• During a COVID pandemic, among the solutions available under the anti-crisis shields, the most favorable was the exemption from social security contributions. The companies also appreciated the benefits offered under the Guaranteed Employee Benefits Fund.
• Polish position among the Visegrad countries strengthened by its minimum wage level.
• The completion of the mandatory online invoice data reporting system will allow the tax office to oversee every invoice.
• Especially in the time of pandemic, transfer pricing was in the crosshairs of the tax authorities.
July 13th, 2021, Warsaw, Poland – The 9th edition of the CEE tax guide by international audit and consulting company Mazars offers an overview of tax regimes in 21 countries. The 2021 publication focuses on labor costs, indirect taxes, as well as various aspects of corporate taxation and transfer pricing. The global pandemic induced several changes to the tax systems in the region, but the brochure focuses on long term trends, as investment decisions are best supported by the analysis of trends and changes in regional tax regimes, both historically and geographically.
The list of countries in Mazars’ tax brochure has been steadily expanding in recent years, with the 2021 edition presenting data from 21 countries: besides the Visegrad Group countries, the states of South Eastern Europe, Germany, Austria, Russia, Ukraine and the Baltic states are also featured. The annual research aims to provide a comprehensive insight into the tax regimes and policies of the listed countries, so the interim tax reliefs introduced in the context of the coronavirus pandemic were not included in this year’s survey.
“Deferment of the submission of tax returns; extension of the deadline for submitting transfer pricing statements and exemption from the provisions regarding ’’bad debt relief’’ in income taxes as well as facilitation regarding the settlement of a tax loss incurred in connection with COVID are the most important solutions available under the anti-crisis shields for the taxpayers. However, the (post-covid) recession has put a strain on the budget, which is expected to be compensated by more intensive tax audits” – concluded Kinga Baran, Partner at Mazars, commenting on Poland's pandemic related interim tax measures.
In 2021, labor and wages related taxes and contributions continue to decrease, but their actual rates vary across the region. The Czech Republic returns from flat to progressive taxation, followed by, among others, Austria, Germany, Slovenia, Croatia and Slovakia. Other countries: Bulgaria, Romania, Ukraine, and Hungary, still apply flat rate income tax.
The regional average of employers’ total wage cost remains unchanged at 160 percent of net wages, but this value varies significantly across the countries. Among taxes and contributions, the ratio of employer costs to gross wages averages 15 percent, but there is a difference of more than 30 percentage points between the lowest and highest employer contributions. The two extremes (the contribution burden is below 5% in Romania and above 30% in Slovakia) also highlight the limitations of the comparability of the respective tax systems.
The countries of the region show the largest variance in their wage levels. The minimum wage in the V4 countries ranges between €400-630, is significantly lower in the Balkans and Ukraine, and remains withnocompetition to around €1,700-1,900 in Germany and Austria. By 2021, however, the minimum wage in euros has risen significantly in several countries (Bosnia, Serbia and Latvia).
The Polish minimum wage expressed in zlotys, however, significantly increased due to last year's major exchange rate shift (2 800 PLN gross, i.e. approx. 621 EUR at the beginning of 2021), which significantly improved our position among the V4 countries. There are also some forecasts that in 2022, the minimum wage expressed in zlotys will be 3 000 PLN gross, i.e. approx. 665 EUR.
The average wage level in euros increased the most in the private sector, by 14% in Germany, but also by 5-10% in Slovakia, Croatia, Latvia and Northern Macedonia. The value of the average salary in Poland changes every quarter, e.g. in May 2021 the average monthly salary in enterprises amounted to 5 637.34 PLN gross (approx. 1 249.97 EUR).
VAT and online invoicing
There was no change in VAT rates across the region over the past year, with standard VAT rates averaging at 21 percent, but showing major differences across the examined countries. The 27%, 25% and 23% standard VAT rates respectively in Hungary, Croatia and Poland remain particularly high. By comparison, in Germany, where the average wage is already close to € 4,000, the standard VAT rate is 19 percent.
Before the pandemic, governments aspired to capitalize on consumption growth, and indirect taxes became the prime sources of revenue for public budgets. As this area is the most prone to tax evasion, national tax authorities push for efficient tax collection and fight abuse with digital technology. The objective is to monitor the sales process between endpoints, detect tax evasive transactions, and curb tax fraud. The introduction of online cash registers proved to be an effective tool in whitening the economy. This will be complemented by the introduction of the mandatory online invoice data reporting system presumably starting in 2023 for B2B transactions in Poland.
The Polish e-invoicing system will be modelled after the Italian one and the bill which introduces this solution is now on the stage of issuing an opinion. E-invoice will be issued, received and exchanged through a centralized government-operated platform – the National E-invoicing System. Taxpayers choosing an e-invoice will receive VAT refund about 1/3 faster – the return period will be shortened for them by about 20 days – from 60 to 40 days.
In the first phase of implementing e-invoicing, Polish enterpreneurs will have a right to use it voluntarily. It will be one of the acceptable forms of documenting the sale, alongside with paper invoices and electronic invoices. In 2023, e-invoices will be mandatory – comments Kinga Baran. What is more, the implementation of e-invoicing system will speed up the turnover, introduce standardization and safety - the invoice will remain in the database of the Ministry of Finance and will never be damaged or lost.
The rules of international e-commerce have also been transformed from July 1, 2021. At the EU level, a significant change in VAT taxation is the extension of the OSS (Single Window System, formerly MOSS system, which was only applicable to telecommunications, radio and television broadcasting and electronic services) applicable to distance selling to private individuals in general, and to all services supplied to non-taxable entities, provided the place of delivery of the service coincides with the member state of effective use.
Corporate income tax
It remains obvious that countries in the region place a very different emphasis on the taxation of corporate revenues: there is a difference of 22 percentage points between the lowest and highest corporate tax rates. Germany has the highest corporate income tax rate (31 percent), the lowest CIT are applicable in Hungary and Montenegro (9 percent), while the mainstream corporate tax rate in the countries of the region is typically between 15-20 percent.
However, the limits of tax competition are becoming increasingly visible. On one hand, there is no country where the rate of corporate income tax would be lowered, while the European Union also actively seeks to limit tax competition. The EU’s objective is to establish a common framework for corporate taxation, or at least to prevent the most harmful tax avoidance techniques in the member states. An important tool in this effort is the Anti-Tax Avoidance Directive (ATAD, Directive 2016/1164 EC), which is mandatory for Member States from January 1, 2019. The adoption of this set of EU rules, including those on the restrictions of interest deductions, was the biggest challenge of the past years. The standardization of offshore (controlled foreign company, CFC) is also included in ATAD.
The planned introduction of a global minimum tax will fundamentally change the future of corporate taxation and the stage of tax competition between the countries.
Without exception, CEE countries applying traditional corporate taxation allow the carry-over of losses acquired in previous years and the possibility of standing these against the positive tax base of later years. Typically, this option can only be used for a predetermined period of time, usually for 5 to 7 years, in some countries only for 3 to 4 years. Currently, 7 countries allow unlimited loss carry-forward.
Regarding corporate income tax, it is worth noting that Hungary and Lithuania still do not apply withholding tax on capital income. Since 2019, group taxation has also been available in Hungary, which was previously only applicable in Austria, Poland and Bosnia and Herzegovina.
By 2021, transfer price regulations appeared in the tax regimes of almost all countries, except for Montenegro. The OECD's country-by-country reporting (CbCR), aiming at improving transparency, makes the information needed to assess tax risks available to local tax authorities.
As Kinga Baran explains, “The fact that a specific group has been affected by the risks resulting from the COVID pandemic, does not immediately mean that all entities which belong to the group bear the same degree of risk associated with it. What is more, economic consequences of COVID may oblige to update benchmarking analysis, however, sometimes the access to the data on the basis of which the analysis is to be prepared may be difficult”.
Regarding transfer prices, the biggest challenge of the past year has arguably been responding to the consequences of the global pandemic. The crisis has disrupted expected profit levels, multinationals had to change their pricing structures, and the question remains to what extent the tax authorities will accept or challenge tax bases that will be significantly lower than in previous years.
The G7’s decision to introduce minimum global taxation sets a clear path to what comes next in corporate taxation. We do not see the end of the road yet, but it is clear that there will be fewer and fewer opportunities for multinationals to use profit shifting. Poland will not support the plan to introduce a global minimum corporate tax. The basic corporate income tax rate in Poland is 19% and the government does not want to attract companies to Poland for the purposes of minimising their tax burden.
The Mazars CEE Tax Guide 2021 is available here
Renata Stefanowska, Marketing and Communications manager, Mazars in Poland
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