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MSE taxation – Polish experiences

MSE taxation – Polish experiences. Tbilisi, May 6, 2011. Maciej Grabowski, Ph.D. Undersecretary of State Ministry of Finance, Poland. Rationale for special tax treatment of small business es. High tax compliance costs (in relation to f.i. turnover) Limited access to capital

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MSE taxation – Polish experiences

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  1. MSE taxation – Polish experiences Tbilisi, May 6, 2011 Maciej Grabowski, Ph.D. Undersecretary of State Ministry of Finance, Poland

  2. Rationale for special tax treatment of small businesses • High tax compliance costs (in relation to f.i. turnover) • Limited access to capital • Income volatility • Difficulties with defining business and private consumption • Transaction evidence and enforcement

  3. Business income taxation – general regime • CIT for incorporated businesses – rate: 19% • PIT for unincorporated businesses (sole proprietors and partnerships): • progressive tax scale with rates 18% and 32% (since 2009) • flat rate taxation (since 2004) – 19%

  4. Business taxation – small taxpayers regime • Small taxpayer definition: taxpayer with annual gross income up to1.2 m € (1.6 m USD) • Income taxation: • special tax measures in general regime: • lower accounting requirements (only PIT) • option for cash based accounting • quarterly advance tax payments • accelerated deprecation • possibility of tax deferral • presumptive taxation – optional for unincorporated businesses • VAT: • optional tax exemption (with 50k USD threshold) • cash accounting for small taxpayers

  5. Presumptive taxation • Simplified and optional form of taxation of individual entrepreneurs • Designed to reduce tax compliance costs (by many perceived as a tax preference) • Present in tax system since 1954 (abolished and reintroduced in 90s) • Three forms of presumptive taxation: • indicator-based (patent like) tax – „tax card” • turnover-based tax – „tax on registered revenue” • indicator-based tax - „tax on special farming activities”

  6. Turnover based tax • Optional form of taxation – requires notification to tax authority • Annual turnover ceiling: 200k USD • Tax rates depending on activity type: • 3% - trade • 5,5% - production and construction • 8,5% - services • 17% - highly profitable services (e.g. consulting, real estate, hotel, car renting) • 20% - liberal professions • Certain activities excluded (eg. pharmacies, production of excisable goods, advertising, tax advisors, solicitors, architects) • Cash register required – if non or unreliable 5 times rate applies • Limited filing requirements – only annual tax return • Advance tax payments – monthly or quarterly

  7. Lump-sum patent (tax card) • Applied to activities explicitly indicated in tax law (over 100) – basically hand made, laborious and recessing activities and basic retail • Application limited by number of employees • Fixed lump sum tax - depending on (proxy of profitability): • business type (ca. 100), • place of activity (small, medium, large cities) • number of employees (0-5) • Tax rates provided in tax law, still may be adjusted by tax authority • Monthly payments, no filing and cash register required

  8. Tax card rates • Tax rates expressed in amounts • Indexed annually • Aimed to reflect profitability of businesses • In some cases tax based on specific criteria, eg.: • [parking lots] number of car posts • [leisure services] type of device used, no. of devices • [liberal professions] type of profession, no. of work hours

  9. Tax on special farming activities (SFA) • Applied only to specific farming activities explicitly indicated in tax law, eg.: • cultivation of plants in greenhouses • breeding of poultry, fur animals (foxes, rabbits, chinchillas, nutrias), laboratory animals (mice, rats, guinea pigs, etc) • Indicator based tax – income assessment based on acreage or number of animals and annual income norm (estimation) from a given activity • Notification required – tax authority sets monthly tax payment • Limited filing requirements – only annual tax return • No accounting requirements (regardless of the scope of activity) • Problem: NO LIMIT OF SUCH BUSINESS ACTIVITY

  10. SFA: examples of annual income norms

  11. Small taxpayer regime performance • Presumptive taxation chosen by over 890,000 taxpayers (in 2009) - ca. 37% of all individual entrepreneurs (share slightly falling from 2005): • turnover tax: 30.5% (31% in 2005) • tax card: 5% (7% in 2005) • SFA Tax: 1.5% (2% in 2005) • Number of taxpayers: • [turnover tax] steadily growing, even after lowering in 2008 the turnover treshlod from 330 k USD to 200k USD • [tax card and SFA tax] decreasing • Total tax revenue generated by presumptive taxes in 2009 amounted to 500 mil. USD (8.5% of individual business tax revenue), slightly decreasing since 2007

  12. Why do we operate simplified forms of taxation? • Advantages for taxpayers: • lower tax compliance costs • limited interaction with tax authority • in many cases lower tax liability • taxpayers’ customs • Political and economic reasons: • restrictive taxation of business before 1989 and taxpayers aversion to fulfillment of tax requirements • high political and economic costs of reform (experiences with abolishing and reintroducing turnover tax in early 90s, attempts to abolish presumptive taxation in 2006) • incentive for business formalization

  13. Weaknesses of small taxpayers regime • No possibility to enjoy certain tax reliefs (esp. in case of tax card) • Separate filing and payment of social contributions and health contributions • Limitations in self-employment possibilities • Difficulties in access to capital (no proof of real income) • Fluctuations of business income (seasonal, cyclical) • Disincentive for business growth (eligibility ceilings: turnover, employment) • No possibility to resign from presumptive taxation during the tax year

  14. Operational challenges • Risk of tax fraud: • hiding below threshold, usually by: • keeping turnover or employment off the record • splitting or setting up new business activity • issuing false receipts/invoices (in case of tax card, SFA tax) and lack of interest in receiving cost invoice • Family businesses – difficulties with determining private and business consumption, non-registered employment of family members • Self-employment and providing services / sales to former employer • Limited possibilities of tax audit • Disputes over application of proper tax rate (turnover tax) or eligibility of a given activity • Pressure for increasing turnover threshold and lowering tax rates in turnover tax (esp. after lowering tax rates in general PIT regime)

  15. How do we address them?[Turnover tax] • Proper turnover record keeping: • requirement to keep register and produce a daily summary of sales • incidental and cross-check tax audits, • penalty tax rates if records are not reliable, • raising awareness of consumer rights and interest in receiving receipts, • popularization of electronic payments and banking, • Splitting of business activity – exclusion of spouses • Setting up new business activity – change of business activity or a partner deemed not to be a new business activity • Self-employment – prohibition of providing services/sales to former employer • Invoices – requirement to posses proof of purchase of goods • Exclusion of certain activities

  16. What activities are excluded?[Turnover tax] • Business with high profit margins (eg. financial services, services related to intellectual property) • Liberal professions • Production of excisable goods • Businesses prone to operation (even partially) in the black market (eg. sales of spare parts, scrap-metal) • Businesses of great scale (eg. whole traders, telecommunication)

  17. Lump-sum patent regime – target group • Applied to simple activities undertaken usually in micro scale: • usually run an entrepreneur personally, based on his skills or trained profession • requiring no additional staff (employment) • using private premises and based on home-made goods, • labor demanding and yielding low profits • usually with turnover below VAT threshold • prone to operation in informal sector • … as it main purpose to keep these businesses in tax net (formal sector) by easing tax compliance burden, not to maximize tax revenue…

  18. Lump-sum patent regime – indicators • …still, it should not be generous in terms of tax burden – otherwise may be an incentive to hide below the threshold (employment level) • Critical issue: design of indicators reflecting profitability • Advantages of employment indicator: • reliable proxy of business profitability • stable indicator with no requirement for periodical reporting • easy to check • Weaknesses of employment indicator: • possibility of substitution with contractors • engaging family members • Why number of inhabitants matters? – it reflects margins differentiation between small towns and big cities, being objective factor with no need to verify

  19. Thank you Ministry of Finance 12 Swietokrzyska Street 00-916 Warsaw

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