Settlement of tax disputes: A revolution or a paper promise?
In early May the Polish Ministry of Finance presented a bill to amend the Tax Ordinance to introduce a long-awaited institution: settlement of tax disputes. According to the aims of the proposal, the new solution should reduce the number and the costs of handling tax disputes, by allowing taxpayers and tax authorities to resolve the dispute earlier and amicably, before litigation commences in the courts.
But the proposal in its current form raises issues whether it will provide real room for compromise between the parties.
What is to be covered by the settlement of tax disputes?
Under the proposal, a settlement could apply only to tax arrears, i.e. obligations for which the payment deadline has already passed. It would not apply to overpayments or future obligations. Those eligible to apply for a settlement would be taxpayers, remitters, and heirs. Settlement would be voluntary for both parties: the initiative in seeking to reach a settlement would rest with the taxpayer, but the tax authority would not have to agree to the settlement.
In the settlement of a tax dispute, the parties would agree on the correct amount of the tax obligation and the manner of paying the arrears, i.e. by deferring the payment deadline or spreading payment out in instalments. The bill also foresees preferences in the interest due on tax arrears. The earlier the taxpayer applies for a settlement, the lower the interest rate would be. Reaching a settlement would also, as a rule, halt further accrual of interest from the day following filing of the application, and exclude fiscal criminal liability for the taxes covered by the settlement.
But under the proposal, the settlement would not allow the taxpayer to truly negotiate the amount of the overdue tax.
No negotiation of the facts or the amount of tax
The justification for the proposal expressly states that neither the factual circumstances of the case, nor other issues directly or indirectly affecting the amount of the tax obligation, would be subject to negotiation. This assumption greatly narrows the conciliatory nature of the proposed institution, and poses the risk that in practice, the settlement of tax disputes would serve mainly for the taxpayer to accept more quickly the findings of the tax authority, rather than mutually working out a compromise. In its current form, the institution more resembles another variety of relief in paying tax obligations than a real instrument for out-of-court settlement of disputes between taxpayers and the tax authorities.
Settlement in the public interest
A fundamental condition for concluding a settlement is that it would have to serve the public interest. In this respect, the public interest would include reaching a result more favourable to the State Treasury than the likely consequences of action by the tax authorities, in particular reducing the costs of tax enforcement.
One question that arises is how the potential benefit to the State Treasury from reaching a settlement would be measured. The proposal and the justification refer to the costs of conducting the dispute, the costs of collecting the tax, and the probable outcome of further actions by the tax authorities. It is not clear, however, whether such costs would be estimated by the tax administration, or how such an estimate would be made, nor the manner in which the tax authority would compare the projected costs of reaching a settlement against the costs that would be incurred in a scenario where the dispute is carried through to the end.
Given the lack of transparent criteria, there is a risk that the condition of serving the public interest would be applied arbitrarily, and the tax authority’s consent to a settlement might become highly discretionary. Additionally, one effect of a settlement would be reduction of the interest due on the tax arrears. Thus the tax authority would have to justify why accepting a lower amount of interest would be more advantageous for the State Treasury than pursuing a dispute and executing on the tax arrears under the general rules.
No settlements for local governments
Doubts are also raised by the exclusion from settlements of arrears in charges payable to territorial (local or provincial) governmental units.
In practice, it is often the local government that has an interest in granting relief in payment of tax arrears, e.g. by scheduling payment in instalments. This practice is in the interest of the local tax authorities, whose aim should be to support taxpayers’ financial capacity and thus to ensure the future flow of tax revenues into the budget of the territorial governmental unit or to keep jobs in the region. Excluding tax arrears owed to local governments would limit the use of settlements in practice.
Rigorous consequences of late payment of arrears
The bill provides that if the extended payment deadline is not met, or any of the instalments are not paid on time, the settlement agreement expires (in whole or in part respectively) by operation of law. If three instalments were missed, the settlement agreement would lapse in its entirety.
This solution seems disproportionate, as the settlement would cease to be in effect if the taxpayer were even a day late, and even not at the taxpayer’s own fault. The taxpayer would lose all of the benefit of lower interest payments, and could then look forward to a standard tax proceeding, with all of the time and money that entails which the settlement would have avoided. The proposal also provides for temporary limitation on the possibility of reapplying for a settlement agreement, unless the settlement lapsed without the fault of the applicant. The burden of proving lack of fault in the late payment would rest on the taxpayer.
A step towards improving relations between taxpayers and the tax authorities
The proposed regulations are an important signal that the Ministry of Finance perceives the need for strengthening dialogue between taxpayers and the tax authorities. Because tax inspections and proceedings can go on for years, generating costs, uncertainty, and major business risks, a settlement agreement should be an efficient and flexible mechanism for resolving tax disputes without the need to pursue litigation. The current draft does not meet those aims.
Whether settlement agreements in tax disputes become a realistic instrument for changing the dealings between taxpayers and the administration, or just an empty promise, depends on the further legislative work on the proposal.
The bill is currently at the comment stage, and we will track its future progress.
Katarzyna Ziomek, Jakub Macek, attorney-at-law, tax adviser, Tax practice, Wardyński & Partners
