cases I FSK 1652/13 and I FSK 302/14).
It is now accepted that the process of organizing a competition and purchasing and delivering the prizes to the winners is two separate activities which cannot be treated as provision of a single complex service. Consequently, on one hand the ad agency conducts a promotional campaign for the client, i.e. performs a service, and on the other hand it makes a paid supply of goods to the winners.
In practice this means that when acquiring the prizes, the ad agency becomes the owner of the prizes and has the right to deduct input VAT on their purchase under general rules. Meanwhile, the client hiring the agency to organize the contest does not have the right to deduct VAT in the portion in which the invoice issued by the agency covers the prizes, because the client does not acquire the right to dispose of the prizes as their owner (tax interpretation no. ILPP2/443-497/13-4/MN).
In the situation described, the true burden of VAT on the purchase of the prizes is borne by the client hiring the agency to organize the contest. To avoid negative tax consequences, the client should purchase the prizes and deliver them to the winners. In that construction, VAT will be neutral for the client.
It should be noted that this problem does not arise in the event of guaranteeing cash prizes or prizes in the form of vouchers. Money, as a means of payment, and vouchers as a marker substituting for cash, do not constitute goods for the purpose of VAT regulations (tax interpretation no. IPPP1/4512-32/15-4/BS).
This article covers the issues raising the biggest tax questions in organizing contests. But the tax complexities associated with organizing contests should not discourage businesses from using promotions of this type. The benefits that can be derived from organizing contests can be significant, while with sound advice the tax issues can be resolved.
Published in: American Investor, Summer 2016