Summary
Poland is one of the most innovative countries in the EU when it comes to closing the VAT gap. We are pleased to discuss Poland’s VAT landscape with Piotr Arak, Director of the Polish Economic Institute. He tells us that by implementing stricter measures, Poland was able to reduce its VAT gap from 24.7% in 2015 to 8% to 9% in 2020. During this time frame, it introduced a Split Payment scheme, a Single Audit File for Tax (SAF-T) and the technical system STIR that sends real-time data from businesses to tax authorities. Setting up this technical system helped digitalise companies at a broad scale and increased Poland’s VAT revenue, since it enabled for instance, the automatic detection of suspicious transactions and fraudulent behaviour. Piotr is a strong advocate for real-time reporting and data confidentiality in these mechanisms to prevent valuable information being exposed. Lastly, he also notices the importance of more international collaboration of tax authorities and provides insights into the mandatory e-invoicing regime, which is coupled with real-time reporting obligations, that is planned to enter into force by the end of the year.
Could you tell a bit more about your background and what you do for the polish economic institute?
“Previously, I worked as an analyst in a wide variety of organisations such as the Office of the Prime Minister, the Ministry of Digital Affairs, the UN development program, commercial think tanks and also one of the Big 4 companies. Now I’m the Director of The Polish Economic Institute, which is a think tank that is funded and supervised by the state. However, important to stress is that we are still an independent organisation. We provide reports, analyses and we organise debates on important topics relating to the economy, both in Europe and in Poland specifically.”
“One of our main goals is (1) to get Poland a bit outside of its own bubble, but also (2) to bring across knowledge about Polish economic policy and our way of thinking to other Member States. Our focus on the economy originates from the fact that if there is one thing that we got right over the last 30 years, it is probably the economy. Although there are not many people that realise this, during those 30 years Poland implemented a wide variety of economic measures that turned out to significantly improve the competitiveness of the Polish economy.”
You have written about VAT/taxation in the past, what makes this topic interesting?
“[laughing] I wouldn’t say that VAT is particularly interesting. However, I worked on other topics, such as social security systems, that were definitely way more boring. So one could see taxation as an upgrade.”
“What I find interesting about VAT is that it will probably play an important role in the future of all tax systems. I believe that any development in EU tax will go into the direction of some kind of green tax, on an indirect basis. An important reason for this is that it is easier to tax consumption than to tax labour and capital in the current state of the economy.”
Could you tell a bit more about the problem of VAT fraud in Poland?
“I was actually one of the first persons, I believe it was in 2012, to write about the Polish VAT gap. At that time it was PwC that estimated the height of the VAT gap. Afterwards, the European Commission (EC) followed with their annual VAT gap report, making clear that many EU Member States had problems regarding their VAT revenue.”
“An interesting situation occurred just before the VAT gap became part of the public debate. At that time, the government increased the VAT rate. However, remarkably, this did not increase the government revenue. This projected increase in government revenue did not happen because a quarter of the projected government VAT revenue was not going to the tax authority. This was 2012, the peak year of the VAT gap. Although afterwards the VAT gap decreased due to policy reforms, I think the authorities were waiting too long with the implementation of these reforms. If they would have acted sooner, it could have increased government revenue at an earlier stage. In the end, they took action in 2015. From that year onwards, the VAT gap became one of the key policy issues for the government. The two most important goals became to (1) generate more VAT revenue and (2) to close the loopholes in the system by using new technologies. The latter was realised by cooperating with business, but also by being very vocal about fighting VAT fraud (which is actually an advised policy tool by the IMF).”
“This is basically a short history of the VAT gap in Poland. It explains why this topic became so relevant in Poland and also why it is still such an important issue for us today. The measures taken resulted in lowering the VAT gap towards 8-9% for 2020. This is still an early estimate, but the most important take from these figures is that we did not see a new VAT gap peak caused by the recession. That means that all the solutions introduced after 2015 are holding the level of VAT revenues in place. We do not see as much organised crime in our country as before.”
What are the concrete measures that were taken after 2015 in Poland?
“The measures range from simple solutions to more complex ones. A simple solution was to have more people guarding the borders and counting the lorries coming from outside of the EU. A more complex solution was the introduction of the Split Payment scheme. For the readers who don’t know what Split Payments is: it is basically a scheme that requires taxpayers to have a separate bank account where the paid VAT is going. This account cannot be accessed by the taxpayer, so they cannot use that money to finance other endeavours for the company as it is supposed to go to the state. Yet another solution was the introduction of a new law which imposed that new companies should pay the VAT monthly and not quarterly. Only after a bit of time these companies are allowed to change to quarterly VAT returns.”
“The Single Audit File for Tax (SAF-T or in Poland JPK) was also introduced. This means that every company is required to report this file to a central government system. It also required all companies to go through a digital transformation, as still many smaller companies, and self-employed people conducted pen and paper analysis of the taxes due. Then you have another technical system that automatically identifies suspicious transactions and fraudulent entrepreneurs in real time from the accounts of all companies in Poland. It’s called STIR, and it’s a warehouse of data. This is something that many European governments would like to introduce, the Dutch for example are very fond of this idea. The data that is being reported can also help to analyse the effects of e.g. the current crisis, as it is real time information coming from the whole economy. We, as the Polish Economic Institute, also use this type of information on a statistical level.”
“The last thing that is important to note, is that we managed to develop our own IT-systems. We do this in order to avoid having a black box solution coming from a foreign organisation. It was actually quite easy to find the right people with so many great IT specialists working in Poland.”
So, the tax authority already has access to real-time information through the SAF-T (JPK) reporting obligations. Now the next step is the implementation of e-invoicing. What do you think of this development?
“The biggest challenge regarding the implementation of e-invoicing in Poland is that there are many smaller companies that are still in the process of digitalisation. Although this process is accelerated by the current crisis, the new e-invoicing regime will probably not be welcomed by these companies. Still, they need to adapt, as it is the future.”
“Another issue is the cooperation between tax authorities in the EU. In order to close the VAT gap in countries such as Poland, Slovakia, the Czech Republic, Hungary, Italy and Portugal, you need to have the means to exchange information more easily between tax authorities. This is challenging because although we are a single market, there are 27 different tax authorities. The result is that the exchange of information between different government agencies is almost non-existent. Therefore, unfortunately it is still quite easy to get away with a crime such as VAT fraud within the EU Single Market, even though we managed to significantly decrease this type of crime.”
“All in all, governments should try to apply more technological solutions to further close the VAT gap, but they should also try to intensify their cooperation with other Member States. This cooperation should especially be enhanced between the biggest trading partners, because this is where the criminal activity is the highest.”
What role does data protection and confidentiality play in the discussion around the implementation of measures, such as real-time reporting, to close the VAT gap in Poland? Is that part of the discussion?
“It is a very important part of the discussion. Nobody would like to compromise the data coming from companies. Therefore, only state owned or state trusted organisations are allowed to analyse the information. Data breaches are actually one of the biggest threats to any IT solution: people don’t want to see their data being exposed or their private information falling into the wrong hands. So, any new measure which implies an increase in the amount of data that is gathered by the state must also be discussed with the business community.”
“In these discussions it’s important that the government always gives something in return to the businesses. In the particular case of the implementation of mandatory e-invoicing, the carrot was that the government promised to speed up the VAT refunds. So, the story was ‘if you give us more information, the system will become more efficient.”
Is the Polish Economic Institute consulted when these kinds of decisions need to be made?
“We’re asked for our opinion on many occasions and on many different topics, all related to economic policy. We try to help, whether it is the Ministry of Finance or the Ministry of Economic Development which is asking for advice, by offering analyses and/or by benchmarking solutions with other states. However, for many tax related matters, we actually ask the Ministry of Finance for help in order to understand some of the complicated tax schemes.”
“Our main added value is that we are looking at the economic consequences of political decisions. We investigate the effect of new laws/regulations in terms of costs for business, but we also try to measure the actual increase in efficiency of such measures. For example, the introduction of the JPK (SAF-T) increased the digitalisation of Polish enterprises, which is a positive side effect of such a regulation.”
The Polish Prime Minister Mateusz Morawiecki called for a global crusade against tax evasion and a European convention to help fight the VAT-Mafia. What do you think? What should be done on the European level to further close the VAT-gap?
“This is a matter we are also voicing on many occasions. For example, we see tax havens within the EU as a distortion of the labour market and of the level playing field. It’s not that low taxes are an issue here, it’s more the loopholes in the tax system, which basically allow for money-laundry schemes. In order to increase government revenue, you need to decrease the loop-holes, the shadow economy etc. Poland is quite good at this: we managed to decrease the shadow economy and the VAT-gap. However, we are reaching a wall now as there are no new solutions that we can implement within one single country. So, that means we need more international cooperation. Unfortunately, all the OECD negotiations are taking too long and when concluded the end results will only be recommendations. Of course, these will be OECD recommendations, but it doesn’t mean that everybody is actually going to implement them. We would like the EC and the other OECD countries to increase their participation in some international cooperation schemes that could increase the revenue of all governments involved.”
“If the EC tries to do that, this is going to take 5-6 years, so that means an additional 5-6 years of decreased revenues for the government. If we act sooner, we will have more money available for e.g. the fight against inequality and the COVID-19 crisis. Probably the EC VAT gap report for 2020 is going to show that in some countries the VAT-gap increased. This means that it will become an even more pressing matter, especially with the rising debt levels in all countries. Basically, for those countries which cannot do structural reforms like Italy or France because of many political and non-political reasons, there are some solutions that we introduced which actually increased government revenue.”
“This is basically what the Prime Minister is advocating and I totally agree with him. The sooner we act, the sooner the debt levels of all Member States will decrease.”
The EC is also investigating the possibilities of real-time reporting for intra-Community transactions, what do you think of this idea?
“I think it is a good idea, although there are some challenges. The first one is if it is going to be secure. As I said, this is an important topic for the Polish businesses and we know from our experience that you need a good dialog with the business community. Related, it’s important to introduce some carrots, to create some kind of bridge between governments and businesses. Secondly, the question is if it’s going to achieve further cooperation between tax authorities within the EU. We need more information. It should take less time for us to get more information from other Member States. VAT fraud is a very serious crime. The Americans found invoices and carousel schemes in the hideout of Osama Bin Laden in Pakistan, so it is not childsplay. These schemes are being used by very bad people, also outside of the EU. I am sometimes astonished that there are not more people that say that real-time reporting could be a good solution. This is a way that is not increasing the tax rates, but the efficiency of the tax system and decreasing crime.”
What do you want to tell the reader to make them more enthusiastic about VAT or taxation?
“[Laughing] Envision a world where you don’t pay any direct taxes but only indirect taxes. This is probably the future we are going to see at the beginning of the 22nd century. That would make you more enthusiastic, because you would pay no taxes at all, at least no taxes that you can see directly.”