Restriction of VAT deduction for transactions settled using the reverse charge mechanism in Poland

October 30, 2018

Lidia Adamek-Baczyńska and Olga Palczewska of WTS&SAJA dissect the differences between Polish and EU VAT law, the opportunities and difficulties these differences present,, and relevant case law.

The VAT acts of member states are subject to harmonisation upon which EU VAT law is being standardized. This, however, is not aimed at eliminating the national law systems.

The VAT directive (2006/112/EC) is binding to each EU country, but leaves the choice of form and methods to the national authorities who transpose it into national legislation. Consequently, member states’ VAT acts of are not fully coherent and unique rules and solutions can be found.

There are many VAT rules in Poland which do not stem directly from the EU VAT Directive, and therefore we could ask whether these laws are compliant. Polish VAT law includes, among others, additional requirements which must be fulfilled to reduce the taxable amount in the case of non-payment by the other contracting party (so-called bad debt relief).

However, the most frequently discussed VAT issue in Poland is the restriction of the period for input VAT deduction with respect to transactions settled using the reverse charge mechanism (e.g. intra-community acquisitions (ICA) or imports of services).

Until the end of 2016, Polish taxable persons could report input and output tax resulting from ICAs and the import of services in the same VAT return, irrespective of when the invoice was received and when the output VAT was reported. Such VAT treatment made purchases of goods from the EU and service imports neutral even if they were not reported on time.

New regulations have been enforced

The situation changed from January 1 2017.Since then, taxpayers have been entitled to deduct input VAT paid on a transaction for which the reverse charge mechanism applies, provided that the output VAT from this transaction is reported in their VAT return within a maximum of three months from the end of the month in which the tax became chargeable. If the output tax is reported later, input VAT can be deducted in the VAT return for which the filing deadline is still pending (current VAT return). Output VAT, however, must still be reported in the VAT return submitted for the month in which the tax became chargeable.

Practical aspects of the new regulations

The practical impact of this is that where a reverse charge transaction is reported after the three-month time limit, the input and output tax are reported in VAT returns for different periods. This can lead to tax and interest arrears. As invoices documenting ICAs and imports of services are usually received with some delay, reporting output VAT within this time limit is not always possible. So, many taxable persons in Poland face the problem of being obliged to pay interest due to not reporting these transactions on time.

Moreover, to meet the (three-month) deadline for reporting input and output VAT from a reverse-charge transaction in the same VAT return, and avoid any negative consequences, taxpayers need to correct their VAT returns by this rather short deadline. A subsequent correction of VAT returns is usually required when additional invoices are received. This causes a lot of administrative work for taxpayers.

Divergent judgements

In the judgements from September 29, 2017 and May 15, 2018, the Polish provincial administrative courts held that taxable persons shall not be obliged to pay interest due to reporting ICAs after three months (case no. I SA/Kr 709/17 and no. III SA/Wa 2488/17). It was pointed out that, in accordance with the principle of neutrality, taxable persons cannot bear the economic burden of VAT. Moreover, taxable persons cannot report output VAT until the invoice is received, and it is the supplier who must be blamed for the delay in providing it. Therefore, the regulations were considered to be non-compliant with EU law.

Despite this tax-friendly approach of the administrative courts in Poland, the regulations not been changed and nobody has yet submitted a preliminary ruling to the European Court of Justice. Moreover, in August 2018 one of the provincial administrative courts presented a negative opinion in this respect (I SA/Op 246/18). Given that the tax authorities and taxable persons are obliged to obey the provisions of the Polish VAT Act, as long as the rules remain unchanged then interest will have to be paid. Will the tax-friendly approach of administrative courts have an influence on the lawmakers? Or will the preliminary ruling to the ECJ be submitted? These are some of the questions raised.