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Withholding Tax in Practice: Interpretive Discrepancies and Evolving Approaches

FINANCEWithholding Tax in Practice: Interpretive Discrepancies and Evolving Approaches

According to the assumptions outlined in Poland’s Polski Ład legislation, the assessment of the new pay-and-refund mechanism for withholding tax (WHT) should take place three years after its introduction into the Polish tax system. However, the practical application of these regulations shows that businesses continue to face significant challenges, including issues related to the definition of the beneficial owner and the obligation of due diligence.

In its latest report, “The WHT Pay-and-Refund Mechanism: A Three-Year Review of Tax Reform,” KPMG provides an in-depth analysis of the implementation stages of this mechanism and summarizes the key challenges faced by Polish payers and foreign taxpayers affected by WHT.


Expanding the Definition of Beneficial Owner

One of the early challenges in the area of withholding tax was the broadening of the definition of the “beneficial owner” in 2019. This expansion significantly increased the scope of information that payers must possess before making payments subject to WHT. Consequently, the definitions in Poland’s Personal Income Tax (PIT) and Corporate Income Tax (CIT) acts became more complex, making compliance more difficult for payers.

This complexity has also heightened the risk of divergent interpretations by taxpayers and tax authorities. According to Michał Niżnik, Partner in KPMG Poland’s International Tax Team:

“The expanded definition of the beneficial owner increased the likelihood of differing interpretations by Polish payers and tax authorities, leading to uncertainty in applying the regulations.”


Key Challenges for Payers and Taxpayers

Despite being in effect for over three years, the WHT pay-and-refund mechanism remains fraught with interpretive and practical uncertainties. These include:

  • Defining the beneficial owner: This involves assessing their proper business substance.
  • Meeting the due diligence requirement: Payers must collect and verify extensive documentation to comply with expectations set by tax authorities.

Although Poland’s Ministry of Finance has issued draft tax clarifications, these documents are not legally binding. However, they have influenced the interpretive practices of tax authorities and administrative courts.

Payers face particular challenges with the vague definition of due diligence. The second draft of clarifications, released in 2023, introduced requirements perceived as either overly burdensome or unclear. As Niżnik explains:

“Striking a balance is essential, allowing payers to fulfill their obligations while protecting their organizations from potential sanctions.”


Implementation Challenges

Since its introduction in January 2019, the WHT pay-and-refund mechanism has undergone a phased implementation. However, the Ministry of Finance has yet to issue binding clarifications for its application. In the absence of clear guidelines, tax authorities have issued individual interpretations and decisions, while administrative courts have ruled on WHT disputes.

Over the years, this has led to inconsistent interpretations and practices. Draft clarifications have often raised more questions than answers, further complicating the application of WHT rules.


Practical Issues and Statistics

Statistics from the Lubelski Tax Office reveal a yearly decline in applications for opinions on the use of tax preferences. In 2022, approximately 650 applications were submitted, compared to nearly twice as many in the mechanism’s first year.

As Sabina Sampławska, Partner in KPMG Poland’s International Tax Team, notes:

“In the initial years, the Lubelski Tax Office was not prepared for the challenges posed by the pay-and-refund mechanism. Although staffing and resources have improved, significant backlogs remain, with some cases taking over 12 months to resolve.”


Controversies Around the “Look-Through Approach”

Another contentious issue in WHT involves the “look-through approach,” which allows tax preferences to be applied to entities further down the payment chain, provided they are the true recipient of the income and meet other conditions.

Initially supported by the Ministry of Finance in its 2019 draft clarifications, this approach was reflected in subsequent interpretations by tax authorities. However, the Ministry shifted its stance in the 2023 draft clarifications, rejecting or limiting the applicability of this concept.

According to Sampławska:

“The ‘look-through approach’ highlights the volatility of tax law. Even without legislative changes, interpretations can shift dramatically, creating uncertainty for businesses.”


Insights from the KPMG Report

KPMG’s report, “The WHT Pay-and-Refund Mechanism: A Three-Year Review of Tax Reform,” provides a comprehensive analysis of the challenges and solutions related to WHT. Key topics include:

  • Due diligence obligations for payers.
  • Tools to bypass the pay-and-refund mechanism, such as opinions on tax preferences and payer declarations (WH-OSC).
  • Additional criteria imposed by tax authorities for applying exemptions or preferences.
  • The role of EU directives, including the FASTER and Unshell directives, in shaping Poland’s WHT system.
  • Recommendations for regulatory improvements.

The full report offers valuable insights for organizations navigating WHT compliance in Poland.

Source: CEO.com.pl

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