Further amendments to WHT

The Minister of Finance announced further postponement of the 'pay and refund' system, as also amending WHT regulation in 2021. Moreover, as of 1 January 2021, the competence of the tax authorities in terms of WHT will be modified. Still, the WHT remitter is obliged to act with due care when making payments subject to WHT.

On 6 November 2020, the Minister of Finance announced that given the exceptional circumstances of the legislative process, in particular due to the COVID-19 pandemic, the Ministry would issue decrees under which the procedure of compulsory collection of withholding tax at the standard rate, with the right to apply for a refund of the tax (the 'pay and refund' mechanism), would be suspended. In parallel, a legislative process regarding the planned amendments subject to public consultations will be carried out and finalized in 2021. Therefore, the entry into force of the pay and refund mechanism was postponed by another 6 months, i.e. until 30 June 2021.

Moreover, in September 2020 during a meeting held by the representatives of the Ministry of Finance with tax advisors, the direction of further changes in the pay and refund mechanism was outlined. The possible amendments thereto include:

• limiting the pay and refund mechanism to payments to related entities,
  
  
• limiting the pay and refund mechanism to passive payments (interest, royalties, dividends), with a threshold of up to PLN 2m (excluding intangible services),
  
  
• extending the scope of clearance opinions to include tax exemptions and reduced rates under double tax treaties (and consequently changing their name to 'Preference Opinions'),
  
  
• excluding dividends paid to Polish residents from the pay and refund mechanism,
  
  
• indicating at the statutory level that the conditions of exercising due diligence shall be stricter for payments made to related entities than for payments made to unrelated entities,
  
  
• introducing changes as to the procedure of signing the statement on applying WHT preference (WH-OSC), i.e. under the new provisions it would be signed in accordance with the rules of representation and not by the entire management board,
  
  
• the clearance opinion, if already issued, will apply from the date of entry into force of the pay and refund mechanism.

Furthermore, the Ministry of Finance representatives confirmed that they had been working on the final version of the explanatory notes to the new provisions, the draft of which was published on 19 June 2019.
 

Moreover, it is worth noting that the Ministry of Finance and the National Fiscal Administration work to change the competence of specialised tax authorities. Starting from 1 January 2021, specialized tax offices will be competent for medium-sized and large companies. Instead, the matters of the largest businesses in Poland are now handled by the First Mazovian Tax Office in Warsaw. Furthermore, the Tax Office in Lublin will handle WHT-related matters across the country.

From 1 January 2019, withholding tax remitters are required to act in line with the due diligence principle. The obligation of due diligence applies to all payments (regardless of their amount) that are subject to WHT in accordance with the provisions of the CIT Act. At the same time, the remitter is obliged to exercise due diligence considering the nature and scale of their business. It should be emphasized, however, that the tax remitter cannot be released from liability, inter alia, when the remitter and the taxpayer are related entities.

Verification of the conditions for applying the exemption, reduced rate or non-collection of WHT cannot be limited only to the scope of provisions that directly relate to withholding tax, i.e. the subject of taxation, the status of the recipient of the payment, WHT rates. In fact, in relation to payments subject to WHT, the authorities may apply anti-tax avoidance clauses: the General Anti-Avoidance Rule (GAAR), Specific Anti-Avoidance Rules (SAAR) as well as PPT and LoB rules. This means that when making payments subject to WHT, the remitter should be able to give the economic justification for the transaction, understand the recipient's ownership/capital structure and be aware of the recipient's economic substance (i.e. their functions, assets and risks).

Failure to exercise due diligence may have grave consequences. The remitter may be required to pay the basic WHT rate (usually 20% or 19%) along with interest for late payment. Moreover, the remitter may be also subject to sanctions provided for by the Tax Ordinance (the so-called additional tax liability) amounting to 10% of the gross value of receivables subject to WHT. Regardless of the sanctions stipulated by the CIT Act and the Tax Code, the tax authorities may apply penalties to individual persons responsible for WHT settlements under fiscal penal provisions.
 

As a part of due diligence, the WHT remitters apart from supporting their approach with applications for clearance opinions or tax rulings, should introduce an internal procedure that let to verify the terms of payment, including documentation, and assign WHT-related obligations to appropriate employees. The WHT procedure is also part of the new obligation related to the implementation of the tax strategy.

Iwona Krzemińska, Manager, Corporate Tax Advisory, KPMG in Poland