Around the world, traditional taxation processes and systems are undergoing transformation. In an effort to close tax gaps and reduce value-added tax (VAT) fraud as they look to reclaim money owed to them, a growing number of tax administrations are introducing new e-invoicing, e-reporting and storage requirements.
Inspired by the success of initiatives undertaken by countries in Latin America almost two decades ago, governments have since been embracing continuous transaction controls, such as making electronic invoicing mandatory for businesses and introducing real-time reporting requirements. In line with this rise in e-invoicing, there has been an increasing need for tax administrations to carry out electronic audits.
The adoption of the Standard Audit File for Tax (SAF-T), a methodology designed to allow more effective and efficient audits by providing authorities with easy access to the data they need in an easily digestible format, has been widely encouraged, particularly throughout Europe. In Poland, for example, which has seen the largest implementation of SAF-T, it has been mandatory for large companies to file monthly returns in the format since July 2016, and since 2018 for all companies.
Poland is due to expand its SAF-T system this year into an enhanced version of the scheme, making it compulsory for all the country’s taxpayers. But it’s not stopping there. The Polish Ministry of Finance recently announced plans to implement a centralized e-invoicing platform. And these plans are justified. Since it began transforming its taxation systems, Poland has significantly reduced its VAT gap from 24% in 2015 to 12.5% in 2017, and is on track to reduce it even further.
JPK: the Old System
With the introduction of a more detailed form of SAF-T, Poland has become one of the first European countries to move away from the traditional VAT return. An expansion of the existing SAF-T system, known as JPK (Jednolity Plik Kontrolny)—which has been in use in the country since 2016—will become mandatory for all taxpayers in Poland from July 2020, following an extension of the implementation deadline motivated by the Covid-19 crisis.
Currently, all VAT-registered businesses in Poland need to submit monthly SAF-T reports, or JPK_VAT, as well as monthly or quarterly VAT returns. These JPK_VAT reports must include all the information that a company keeps in its records concerning its transactions, and need to be submitted to the tax authorities in a prescribed XML format. Furthermore, the accompanying VAT returns should contain the sums of various kinds of transactions, as well as the total amount of VAT to be paid, refunded, or carried forward to the next period.
In addition to these periodical reporting requirements, businesses must also be prepared to respond to various requests from the tax authorities during audits, tax proceedings, and verification activities. Businesses may, for example, be asked to transfer various accounting JPK structures such as:
- JPK_KR, which includes data from a company’s main trial balance and general ledger journal;
- JPK_WB, which includes bank statement balances and other detailed records from the taxpayer’s accounts; and
- JPK_FA, which is used for reporting information concerning sales invoices for a given period.
But this is all about to change.
What’s Next for JPK?
Now being enforced in July 2020, the enhanced JPK_VAT structure, known as “JPK with declaration,” is a periodical filing requirement which includes all the information already contained within the combined JPK_VAT report and VAT return. The main difference between the new format and the original JPK_VAT is the inclusion of new fields for the addition of a company’s VAT return information; sufficient information to meet all periodic data requirements, according to Poland’s tax authorities.
Eliminating the need for the various attachments required when submitting a traditional VAT return, the new “JPK with declaration” undoubtedly makes the reporting process far simpler and less cumbersome. At the same time, however, it does introduce new reporting obligations. Additional settlement data is now required across a variety of specific transaction types, for example, while a series of codes have been added that make it easier to identify transactions of various goods and services.
As before, taxpayers need to submit the new “JPK with declaration” to the authorities on a periodical basis. Those who file monthly must submit version JPK_VAT7M, for example, while those who file quarterly must use JPK_VAT7K instead. Failure to meet these submission deadlines comes at a cost, and can be met with a hefty fine based on increased interest rates proportional to the unpaid VAT.
Further, the Polish tax authorities have proven to be just as strict when it comes to meeting content requirements, applying financial penalties for every error and missed obligation contained within the new file. The number of tax audits using SAF-T has also increased substantially since the introduction of the new system.
Given the need to meet the submission deadlines and the required accuracy of the new SAF-T VAT report—not to mention the increasing number of requests for additional accounting SAF-T reports—businesses in Poland must quickly adapt to the new expanded electronic reporting systems, or face the consequences. And if this did not present enough of a challenge, Poland’s taxpayers will soon be presented with further changes to the country’s taxation system.
The Next Step
Even before the expanded SAF-T reporting system had come into force, the Polish government announced a new, more far-reaching plan—the introduction, by 2022, of a centralized e-invoicing system built around an online exchange platform.
According to Poland’s Minister of Finance, the initiative will begin with a pilot project, in which e-invoicing is made mandatory in public procurement only, with the possibility of being expanded to business-to-business transactions in 2022, although initially on a voluntary basis.
A range of different approaches to introducing e-invoicing in the country is currently under consideration, including an exchange platform via which suppliers and buyers will be able to exchange structured invoices electronically. A similar scheme has been employed with considerable success by Italy’s tax authority, whose clearance system requires businesses to exchange their invoices through its central SDI (Sistema di Interscambio) platform or face substantial financial penalties. Through the SDI platform, the Italian tax authority performs technical checks on the content of the e-invoice, pre-authorizes the issuance (“clears the invoice”), and makes it available to the buyer, controlling all the steps from the creation to the receipt of the document.
Unlike Italy, though, Poland is still a “post-audit” regime. It allows the use of electronic invoices—buyers must agree to receive invoices electronically, and the issuer is obliged to comply with certain requirements, such as ensuring the integrity of the invoice’s content, its legibility, and the authenticity of its origin—but the tax authority has no direct involvement in the transactions themselves.
While the exact details are not yet available, it is expected that the new e-invoicing system will more closely involve the Polish tax administration with the invoice issuance process. In doing so, it will move the country from a post-audit to a clearance tax regime, with the greater economic transparency and control that this brings.
The new scheme represents benefits for both businesses and government alike. The transmission of data will be far quicker, for example, and will require no additional input from businesses. The tax authority already holds all the taxpayer data it needs, as it is collected through the submission of JPK reports. But, by communicating that data to the tax authority in real time, the e-invoicing system will significantly enhance the efficiency of the tax system.
Businesses will benefit from the simplification and enhanced security of a centralized, standardized e-invoicing system. And with the ability to download all invoices issued to them from a centralized storage repository, buyers will enjoy greater oversight of the entire value chain. It is hoped, too, that if the new initiative is implemented successfully, it will spell the end of the periodic JPK returns, leading to a welcome reduction in the administrative burden currently borne by the country’s taxpayers.
Returning to Italy as an example of a country that is leading the way in Europe when it comes to successfully embracing continuous transaction controls (CTCs), it is worth considering how it actually approached the situation. In September 2017, Italy submitted a formal request to the European Commission for derogation from two provisions in the EU VAT Directive—a formal hurdle and legal necessity that would allow it to roll out its ambitious e-invoicing mandate. By following Italy’s example and, indeed, explicitly acknowledging it as a successful model, it would not be surprising to see Poland’s Ministry of Finance take a similar course of action in the near future.
Whatever that future holds—and only time will tell how successful the country’s e-invoicing endeavors will be—it is certain that Poland’s taxpayers are in for a period of disruption. The efficiency, transparency and security benefits it represents may be considerable, but so too are the consequences of non-compliance. At the same time as they adjust their reporting systems and processes to the requirements of “JPK with declaration,” the new SAF-T reporting format, so too must businesses prepare for the introduction of mandatory e-invoicing, and everything that entails.
Given the current global economic crisis, a more accurate and real-time view of how Covid-19 is impacting the economy could also be in reach with the use of such transparent tax controls.
Poland is the latest country in Europe to unlock the benefits of introducing CTCs—further closing its, already impressive, VAT gap. And as it does so, its taxpayers need to ensure they are ready for change.
Gabriel Pezzato is Regulatory Counsel at Sovos.
The author may be contacted at: email@example.com
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.