The interest on arrears is supposed to work as a carrot and a stick. At the time of the tax inspection, those who will suffer the most are VAT and excise taxpayers
The legislator invented a new method to motivate taxpayers to fulfil their obligation towards the state budget. As of next year, interest on tax arrears will be diversified differently than now – not only its rate but also the rules for its application.
Concessionary treatment for 6 months
In short, it can be said that there will be several rates depending on the type of misconduct and the time when the taxpayer settles the arrears. The basic rate of interest on late payment of tax will remain the same. It will still amount to 200 per cent of the Lombard credit rate plus 2 per cent but not less than 8 per cent. This is the current rate. The changes relate to exceptions to this standard rule. As an encouragement to quickly settle unpaid tax, the Minister of Finance decided to lower the decreased interest rate from the current 75 per cent of the basic rate to 50 per cent.
“It will be payable by those who quickly realise their mistake,” says Marta Ignasiak, tax consultant at FKA Furtek Komosa Aleksandrowicz law office. As it is the case today, this exception will apply to taxpayers who amended their tax returns and settled the arrears within 7 days of filing the amendment. They can still use this possibility before the tax office finds the irregularities. Such a right, however, will not apply indefinitely. Reduced interest rate may be incurred provided that the incorrect calculations are amended within 6 months of the date of filing the tax return that should be amended. Despite lowering the reduced interest rate, the new rules for it have met with criticism from tax consultants.
“Tightening the conditions for applying that rate is justified because it should not be used by taxpayers who treat the State Treasury as a cheap lender. Although such an action comes with penal and fiscal responsibility as well as with the risk of administrative enforcement, some taxpayers have used the possibility given by the legislator regardless,” claims Marta Ignasiak. She does not believe, however, that it is right that the entitlement to the tax credit will be limited to 6 months from the tax return filing.
“Some taxpayers will not be given enough time to realise that they made a mistake or that certain provisions are construed differently,” explains FKA’s tax consultant. Jarosław Ziobrowski from Kurpisz i Ziobrowski Adwokacka law office states that although lowering the rate should be regarded as a positive step, its scale does not bring considerable benefits. He points out that taxpayers are not always able to notice irregularities in their settlements immediately, for example if they run a large-scale business.
“To err is human. Many taxpayers do not want to cover up their mistakes from the tax office and try to fix them as soon as they find out about them, by amending the tax return,” emphasises the lawyer.
VAT and excise tax penalty regime
Given this, the new future increased rate received an even harsher reception. It will amount to 150 per cent of the basic rate and will apply to arrears in two taxes – VAT and excise tax – if during tax inspection or tax proceedings the tax inspector finds out that the businessman understated tax liabilities or overstated overpayment or reimbursement. Also, if the authority discloses that the taxpayer failed to file the tax return and pay the taxes. The increased interest will also be charged in the case of amending the tax return after receipt of the notice of the intention to begin an inspection or after the inspection is completed (if conducted without notice) as well as when the need for an amendment arises in connection with verification performed by the tax authority.
This new financial pain will not relate to arrears (involving understating tax liabilities, overstating overpayment or reimbursement) not exceeding 25 per cent of the amount due and not greater than five times the minimum salary. Currently, the cap would be PLN 8,750. Next year, following the raise of the minimum salary from PLN 1,750 to PLN 1,850, it will stand at PLN 9,250. The Ministry of Finance explained that the increased interest rate would not apply to small arrears because the vast majority of such cases is unintentional or results from obvious mistakes or calculation errors, and not from planned actions aimed at considerable understatement of liabilities.
“This rate seems to resemble the famous ‘additional VAT penalty’. In this case, the taxpayer will be penalised not necessarily for a wilful act aimed at presenting reduced income but also for an incorrect evaluation of the consequences of the transactions made in the VAT or the excise tax form, resulting in such a reduction. While his or her penal responsibility will depend on many criteria, the increased interest rate will apply automatically only due to the outstanding tax liability,” comments Marta Ignasiak.
Dubious reward
The Ministry of Finance notes that the VAT and the excise taxpayers who made mistakes causing even serious reductions will be able to avoid the increased interest provided that they voluntarily file an amendment to the tax return within 6 months and settle the arrears within 7 days (in such a case, with lower interest) or file a voluntary amendment after 6 months and pay the arrears (with basic interest).
“This means that, for instance, interest on late payment of VAT and excise tax may be calculated using three different rates – 4 per cent within 6 months of tax return filing, 8 per cent after that period, and 12 per cent in the case of initiating an inspection or a verification,” summarises the consultant at FKA. The author of the amendment justifies the changes in the following way. It is necessary to create instruments stimulating filing amendments to remove irregularities on an ongoing basis and not within several years until the limitation of the tax liability. We need preventive tools relating to taxpayers in areas with an increased risk of fraud, or the VAT and the excise taxpayers. According to the Ministry, the changes can decrease the general amount of tax arrears, lower the cost of tax collection, and improve compliance with the law. These objectives can be achieved by applying a diversified rate of late payment interest to enhance the rewards for voluntary disclosure and payment of arrears and to increase the financial pain for evading the obligation to file the tax return and considerable underdeclaration in higher risk areas.
“It is rather a manifestation of the Ministry’s seeking for money to balance the budget, and in any case certainly not a method of rewarding taxpayers. The decreased rate for voluntary correction of errors is still a kind of punishment, and the rate increased to 150 per cent is a particularly high penalty threatening many taxpayers unaware of their irregularities which occurred for the same reason as those noticed before they could be detected by the tax authority,” comments Jarosław Ziobrowski.
In his opinion, the reasons for mistakes in tax settlement lie in the complicated law and frequent amendments to it. For example, the VAT Law has been amended as to the rules for defining the tax point date.
“If the Minister of Finance wants the taxpayers to carry out their obligations in a better way, he should improve the law and provide clear, transparent legislation,” says the lawyer. He also believes that late payment interest should not be used as a bogeyman. “Penalties are a matter of the Penal and Fiscal Code, and not of tax regulations,” emphasises Jarosław Ziobrowski.