A change for the worse?

This year’s parliamentary elections in  Poland generated a great deal of excitement because changes were expected in the country’s government, which for eight years had been a coalition of Civic Platform and the Polish Peasant Party. Such expectations turned out to be more than justified, when on October 27th it became clear from the official results that Law and Justice had an absolute majority of seats and could rule alone.

New road

This is the first time such a situation has occurred since democracy was reintroduced to the country in 1989. Thanks to its decisive victory, the Law and Justice party can hold power on its own, which means a strong mandate for governing and considerably streamlines the implementation of its own ideas. This is why today we are asking real estate experts and players about the likely impact of the change in government on the sector. “As in any new situation changes involve a certain degree of uncertainty and nobody can really predict how certain measures will translate into investor or market behaviour. However, Poland is undoubtedly integrated into the reality of the European Union and regardless of the political changes, this guarantees the country a considerable degree of certainty, which is the most important thing for the economy,” believes Daniel Bienias, the managing director of CBRE in Poland. “We do not expect there to be any sudden changes; however, all the moves of the new government need to be closely observed, so we can try to forestall any ideas that could stop the development of the market in any way, through cooperation with real estate market organisations,” he cautions.

The market does have certain expectations of whoever governs Poland, connected with issues that directly concern the real estate sector and have an impact on the country’s economic development. “To the list of demands, another three could be added: a strategic approach to the support system for investors that create jobs, both foreign and local ones, which could increase Poland’s competitiveness across Central Europe; clear and transparent principles for the investment process, obtaining building permits and speeding up the creation of development plans; a greater ability to make decisions and the greater cooperation of municipal authorities in the urban development process; and the planning and Tomasz Trzósło, the managing director of JLL Poland, adds: “I hope that the new government will look favourably at the issue of regulating REITs in Poland. The introduction of measures concerning this issue could attract direct real estate capital to the Warsaw Stock Exchange, which would be to its great benefit.” In his opinion, real estate market-related services also deserve a mention. “Another issue is the legal and tax systems for the business services sector in Poland. As we know, this industry has generated more than 150,000 jobs in the country and in order to develop further it needs legal and tax regulations that make it possible to attract fund management companies to Poland – and not only real estate funds!. The know-how and specialised staff are already in place in Poland, but legal changes are now needed,” claims the head of JLL Poland.

Towards Budapest?

The new government’s plans for the retail sector have evoked a slightly different reaction from market players. One of the election promises of the Law and Justice Party in the election campaign was the introduction of a sector tax on large-format retail – its most controversial pledge as far as the real estate sector is concerned. A draft bill of September 15th entails a tax for companies operating large-format stores, which are defined as those with areas in excess of 250 sqm. However, the proposal is swathed in a great deal of uncertainty. The new tax was initially supposed to apply only to foreign chains and its main targets were to have been hypermarkets. However, in the draft bill there is no distinction drawn between Polish and foreign enterprises. The draft also includes two variants for calculating the tax. The first involves a 2 pct retail tax on the tax base, i.e. the turnover. The second variant introduces a tax scale (see the chart below). In this version the tax is charged on the tax base for quarterly periods.

All of these proposals are currently in their draft form, with the final shape of the so-called hypermarket tax still being worked on.

Retail organisations have reacted quickly to the prospect of such taxes by comparing them to policies that have been implemented in Hungary. The ‘Retail Trade Market in Poland. Potential Consequences of Introducing Hungarian Regulations to the Polish Retail Chain Market’ report was published in May 2015 by PwC at the request and with the cooperation of the Polish Trade and Distribution Organisation. The report warns against the introduction of measures based on those currently in place on the Hungarian retail market. “The scope for implementing Hungarian regulations is subject to the size of the chain’s sales or the size of the stores. Three entail a direct financial burden for the owners of the businesses and they apply subject to the revenue of a given chain. These are: the so-called ‘crisis tax’ (which has been in force since January 2013), the advertising revenue tax (or ATA), and a progressive fee for ‘food control’,” reads the report. Furthermore, in Hungary retail has been outlawed in large-format stores on Sundays since March 2015 and there are also limitations with regard to the construction of such stores in protected areas and a requirement to obtain additional permits for their construction in other locations. The authors of the report stress that the direct impact of taxes and similar fees to those adopted in Hungary over the last few years could equal charging the retail sector PLN 2.5 bln per year. “For the 17 retail chains with revenues in excess of PLN 500 mln, the additional impact of taxes on their financial results, excluding other factors, would result in reducing their profits almost to zero (…) from around PLN 2,200 mln to about PLN 31 mln,” reads the report. Meanwhile, the restrictions on Sunday trading could result in sales revenue falling by app. 5 pct i.e. from PLN 230 bln to
PLN 218 bln.

The retail sector’s worries are almost tangible, so we asked who those know the market best to comment on the draft of the resolution for large-format retail.

Maciej Krenek

managing director, Re Projekt Development

In my opinion, a retail tax based on turnover calculated on a sales basis is a consumption tax, because it is ultimately paid for by the consumer purchasing the goods. The act will do nothing to reduce the transfer of revenues abroad. It will lead to the implementation of certain structures or reductions in areas leased and the scope of products offered by some enterprises in order to avoid paying the retail tax. I do not like the idea that by limiting your range of products (which will mean a smaller sales area), you will be exempt from paying the tax on retail. I do not like the fact that by having a broad range of products (and as a result a larger sales area) and generating high turnover you will be punished with an additional retail tax. I do not like the introduction of such regulations that distort the retail market. Ultimately, it will be the consumer who will have to pay all these additional fees.

In the draft bill a large-format store has been defined as one with a sales area of more than 250 sqm, in line with the planning and spatial development act, which defines the sales area as the section of a retail facility constituting its technical and useable area designated for direct retail sales. Such a definition will lead to many disputes and differing interpretations. After all, in the past the sales area was only defined as the area around the cashiers, while the rest of the space was classed as a display and communication area. Is it worth returning to this classification? A definition for large-format stores as having an area in excess of 250 sqm is not consistent with the repealed act on Large Format Facilities or the act on planning and spatial development. Another plank of the bill is that quarterly turnovers in excess of PLN 2 mln will be introduced, which a shop operating over an area of more than 250 sqm would have to reach in order to be subject the retail tax. This can be interpreted in the following way. If you are resourceful, have a broad range of products and operate your business well, you will be liable for an additional public duty, 50 pct of which will support the budget of the administrative district where a given retail facility is located while the other half will go to the state budget. The act does not define the purpose of the duty fee, so it will probably be used to generally patch up gaps in the budget. What about stores that operate over areas of less than 250 sqm? According to the act, even if they have astronomical turnover, they are not subject to the retail tax. What about stores that do not have quarterly turnovers of over PLN 2 mln on an area of more than 250 sqm? They will not be subject to the tax either. An act like this entails unfair treatment of business entities under the law. I am convinced that if an act worded in such a way comes into force, it will inevitably be challenged.

Marcin Materny

director of the shopping centre department, Echo Investment

The turnover tax will undoubtedly affect the profitability of large retail chains, that is, mostly hypermarket operators in our case. The eventual amount of such a tax could result some companies ceasing to be profitable. Because it has to be remembered that margins are really low in the grocery sector and profitability is fluctuating at around a few per cent. All this could result in large retail chains analysing their development plans and freezing their investment. As a consequence, supermarkets currently in operation could be closed down, not only due to the reduction in profits because of the tax increase, but also through reductions in their total workforces. Such conclusions can be drawn from the Hungarian experience. A progressive tax was introduced there, popularly known as the ‘Tesco tax’, which quickly made large retail chains suffer strongly from the additional fiscal obligation. Due to the controversy this led to, the tax was suspended at the level of 0.1 pct.

Maria Andrzej Faliński

general director, the Polish Trade and Distribution Organisation

Modern retail is unlikely to avoid the tax, and neither will the suppliers, service providers and consumers be spared its consequences. If the act comes into force in its current shape, interesting but unwelcome things will start happening to shopping centres and other places with a multifunctional demand focus. Firstly, the 250 sqm limit (or any other) as the criterion for being subject to the tax guillotine, will immediately make smaller areas more expensive. On the other hand, it will reduce the demand (and prices) for larger areas. The deregulation of this very sensitive market is not a good thing – neither for landlords nor for the tenants. It will immediately increase technical costs, visualisation obligations, the marketing of the shop and the marketing of the centre, etc. The availability of many products will change, and so will their scope and price structures. Either way the negative movement of consumer prices, costs and B2B prices, etc. will not spare shopping centres. So the profitability on this specific market will come into question. Of course, there will be frantic consolidation and a slowdown in the inflow of investment from abroad (which would not be at all paradoxical) and perhaps an outflow of capital (which amounts to the same thing, in principle). In a nutshell: 2 pct before the tax return is great deal, considering the effects.

Radosław Knap

general director, Polish Council of Shopping Centres

We have been watching closely the potential effects of the implementation of the so-called turnover tax. Firstly, it needs to be stressed that an official draft bill of the act has not yet been drawn up and we can only rely on media leaks, which is why it is difficult for us to assess what the final impact on the market might be. According to such leaks, the tax could apply to facilities with areas of more than 250 sqm, which in practice would cover not only discount stores and hypermarkets but also drugstores, bookshops, footwear and clothing boutiques, which in many cases are franchise stores operated by smaller businesses. The Polish Council of Shopping Centres, being a member of the International Council of Shopping Centers and the European Property Federation, has been monitoring the way in which EU policy has influenced the real estate and retail markets over the last few years. Undoubtedly, the speculation over the new tax is an issue that generates a great deal of controversy. Even more so considering the fact that on July 15th the European Commission started proceedings against the measures adopted in Hungary that the Law and Justice party have based their turnover tax draft bill on. According to the Commission, the tax introduced by Viktor Orban bears all the hallmarks of discrimination against one sector. Budapest has since suspended these charges on retailers until the issue has been settled. It is worth thinking about this in advance.