Polish Retail tax hits EU brick wall

In mid-October, the Polish government announced that it would suspend the implementation of its planned retail trade tax until January 1st 2018. This followed a decision by the European Commission to launch an in-depth investigation into the proposed levy on the Polish retail sector. This suspension has met the Commission’s demands, which require Poland to suspend the tax until it has concluded its assessment.

No more (un)wanted state aid

The Commission’s main concern is that the progressive rate based tax would give companies with a low turnover an advantage over their competitors in breach of EU state aid rules. A similar investigation was started in July 2015 into the Hungarian food chain inspection fee and its tax on tobacco sales, which were also based on a progressive turnover rate. The conclusions announced in July this year were that the Hungarian regulations were in breach of EU rules. “Hungary has a full right to finance the cost of its food inspection activities and to levy a tax on tobacco products to finance its health system. However, Hungary should make sure that all companies are treated alike so that the contributions are levied on non-discriminatory terms,” Margrethe Vestager, the EU commissioner in charge of competition policy, concluded earlier this year.

Although the results of the EU investigation into the Polish fiscal measures are not yet known, the EU’s main doubt as to the progressive nature of the tax clearly makes the case similar to the Hungarian levy and seems almost to predetermine the outcome of the investigation. Not long after the EC announced its position, Mieczysław Janczyk, the vice-minister of finance, said that a new version of the tax could be formulated without an income tax threshold (another problematic clause that might breach EU state aid rules) and would apply equally to everybody. But the new version based on a linear tax would bitterly disappoint medium and small retail chains, exactly those retailers the government had been intending to favour from the very beginning. “The tax, according to government assurances, was supposed to be a tool that would even the chances between small independent retail and large retail chains, and in particular the discount chains,” explains Maciej Ptaszyński, the general director of the Polish Chamber of Retail, an association of smaller retailers present on the Polish market. The Polish Chamber of Retail was also one of the organisations that supported the tax based on progressive turnover rates and, through the public consultation process, was influential in the law’s final drafting .

The dodgy state of corporate tax

From what some politicians in Poland and the media are saying, it seems clear that one of the reasons for introducing the new taxation was that large foreign chains keep avoiding corporate income tax (19 pct). According to a report by the Entrepreneurs’ and Employers’ Association (ZPP, the “Podatek od handlu detalicznego w Polsce” report), the 18 largest grocery retail chains in Poland paid less than PLN 220 mln in corporate tax in 2013, while seven of them did not even pay one penny. At the same time the combined turnovers of the 18 chains exceeded PLN 102 bln, which meant that they paid only 0.2 pct of their revenue in total in corporate tax. According to more recent data, however, presented by the Polish Organisation of Retail and Distribution (POHiD), an association of some of the country’s largest retail chains, the corporate tax paid by the 18 largest retail chains came to PLN 711 mln in 2014, which represented 0.6 pct of their revenue. The same study shows that the largest Polish chains paid significantly less – only PLN 25 mln, or only 0.2 pct of their combined revenue. “Everybody is avoiding corporate tax. It is paid only by those who want to and this does not mean only the retail sector. About 60 pct of companies in Poland don’t pay it,” says Cezary Kaźmierczak, the president of the Entrepreneurs’ and Employers’ Association, which lobbies strongly for a simplified Polish tax system. According to Cezary Kaźmierczak, Poland’s corporate tax is a relic of the post-transformation times and should be scrapped from Polish fiscal system to be replaced by a new common revenue tax. He points out that the European Commission has estimated the losses resulting from corporate tax avoidance in all sectors of the Polish economy to be as much as PLN 46 bln. Meanwhile, the tax adds app. PLN 30 mln per annum to the Polish budget.

Retailers not guilty

Retail chains, however, do not accept the accusation of tax avoidance pointing out that they are frequently subject to tax inspections that fail to show any irregularities. Moreover, the situation on the market is not as easy as the supporters of the new tax would claim. ”The Polish market is not easy for retail chains for many reasons. The list of companies who once invested here and later quit is long: Cassino Group (Géant and Leader Price), Jumbo, Tengelmann (Plus), Hit, Ahold (Hypernova and Albert), Metro Group (Real and Tip), Edeka (Billa), Electroworld, and Julius Meinl,” reads a POHiD statement in answer to some of the “false opinions about the taxes paid by retail chains”. The list presented by this organisation of the ways in which foreign retailers support the economy is also long. It includes EUR 50 mln in investments that they have made, the 200,000 people they employ, the PLN 20 bln in other taxes that they have paid including personal income tax and social insurance for their employees, and also their PLN 10 mln share in the Polish export market.

The tax has also been, from the very beginning, criticised by the Polish Council of Shopping Centres, which includes not only retail centre owners and investors but also some of their largest tenants. “This tax would impact app. 200 of the largest retail chains, which are key tenants in most shopping centres. We’re talking not only about the 120 discount stores, hypermarkets and supermarkets, but also in particular about the remaining 70 chains that sell electronics, fashion, shoes and accessories. The increase in operating costs resulting from this taxation would have an indirect impact on shopping centres […]. Having major tenants that are weaker and less competitive results in a more conservative approach to leasing and expansion activity on the commercial property market,” points out Radosław Knap, the general director of PRCH.

A government out of steam

The government, however, seems to have lost much of its original enthusiasm for introducing the tax. Its projections as to how much the tax would benefit the state budget have dropped each time the tax was modified – from PLN 3.5 bln at its inception to app. PLN 1.6 bln for the latest version, so it is also becoming less significant for the Polish fiscal system. The new Polish finance minister Mateusz Morawiecki, who was appointed at the end of September, said he wanted to enter into a dialogue with the EC on what form the tax should now take and also to look at existing retail taxes in other countries. However, since the EC has questioned progressive rates based on turnover, the government’s options seem to be very limited. The ministry might be forced to go back to a proposal that has already been rejected by small and medium retailers, which is to base the tax on the size of the retail area occupied by a store (as it is in France). This would indirectly favour some rapidly developing discount retail chains, such as Biedronka, which already have a tendency to occupy smaller retail spaces, over some Polish supermarkets. As for the linear tax this has also been strongly criticised by smaller retailers. “If you place a linear tax that amounts to even as little as 0.1 pct of revenue on a small store that has 0.5 pct rate of return and on a discount chain with a 4 pct rate of return, the smaller store will have to give away 20 pct of its profit while the bigger one will only pay 2.5 pct. For the little store, in such a scenario, this tax would be almost ten times higher relative to the profit they make,” points out Maciej Ptaszyński, who says that his organisation will vigorously oppose such a proposal. “If the European Union has blocked a progressive rate tax, and there is no way we can move on, it might now be better to drop it entirely,” concludes Maciej Ptaszyński.