Foto: Artklee

Tax dodging is a touchy subject at any time, one quietly practiced by businesses looking to optimize their profits yet condemned by government authorities. These days, as Poland faces an unhealthy budget gap and growing public debt, it’s a particularly sensitive issue.

That hasn’t kept businesses from engaging in the practice, though. A recent Business Centre Club analysis of the most popular means of tax dodging shows that Polish entrepreneurs are experts at it. In Poland, losses resulting from tax avoidance and evasion —legal and illegal means of reducing tax payments, respectively—are estimated to amount to 25 percent of the country’s gross domestic product (GDP).

According to former Undersecretary of State in the Finance Ministry Mirosław Barszcz, the author of the analysis, reducing this to approximately 15 percent of GDP—the European Union average—could theoretically bring in Zł 20 billion (Kč 127.8 billion/€4.9 billion) in revenues each year. That figure would nearly cover the state’s estimated 2009 budget deficit of Zł 24 billion.

Rationalizing businesses’ behavior isn’t hard to do, either. Paying Taxes 2010,” a report from the World Bank and international consultancy PricewaterhouseCoopers, ranked Poland an ignominious 151st out of 182 nations for the relative ease of paying taxes. The report indicated that paying taxes is easier in Zimbabwe and Iran, noting that it takes Polish taxpayers around 395 hours each year to comply with relevant tax regulations.

Motive, means, opportunity

So how are Polish entrepreneurs dodging taxes? According to Barszcz, the two most common tactics involve “creative” employment and underreporting income.

The former occurs most frequently in industries in which there is little risk of a labor audit, such as agriculture, construction or childcare. According to the National Labor Inspectorate (PIP), unregistered employment in 2007 amounted to 10 percent of total employment.

Another such “solution” is to understate salaries by paying the minimum wage on paper and passing the rest to the employee under the table. The chances of being caught are relatively low—employees could report it, but this would leave them to pay the outstanding health and pension contributions.

Between January and August of last year, the PIP found employment irregularities in 40 percent of the 2,200 entities it inspected. The sheer pervasiveness of the problem seems to confirm what businesses in Poland have been saying for years—that labor costs are too high and employment bureaucracy too burdensome.

In some industries—construction and repair, door-to-door sales, or bazaar trade—income is not reported at all. In other cases, entrepreneurs fail to report part of their income, especially if it is earned outside the tax officers’ working hours, when the likelihood of an inspection is negligible.

In other cases, entrepreneurs register fake costs by forging invoices, or simply transfer profits abroad, using overseas subsidiaries in tax havens.

Necessity and history

There are many reasons why businesses look to circumvent Poland’s tax law, but the majority of experts explained that the benefits simply outweigh the risks. The chances of being caught are low, while the savings in taxes and labor costs are high.

“To remunerate an employee Zł 100, the employer needs to pay an additional Zł 65 for taxes and social security contributions,” Jeremi Mordasewicz, an expert at the Polish Confederation of Private Employers Lewiatan, pointed out.

Some businesses would be pushed into bankruptcy if forced to obey all of Poland’s arcane tax regulations. “In most cases, tax avoidance is an alternative to unemployment,” said Robert Gwiazdowski, a tax expert and president of the think tank Adam Smith Center.

“For a large number of entrepreneurs, circumventing taxes means having money to live on. When it’s a decision between paying the [social insurance] contributions or buying bread and butter, the choice is obvious,” he continued.

“For small employers, social insurance contributions are often a burden they cannot cope with,” agreed Arkadiusz Micha-liszyn, head of tax in the corporate department of the Warsaw office of advisory CMS Cameron McKenna.

Not everything can be blamed on the system, however. Poland’s business-tax rate is comparable to others in the EU. Unlike many other bloc members, however, there’s a sense in Poland that cheating the state is not a major offense. There is a lingering conviction, a legacy of decades of communist rule, that the state is the enemy, and that it is extorting funds from its citizens.

“We have only been paying taxes for the last 20 years. [Under the previous system] employers used to pay taxes for most people. We do not have an established culture of paying the state,” said Andrzej Arendarski, head of the Polish Chamber of Commerce.

Moreover, there’s a widespread belief that citizens’ hard-earned tax money is being squandered, as evidenced by the poor quality of the national railway system or health service.

In Mordasewicz’s opinion, it will take generations before that changes. 

Arendarski was more optimistic. “The mindset is changing. A growing number of companies are conducting their activities aboveboard. I remember that 10 years ago people frequently boasted that they had managed to dupe the authorities, but I don’t hear this as often now,” Arendarski said. In his view, Poland could see a more modern mentality toward taxes within the next 15 years.

Some experts also noted tax authorities’ reluctance to actually deal with the worst offenders. “It is easier to catch legally operating companies in a slip-up than to tackle illegal or unregistered entities, which are harder to pin down and recover money from,” said Mariusz Unisk of the tax study consultancy Instytut Studiów Podatkowych Modzelewski i Wspólnicy.



Solutions unlikely

The best solution might be to radically lower taxes and labor costs. According to CMS Cameron McKenna’s Michaliszyn, the government has some room to maneuver here.

He commented that the tax rate in Poland is probably beyond the apex of the Laffer curve, a measure that indicates that revenues would increase instead of decrease if taxes were lowered. “Each time the personal income tax or the excise on alcohol has been lowered, revenues have risen,” Michaliszyn said.

A shift in perspective is also needed. In former Undersecretary of State Barszcz’s view, both employees and employers must be convinced that paying taxes is necessary, and that their money is being put to good use. To encourage this, however, the relationship between the government, the tax authorities and citizens needs to be more transparent.

Gwiazdowski offered another alternative. “Let’s slap more tax on consumption than on labor. It’s less noticeable, impossible to avoid, gives consumers more choice and it’s always nicer to pay and have something for it than to pay and have nothing,” he suggested.

Any of these ideas could help save the government money, but there’s little chance of them being put into practice—not with a gaping budget deficit and major elections just around the corner. “There are no brave politicians in Poland,” Gwiazdowski said.
 

This is an edited version of a story published by Warsaw Business Journal.