How to treat VAT paid in a non-EU country for CIT purposes?
What problem has the authority resolved?
In its individual tax ruling of 24th August 2021, no. 00111-KDIB1-1.4010.240.2021.1.MF, the Director of the National Fiscal Information (Dyrektor Krajowej Informacji Skarbowej) addressed the issue of recognizing in CIT settlements VAT paid in a non-EU country.
The above individual tax ruling related to the application filed by a company that was planning to sell its products to the British market, however, the deliveries thereof were to be made from the warehouses located in the territory of the United Kingdom and were subject to UK VAT. The VAT tax shown on the invoice (after deducting the input tax) was to be paid by the Company to the HM Revenue and Customs.
Pursuant to the Corporate Income Tax Act, the revenues and tax deductible costs do not include VAT (Article 12(4)(9) and Article 16(1)(46)). In the authority’s opinion, these provisions do not apply to the VAT settled in the territory of the United Kingdom, as it is not an equivalent of the VAT. Consequently, in the opinion of the authority:
- revenue shall be the gross amount resulting from invoices issued, together with the UK VAT tax,
- the company may include in the tax deductible costs the expenditures incurred in the territory of the United Kingdom in gross amount, i.e., increased by the paid UK VAT,
- tax deductible costs shall be the UK VAT paid by the company to the HM Revenue and Customs on account of the “sales” invoices issued.
Analogous view was presented by the Director of the National Fiscal Information in respect of the Norwegian VAT tax (individual tax ruling of 18th September 2019, no. 0111-KDIB1-1.4010.305.2019.1.AB)
What do the administrative courts say about it?
Administrative courts assess the issue differently indicating that for CIT purposes the VAT is any tax corresponding, in terms of its mechanism and construction, to the Polish VAT (compare, inter alia, judgment of the Voivodeship Administrative Court (WSA) in Gdańsk of 16th March court file no. I SA/Gd 1152/20 and of 21st March 2021, court file no. II FSK 576/18. Consequently, according to the administrative courts e.g. Norwegian VAT ought not to be included in the taxable revenue/tax deductible costs.
What’s next?
The divergent opinions of the tax authorities in respect of CIT settlement may be of particular interest to entities that carry out business in non-EU countries. For some of them, the approach presented by tax authorities may prove beneficial. Although VAT paid abroad will be the taxable revenue, still, the costs may include both foreign VAT resulting from the „cost” invoices and the foreign VAT paid on account of the issued „sales” invoices. However, it may happen that it would be more preferable to follow the approach presented by the courts, e.g., when recognizing foreign VAT would result in exceeding the revenue threshold that gives the right to apply the reduced 9% CIT tax rate.
It is therefore worth analyzing your situation and, possibly, safeguarding the approach (by way of obtaining individual tax ruling). It is possible that after some time, just as in the case of VAT tax paid in the EU country, the tax authorities will change their approach.
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