The problem of VAT non-compliance in Poland
“VAT Gap in Poland grows rapidly, and budget revenues from VAT remain unstable. It is possible to gradually reduce the VAT gap and maintain it at low level, but it takes time. However, a complete elimination of the GAP is impossible, because a certain part of VAT non-compliance has a “natural” character. The fight against shadow economy, tax fraud, tax avoidance and evasion is very difficult.” said Grzegorz Poniatowski, a senior economist at CASE and author of a report for the European Commission about the VAT Gap in the EU, during the 143rd mBank-CASE Seminar “The problem of VAT incompliance in Poland”.
VAT Gap – a problem across the EU
In the last few years, VAT non-compliance became a hot topic in the European Union. According to estimates published by the European Commission, a VAT gap, i.e. a difference between the expected VAT revenues and the actual VAT collection, amounted to 168 billion euros in all Member States in 2013. Unfortunately, Poland has a big part is this pie with a gap of 42 billion PLN.
What currently affects Polish economy is a much greater volatility of VAT revenues than of the GDP and its base, i.e. final consumption. VAT revenues represent the largest portion of budget revenues (about 40 per cent, which is roughly 7 per cent of GDP). As Poniatowski pointed out, between 2001 and 2014, the annual changes in VAT revenues ranged from -6.6 to 17.1 per cent in real terms. In the indicated period, revenues from VAT increased significantly only in 2011 and 2014.
How to cheat the tax authorities?
There are many components and activities that affect the compliance of VAT in Poland. These include, among others, frauds and criminal procedures (like missing traders or VAT carousel), tax evasion, smuggling, tax avoidance, various types of errors or natural bankruptcy. Missing trader procedures amounted to even 11 percent of the total VAT gap in Poland in 2013. The largest part of the gap results from the overstatement of VAT by the use of unauthorized invoices (32 per cent in 2013, or about 13.5 billion PLN). Other positions are: smuggling of excise goods (6 per cent of the gap), abuse of tax exemption (3 per cent.), errors (7 per cent.), and the remaining part of the gap (worth about 17 billion PLN) that includes other segments of shadow economy.
How to fight against tax fraud?
The elimination of only one of the above-mentioned problems can not guarantee a success. It is necessary to build a system in which cheating does not pay off. Dr. Jaroslaw Neneman, a former deputy minister of finance, indicated a number of solutions, which would significantly improve the system of VAT collection in Poland. These include a reverse charge, divided payment, or the liquidation of quarterly settlements in favor of monthly ones. As dr. Neneman emphasized, the fight against VAT criminality is possible by sealing of the system, but there is a need of a close cooperation between different services in the country.
“Today the climate in Europe is quite different. The wave of limited acceptance for practices involving tax abuse is reaching our country.” said Tomasz Michalik, Partner and Tax Advisor at MDDP. He stressed that it is necessary to maintain a balance between ensuring a proper budget revenues and supporting standards of freedom across the EU. The European Commission currently conducts a number of activities in order to combat tax crimes. One of the most important project concerns a taxation of Intra-Community Supplies.
The presentations stirred up a lively discussion featuring Konrad Raczkowski, Undersecretary of State in the Ministry of Finance, Maciej Grabowski, a former Minister of Environment, and Izabela Leszczyna, Member of Parliament and former Secretary of State in the Ministry of Finance. Attendants drew attention to the problem of VAT multidimensionality and to the various ways of interpreting VAT gap components. Currently, the Polish Ministry of Finance is planning to implement a new strategy based on three main pillars: centralization of tax and customs administration, improvement of IT tools and legislative changes.