INSIGHT: Poland to Introduce Mandatory VAT Split Payment Mechanism

The split payment mechanism was introduced in Poland on July 1, 2018. Initially it was voluntary—the purchaser could freely decide whether to use it or not. If they did decide to then the tax risks for the purchaser were significantly limited, if it turned out that they were unintentionally involved in tax fraud.

However, after receiving the consent of the European Commission on February 18, 2019, the Polish government decided to introduce the mandatory split payment mechanism for certain value-added tax (VAT) payers from September 1, 2019. This comes as a surprise because the government claimed in its original announcement that the split payment mechanism would not be mandatory until 2020.

How Does it Work?

The split payment mechanism requires every entrepreneur to hold two bank accounts. The first is a standard settlement account and does not differ from an ordinary bank account. For every such account a special VAT account is opened automatically by a bank, without even applying for it. This VAT account is owned exclusively by an entrepreneur. Nonetheless, the disposal of cash accumulated on this VAT account is significantly restricted.

When a purchaser wishes to pay an invoice covered by the split payment mechanism, he must choose a certain transfer sheet. It includes some additional data, i.e. information that the payment is going to be settled in the split payment mechanism, as well as the invoice number, contractor’s VAT ID and the amount of VAT to be paid. Based on the information provided, the bank automatically splits the singular payment to the “standard” bank account and the “special” VAT account.

As already mentioned, in general, the funds on the VAT account are owned by the taxpayers; however, they have only restricted ability to dispose of the amounts received on their VAT account.

What can these funds be used for? Firstly, taxpayers may use them to pay the amount of VAT from the invoices they received to their contractor’s VAT account. Also, those funds may also be used to pay other tax obligations, including VAT, as well as most other taxes (e.g. the income tax) and social security contributions.

Finally, funds from the VAT account may be transferred to a standard bank account. This might appear to be obvious, since these funds are the taxpayer’s property. However, those funds belong to the taxpayer only in theory. In practice, to obtain the cash from the VAT account and use it for purposes other than paying the VAT or the due tax, the owner of that account must submit a formal request to the Tax Office, which might be denied by the tax authorities.

An extensive list of reasons to refuse such a refund can be found in the VAT Act. Many taxpayers fear, however, that the tax authorities may interpret that list rather freely.

Who is it Mandatory For?

The split payment mechanism will be mandatory if all the following conditions are met:

• the mechanism applies to business-to-business (B2B) transactions only if those transactions are subject to VAT in Poland;
• the statutory threshold of transaction value has been set at 15,000 złoty ($3,993);
• the split payment mechanism only applies to certain types of goods and services.

The last two conditions are somewhat tricky. The threshold of 15,000 złoty does not refer to the amount resulting from a single invoice paid but rather the transaction in its economic sense (which can be documented by several invoices and can be spread over several payments).

What is important is the mechanism will obligatorily be applied to 150 products and services groups described in the attachment to the Polish VAT Act.

As a rule, the following groups of goods and services will fall under the mandatory split payment mechanism:

• steel products, precious metals, non-ferrous metals;
• waste, scrap, recyclable materials;
• electronics, such as: processors, smartphones, phones, tablets, net books, laptops, game consoles, inks, toners, hard drives;
• fuels and oils for cars;
• greenhouse gas emission rights;
• construction services;
• coal;
• car and motorcycle parts.

Provisions listing those types of goods and services refer to the Polish Classification of Products and Services (PKWiU) from 2008 rather than to the CN classification. Thus, in practice, it may be problematic for foreign entities to verify if the goods and services they sell in Poland are covered by the split payment mechanism or not.

However, even if none of the three conditions are met, the split payment mechanism may be applied voluntarily. The buyer may freely decide that they want to use it. While the availability of such an option may be surprising, the split payment mechanism gives certain benefits to the purchaser. If the mechanism is applied (voluntary or not) joint and several liabilities of the buyer for tax debts of the vendor are excluded. This significantly reduces the tax risks on the side of the buyer if it turned out that he was unintentionally involved in tax fraud.

Planning Points

There are two main issues that should be acknowledged by foreign businesses before the described changes come into force.

The VAT bank accounts are opened for free and with no application for all entrepreneurs who have bank accounts in a Polish bank. But this opportunity will not be available for banks from other countries. So, those who are doing business in Poland and may potentially be covered by the new provisions should open an account in a Polish bank (if they have not done so yet).

In addition, the planned provisions impose obligations to include special information on the invoices documenting transaction covered by the mandatory split payment mechanism. Such an invoice must contain the expression “mechanizm podzielonej płatności.”

Furthermore, it comes as no surprise that the government has also prepared tolls to penalize those who avoid the mandatory split payment mechanism. There are many circumstances where a penalty will be imposed: for example, issuing invoices without the mandatory notification that the split payment mechanism should be applied. Purchasers may also be penalized if they pay an invoice without applying the mandatory split payment mechanism.

Despite the potential penal fiscal responsibility, the tax authorities may also levy the penal tax. Initially, it was planned that the penal tax would be equal to 100% of the VAT amount which should be paid with the described mechanism. However, under the influence of remarks submitted to the draft act, this rate will most probably be limited to 30% “only.”

In summary, the mandatory split payment mechanism is a major challenge for multinationals doing business in Poland, as it may have a significant impact on the cash flow of these entities. Additionally, urgent action may be required, i.e. setting up a bank account in Poland and adopting invoicing systems used.

Piotr Wyrwa is a Tax Supervisor at RSM Poland.