News & Analysis

Poland’s corporate tax gap falling, but more can be done

Money of National Bank of Poland. Polish zloty banknote on red velvet background; Macro photo; Depth of field

Poland lost between 11 billion and 21.4 billion zloty in 2017 as a result of the corporate income tax (CIT) gap, the Polish Economic Institute (PIE) has revealed in its latest report. The amount is equal to 0.55 per cent and 1.08 per cent of the country’s real GDP.

The CIT gap, like other tax gaps, is broadly defined as the difference between the tax that the state budget should have received and the amount actually received.

Possible causes include accidental mistakes by taxpayers, deliberate hiding of income, exaggerated costs, transfer of profits abroad and incorrect application of deductions and exemptions.

“Viewed more broadly, the CIT gap also encompasses problems linked to a lack of optimal regulatory solutions, legislative omissions enabling the exploitation of loopholes in the law and the state’s fiscal and economic policy, within which derogations from general tax rules can be created to encourage specific behaviour by taxpayers that benefits the state’s general development,” reads the report.

Alongside the VAT gap, the CIT gap is the biggest threat to the stability of public finances.

“It should be remembered that the CIT gap is probably bigger than the values presented in this report. It does not account for the artificial overstatement of costs by entrepreneurs, which reduces income significantly, by at least tens of billions of złoty,” the report says.

Encouragingly however, the report does suggest that the CIT gap is coming down, by as much as 57 per cent from 2015 levels.

According to the PIE, the Polish government has introduced a long list of reforms aimed at enforcing corporate income tax such as introducing a minimum tax on commercial real estate, changes to the rules of foreign-controlled companies and changes in the taxation of joint-stock limited partnerships.

“The changed presented above have a major impact on the size of the CIT gap and are reducing it gradually,” says the report.

However, the report’s authors also note that many other reforms, including the implementation of EU directives, best practices from OECD countries and ideas from the Polish tax administration, “could be added to the list.”