Time to redefine strategy and to change approach to taxes. Cezary Przygodzki, Partner, Head of Tax at Dentons’ Warsaw
You are organizing the “Dentons Global Tax Conference. 3 Shades of Tax Grey: Structuring, Avoidance, Abuse” Can you please tell us more about this project?
This is our third Dentons Global Tax Conference. Every year we change the host country for this internationally recognized annual event. This time round we’re meeting up in Warsaw on October 6th to discuss key issues in international tax law. Invited guests include: business practitioners, board members of Polish and foreign companies, top-level managers in finance and tax departments, as well as other professionals dealing with tax on a daily basis.
The conference changes theme every year, in tune with the needs of the international business community. We’re operating in a very challenging environment right now. Times of a global pandemic, a war right on the borders of the European Union, and an impending energy crisis. Given these extraordinary circumstances, businesses must redefine their strategies – and this means changing approach to taxes, too. All companies need an up-to-date tax strategy to foster growth, profitability and long-term stability. This raises strategic questions: What types of international tax planning are permitted, and what are likely to be considered abusive? Knowledge of these issues is more important now than ever before.
Tax-efficient mechanisms firmly grounded in law and regulations are effective tools to support businesses in uncertain times and help business leaders address the challenges they face around the world. Accordingly, the conference this October will focus on international tax structuring.
What topics exactly will you cover at the Global Tax Conference in Warsaw?
The conference agenda is carefully planned to address in depth wide-ranging aspects of international tax structures, including where regulations are less than explicit, if not downright vague. At EU and OECD level, the last few years have seen the advent of numerous measures that significantly impact international tax structuring. For example, the MLI Convention modifying double taxation treaties, and the ATAD I and II Directives. Other OECD, EU and national legislative initiatives are also at the drafting stage — I merely mention here the legislative work on the DEBRA Directive which, among other things, will bring about further restrictions on the deductibility of interest, and the Unshell Directive (ATAD 3), which will apply to entities taking part in international tax planning.
We will pay special attention to these issues, as in their everyday practice tax authorities closely scrutinize tax structures to establish, among other things, whether or not the reduction of the tax burden as a result of implementation of these structures was the main or one of the main objectives of the structure, or whether the foreign company in question has sufficient ‘business substance’ to be eligible for tax preferences (in terms of withholding tax etc.).
We will also discuss how the above changes affect the taxation of M&A and real estate deals, and financing structures.
And even if a given tax reduction is merely a side effect of the business structure chosen by the client, we will try to determine whether the structure may be considered ethical and free of reputational risk. It’s becoming increasingly common for a structure that looks tax-safe to be deemed risky in business terms for reputational considerations.
These are the issues that will be discussed at the Dentons Global Tax Conference 2022.
Many people believe that Poland has a very complicated and opaque tax system. What changes do you think are necessary to avoid the risks posed by the complexities of the system?
Unfortunately, there is no simple solution for this problem. I’m far from glossing over the Ministry of Finance’s approach here, but the economic reality is becoming more complex, and that requires new tax regulations. Who would have thought, just a few years ago, that the crypto-currency markets or digital economy would grow to such an impressive scale? Or that remote working, often on a cross-border basis, would become a widespread solution in the workplace? All these new developments have not escaped the attention of tax authorities, who are now trying to tax profits generated in this way.
We must also remember that a significant part of the new tax legislation originates from EU and OECD regulations, which are merely implemented into Polish law by our legislators.
These factors undoubtedly affect the Polish tax system. By contrast, as far as our own Polish backyard is concerned, where the legislature has full latitude, we should avoid introducing further taxes or quasi-taxes or complicating existing tax regulations. Let’s just mention the banking tax and the retail sales tax introduced in recent years, or the minimum levy on commercial properties and tax on diverted profits introduced under recent amendments to the CIT Act. Plans to introduce more taxes are still in the making, so to say. Additional tax revenues can be obtained through tax simplification.
And, above all, it is an absolute necessity to avoid introducing chaotic tax changes, as happened recently with the “Polish Deal”, where — despite strong criticism and legitimate objections made by business stakeholders — Parliament enacted regulations which then had to be quickly revised. The lifting of the so-called PIT relief for the middle class is a perfect example. This example shows that simpler and lower taxes (the lowest PIT rate is now down to 12%) beat complicated formulas.
We hear that some more changes and improvements to the “Polish Deal” are underway in an attempt to fix what is not working as originally expected. Are the proposed changes really beneficial?
There is no doubt that the Polish Deal was in urgent need of correction, and this applies to both PIT and CIT. Of course, priority was given to PIT, as the new regulations in this area and the ensuing numerous legislative shortcomings affected millions of taxpayers. PIT amendments have already been adopted and went into effect this July. For the most part, these changes are beneficial to taxpayers.
In contrast, a great deal of CIT regulations are still to be fixed. This is to be achieved by a bill approved by the government in late August and now before Parliament. It provides for, among other things, changes in the widely criticized ‘minimum income tax’ (and defers this tax for 2 more years), changes in the tax on diverted profits, it repeals regulations regarding hidden dividends, changes in the ‘Estonian CIT’, and changes to the generally dispraised provisions on documentary obligations under the transfer pricing regulations for what is known as “tax haven transactions”. These changes are undoubtedly favorable, as many of these regulations were either unnecessary, imprecise or their introduction was not justified.
That said, let’s keep in mind that a number of regulations introduced as part of the Polish Deal (e.g., as regards taxation of restructuring transactions such as mergers, de-mergers and share swaps) will not be amended despite widespread criticism, although they should be.
The volatility of the law, the lack of (or very brief) vacatio legis, and the frailty of the tax system raise many concerns among investors, but also make it difficult for companies to plan their strategies. What measures should be put in place to make the tax system an ally rather than an enemy for entrepreneurs?
Unfortunately, tax law is a very dynamic field of law. The only certainty is that nothing is certain. Entrepreneurs, therefore, have no choice but to work the tax system to their advantage and to learn how to use the tools it provides.
As a first step, in particularly sensitive areas, it is worth considering the use of instruments minimizing tax risks such as tax rulings, WHT preference opinions, protective opinions or advance pricing agreements (APAs). Putting in place internal tax procedures can also be a step in the right direction. In the event of contentious issues, if internal analysis indicates a significant chance of winning the case, it will be worthwhile gathering arguments for the purposes of a prospective dispute (defence files) or, if the dispute is already pending, for defending your position in tax and administrative court proceedings. On the other hand, the Polish tax system offers an increasing number of incentives and reliefs, including numerous solutions introduced under the Polish Deal, which are well worth getting to know and using.
It should go without saying that to navigate this maze of risks and opportunities, it’s an absolute must to have qualified tax advisors and lawyers on board. While it costs money up front, the advice of tax counsel is a good investment that helps minimize costly risks and opens the door to tax reliefs and incentives that bring tangible financial benefits.
Cezary Przygodzki, tax advisor, partner, Head of Tax at Dentons’ Warsaw office. He focuses on international tax planning and M&A structuring.
Cezary specializes in tax aspects of M&A, including tax structuring of transactions, tax due diligence, tax assistance with negotiations and closing. He is experienced in tax aspects of restructuring and reorganizing of businesses as well as foreign investments in Poland. He leads projects related to tax disputes, litigations and administrative proceedings.
Cezary supports firms mainly from the manufacturing, energy, real estate, technology, and media sectors, although he is no stranger to assisting financial institutions and private equity funds.
Cezary has been recognized as the Leader in transactional advisory services in Poland by Rzeczpospolita’s XVI Ranking of Tax Advisory Firms 2022. He has over 20 years of experience with Big 4 and renowned law firms.
Last Updated on September 19, 2022 by Valeriia Honcharuk