Financial and PR impact of the new CIT regulations 24.04.18 final

1. Webinar: Financial and PR impact of new CIT
developments in Poland
24 April 2018
Marcin Zawadzki
Marcin Jaworski
www.pwc.pl

2. PwC
PwC 2
2
Financial impact –
The background

3. PwC
Over 70%
attendees
answered that
they will affect
their business
No one
answered that
it will have no
impact
23% recognized
the new limit on
intangibles’
deductibility as
having the
greatest impact
30% were not
sure if new
regulations
will have
impact on
them
During previous webinar we asked you about potential
impact of new CIT regulations on your activity:
Is it important?
3

4. PwC 4
Limitation on tax deductibility of intangible services’ costs
Starting from 1 January 2018, the Polish Corporate Income Tax Act introduced a limitation of tax deductibility of certain expenses incurred
directly or indirectly in favour of related entities (Article 15e of the CIT Act).
Limits on tax deductibility concern expenses borne for:
• selected intangible services*. In particular: advisory, management and controlling, data processing, advertising, market research,
insurance, guarantees and services of similar nature.
• license payments for rights to selected intangible assets (including e.g. trademarks and software).
• transfer of risk connected with bad loan receivables (e.g. via insurance, derivatives, guarantees)
Restrictions apply to the excess of the above costs over the threshold of PLN 3 m plus 5% of company’s tax EBITDA which is
calculated in the following manner:
[(taxable revenues – interest revenues) – (tax deductible costs – depreciation of fixed assets and intangibles – interest cost)] = TAX
EBITDA*

5. PwC 5
Limitation on tax deductibility of intangible services’ costs
Restrictions have certain exemptions. In particular, the limit does not apply to:
• accounting, legal and recruitment services,
• transactions with unrelated parties and transactions within CIT tax groups,
• transactions covered by advance pricing agreements (APA),
• re-invoiced costs (Re-invoiced costs),
• costs of intangible services directly related to production or purchase of goods / provision of services,
• insurance and guarantees provided by certain financial institutions (e.g. National Bank, National Reinsurer Office).
Costs exceeding the above limits and – accordingly – excluded from tax deductible costs in a given year may be carried forward for
5 subsequent years.

6. PwC
Most MNCs are parties to numerous transactions with related parties
6
Impact on Companies’ CIT reconciliation
Limitation on tax deductibility of certain expenses may significantly impact taxpayers’ effective tax rate
Much more complicated tax reconciliation
Potential changes to taxpayer’s policies and agreements with related parties

7. PwC 7
Financial impact –
The questions

8. PwC
The questions
8
There is limited clarity with regard to new regulations and no tax practice as to the
ultimate approach of the tax authorities in this area.
On 23 April 2018, the Ministry of Finance issued explanations regarding how Article 15e of the CIT
Act should be applied in practice. The explanations do not have any binding protective power and
therefore cannot be seen as presenting the approach that will surely be taken by the tax authorities
in all situations.
Questions
• What types of charges are included in the limit? (1)
• What do the exemptions actually mean?
o Which costs are „directly related” to production of goods/ provision of services? (2)
o Do all kind of licenses/ royalties fall into limitation?
o What is understood by re-invoicing? (3)
• What steps to take to tackle the risks related to the new limit?

9. PwC
Please indicate which of the below
issues affects you most:
A. The scope of services which fall into the
limit is not clear for me
B. I have no clarity which „directly
related” to goods/ services are exempt
C. I do not know how to understand „re-
inovices” exempt from the limit
D. It is difficult to obtain APA and change
my contracts/ policies because it
involves liaising with HQ
E. Others

10. PwC
10
Scope of limitation – types of services
The provision specifying the types of services subject to limitation applies also to “similar services” to those listed directly in this
regulation. Generally, most characteristic features of a similar service should be the same as the service to which it is
being compared.
Question: How to determine if a service has similar features/characteristics as services listed in Article 15e and whether such
features/characteristics are dominant?
In explanations published by the Ministry of Finance, the authorities indicated that interpretation of the services definitions should
take into consideration its statistical classification, i.e. the Polish Classification of Goods and Services.
Many intangible services are at least partially similar to advisory services. The tax authorities’ practice with this regard is unclear, e.g.
in tax authorities’ view credit risk analysis should be considered as similar to advisory services.
Question: Can we base our assessment on tax authorities’ approach to understanding of „services of similar nature” for WHT
purposes? - YES
Customer service charges? Group costs allocation
(e.g. administration)?
Complex services (which are within and which out of scope)? IT services?
Management fees?

11. PwC
Exemption – costs directly related to production of
goods/provision of services
The “directly related costs” are excluded from the limit, but the CIT Act does not contain definitions in this respect. It
is not fully clear whether it must be: (i) direct costs recognized in line with Accounting Act, (ii) costs directly related to
revenue within the meaning of CIT Act, (iii) or rather it should be cost directly related to the cost of goods or services
or their price in a casual meaning.
In line with the recen Ministry of Finance explanations, the “directly related cost” should be understood as cost
“incorporated” in a product or service, i.e. a cost that affects product’s/service’s price.
Nevertheles, the tax authorities’ practice is inconsistent in this area:
• tax authorities firstly adopted approach that „directly related costs” are to be directly related to revenues
generated by taxpayer in the manner of costs of goods sold. This approach is considered very conservative
and contrary to ratio legis of new regulations.
• recently there are several individual tax rulings, where the tax authorities developed different approach, where the
direct costs are to be interpreted as costs of intangible services/ royalties purchased by taxpayer, which significantly
impact the price of the goods/services sold by taxpayers – are directly related to the goods/products.
Question: Where does the „direct relation” end? – e.g. are software licenses essential for selling directly related to the
production of goods/ provision of services if they are not included in the goods/services price and not included in the
procuct?
11

12. PwC
Exemption – Costs re-invoiced by taxpayer
12
Article 15e of CIT Act refers to VAT Act, with reference to costs re-invoiced by taxpayer: If the taxpayer, acting in his own
name but on the behalf of a third party, participates in the provision of services, it is assumed that this taxpayer himself has
received and provided these services.
Please note, the CIT Act does not directly stipulate whether this exemption applies to a situation where the taxpayer receives
re-invoice.
In explanations regarding Article 15e, published by the Ministry of Finance on 23 April 2018, the authorities stated that this
exemption relates to services re-invoiced by the taxpayer (e.g. acquired by a shared service centre and further invoiced to
other related entities). However, there are arguments supporting standpoint that costs of re-invoiced services previously
acquired from unrelated entity should be recognized as exempt from the limitation.
We are aware of a recently issued tax ruling, where tax authorities agreed with above-mentioned approach.
Question: if re-invoicing party imposes a mark-up on goods/services acquired from unrelated entity – would this re-invoice
be exempt from the limitation for the taxpayer?

13. PwC
PwC 13
13
Financial impact –
The actions

14. PwC
Which steps have you already
taken?
A. I verified the scope of the transactions
which may be subject to limitation
B. I applied for individual tax ruling
C. I started the APA process
D. I am negotiating/changing
intercompany agreements
E. Others

15. PwC
What are the potential action steps?
15
1. Review
of transactions
2. Tax and statistical
rulings or defence
files
4. APA – „current”
or simplified
3. Changing
group documents

16. PwC
Exemptions from the limitation - Advanced Pricing
Agreements (APA)
16
What is APA?
• Formal agreements in the
matter of establishing
transaction prices between a
taxpayer and a tax authority
• Contract concluded between
the taxpayer and the tax
authority, in which the body
accepts the choice and manner
of applying the method of
determining the transaction
price used in the relations of
the taxpayer and its related
entities form of an
administrative decision, the
competent authority for its
conclusion is the Minister of
Finance
How APA works?
• Very formalised process
• Cost inneficient: up to PLN
200k
• Lengthy procedure (up to 3
years)
What will change?
• The Ministry of Finance currently works
on „simplified APA”:
• APA is to be based on taxpayer
statements, a standardized application
and real data (which means resignation
from the obligation to indicate financial
forecasts and introduce critical
conditions)
• The procedure is to last 3 months with
the possibility of its extension
• By itself the decision is to apply for three
years, also with the possibility of its
extension
• The fee for the simplified APA application
is to be set at one fixed level

17. PwC
PwC 17
17
PR impact –
Tax transparency

18. PwC
Tax transparency.What it is?
Advanced pricing
agreements
Taxpayers have possibility to
confirm with authorities a
methodology of making
settlements with related parties
Tax rulings and tax
explanations
Taxpayers have possibility to
ask for interpretation of the
law; Ministry of Finance
provides general explanations
on regulations
Protective opinions
Taxpayers have possibility to confirm
whether a certain transaction meets
criteria for application of the GAAR
clause
• Tax transparency is a trend
• Tax transparency is a bundle of heavy and soft measures aimed at increase of
visibility and mutual confidence of taxpayers and tax administration
• Tax transparency is an element of the risk management procedure that
increases level of certainty with respect to behavior (attitude) of tax authorities
Measures increasing tax transparency applied so far in Poland:
These measures are limited
and do not increase level of
mutual transparency to
expected level
18

19. PwC
Tax transparency - new measure
19
To reveal tax data of major
Polish taxpayers for several
years back
Since January 2018, the CIT regulations have been amended; under the
amended provisions, tax data of major taxpayers (CIT-payers with annual
revenues exceeding EUR 50m and tax capital groups) will be revealed and
published by the Ministry of Finance (for non-expired years)
Tax data subject to publication: tax revenues, tax deductible costs, taxable
income, tax base, tax paid and ETR
Subject to publication will be tax data since January 1, 2012; according to
press release from the Ministry of Finance, in April 2018 tax data for 2012 –
2016 should be made public and in Q3 2018 data for 2017
! The amended regulations are applicable only to CIT-payers

20. PwC
Obligation to publish tax strategy for
selected companies (threshold set at
revenues)
The strategy should include tax risk
management methodology, way of
taxation in the UK and tax planning
Obligation for publication of
information on major taxpayers: tax
identification number, tax revenue,
taxable income, tax paid
Voluntary Tax Transparency Code (TCC)
is a set of rules and guidelines for major
entrepreneurs and SMEs; it is voluntary
to implement this code by the business
Tax transparency in Scandinavia is well-
established; tax data of taxpayers – in
many cases – are made available in tax
offices and everyone can review it
20
Tax transparency - this is not a novelty

21. PwC
Source: PwC UK: Tax Transparency – A new era? Trends in voluntary reporting, fourth edition
Significant increase of
publications on tax
management in 2016
(almost 20% gain)
In 2016 almost 70
businesses published their
tax strategy (increasing
trend)
Why does the taxpayer decide
for publication of its tax data?
• To underline its contribution to
the society which is much
broader than CIT payment
• To show how the taxes impact
its business
• To effectively communicate
with the investors and show
that tax matters are under
control
In 2016 about 20
companies explained
differences between
financial and tax results
Almost 50 companies (in
2016) revealed
information on how
much they give to the
environment
21
Tax transparency. How they make this in the UK?

22. PwC
1 Increase of tax transparency should lead to self-control of the market with respect to tax obligations
Instead of heavy tax audits and tax controls, the administration seeks fora situation where taxpayers want to
be transparent and explain their tax position (because they are subject to soft control of public opinion and
their business partners)
Increase of tax transparency should mean decrease of tax burdens and promote taxpayers who follow the
trend
2
3
22
Tax transparency - reasoning the tax transparency

23. PwC
PwC 23
Tax transparency
creates an interest
of the public
opinion (self-
control measure)
Tax position of the business is subject to discussion in many countries –
control made by the public opinion is an element of soft impact of authorities
on taxpayers
23
(Guardian)
(Financial Times)
(Politico)

24. PwC
PwC 24
Tax transparency is
a multidimensional
phenomenon
Low amount of CIT paid does not necessarily mean that a taxpayer is
avoiding or evading tax; it could be an effect of its business profile or
business opportunities taken in a certain year
Tax data to be revealed does not consider many factors, such as macro
environment and legislative changes (e.g. increase of labor cost or
acting through partnerships)
Desultory interpretation of this data could lead to incorrect conclusions
regarding impact and contribution of a taxpayer to the society and
environment
24
Tax transparency
Lesson learnt
Focusing only on CIT position of
the taxpayer could lead to
incorrect conclusions over
situation and approach of the
taxpayer

25. PwC
CIT is commonly used by the legislator to promote certain behavior or action among
taxpayers, e.g. R+D incentive, SEZ credit or tax loss utilization
Due to certain differences in recognition of revenues and costs for financial and tax
purposes (e.g. with respect to interest, provisions, intangible services or asset
depreciation) taxable income could be unusual from the financial one
ETR, i.e Effective Tax Rate (tax in financial statement to gross profit), being a measure
of tax effectiveness of a taxpayer, is frequently different than the standard CIT rate
Total impact or contribution of a taxpayer to the society and environment should be
assessed taking into account its business model, business goals or realization of
expectations set by the legislator to taxpayers (e.g. by providing certain CIT exemption
or allowances in exchange for proper behavior)
25
Tax transparency
Why CIT is not a key assessment factor?
Innovative taxpayers could pay
no CIT (due to CIT allowance)
and – at the same time – create
many workplaces / export
know-how

26. PwC
Inflows (State Budget) - 2016Inflows (State Budget) – 1H 2017
26
Tax transparency - CIT impact on the Polish State Budget
excise tax other excise tax other

27. PwC
Source: Taxation Trends in the European Union. Data for the EU Member States, Iceland and Norway. 2017 Edition
23%
18% 20%
13%
19% 21% 25%
15%
19%
20%
18%
22%
29% 25%
19% 22%
32%
24%
14%
13% 13%
37% 34%
16%
39% 39% 29% 34%
6% 7% 11%
6% 6% 8% 4%
France Spain Ireland Germany Poland Romania Hungary
other VAT PIT social security CIT
27
Tax transparency. CIT impact on the EU Member States’
budgets

28. PwC
Taxpayers could expect – in
exchange for their
transparency – an increase
in tax protection and
reduction of tax burdens
Critical goal of each
administration is to find a
happy medium between tax
burdens associated with
entrepreneurs and boosting
their growth; tax
transparency seems to be a
non-invasive measure
aimed at finding this
medium
Transparency of taxpayers
should lead also to
transparency of
administration; this trend
in Poland would only make
sense if it leads to a
situation where relations
between a taxpayer and
administration are
„horizontal” (not „vertical”)
Contribution of a certain
taxpayer to the society or
environment should not be
considered only based on
its CIT data; broader view
on the profile and activity
of the taxpayer is required;
public opinion and
administration should be
able to understand this
contribution
28
Tax transparency. Challenge or opportunity?
Transparency of taxpayers
should be rewarded by the
administration

29. PwC
Contract / mediation with administration
New Tax Ordinance provides for a legal possibility to conclude
a contract with the administration over taxation of certain
events or operations.
Horizontal monitoring
It is considered to implement horizontal
monitoring, i.e. a way of „protected”
cooperation / communication of
taxpayers with the administration (KAS
strategy for 2017 -2020).
Certification by a tax adviser
It is considered to appoint tax advisers to efficiently control
taxpayers settlements (in a way acceptable by the
administration).
Ministry of Finance considers implementation of additional benefits for
taxpayers being transparency
29
Tax transparency.What the market can expect?
Potential reputational or
business risk can be turned
to a chance for burdens
dropping and increasing tax
safety

30. PwC 30
Contact details:
Marcin Zawadzki
Senior Manager
Tel. 510 20 1321
marcin.zawadzki@pwc.com
Marcin Jaworski
Senior Manager
Tel. 502 18 48 38
marcin.jaworski@pwc.com
© 2018 PricewaterhouseCoopers Sp. z o.o. Wszystkie prawa zastrzeżone. W tym dokumencie nazwa „PwC” odnosi się do podmiotu lub podmiotów wchodzących w skład sieci PwC, z
których każda stanowi odrębny i niezależny podmiot prawny. Dowiedz się więcej na www.pwc.com/structure
W PwC Polska naszym celem jest budowanie zaufania wśród społeczeństwa i odpowiadanie na kluczowe wyzwania współczesnego świata. Jesteśmy siecią firm działającą w 157 krajach.
Zatrudniamy ponad 208 tysięcy osób dostarczających naszym klientom najwyższą jakość usług w zakresie audytu, doradztwa biznesowego oraz doradztwa podatkowego i prawnego.
Poznaj szczegóły na www.pwc.pl.