Kraków, Polska
Taxes are a critical stream of revenue for governments to foster economic growth and development. In pandemic times, vital public services are a lifeline to fund critical health, education and infrastructure for everyone, but especially those most vulnerable. Stimulus packages designed to boost economic growth, can help governments plan, stabilize economies, protect social services, create jobs, and attract private investment.
Yet, many governments struggle with tax evasion, tax fraud and tax compliance. In the European Union (EU), Value Added Tax (VAT) fraud, and in particular carousel fraud, continues to be a major contributor to revenue loss. It is estimated that the EU loses up to € 1 trillion due to tax evasion and tax avoidance. That may mean crumbling infrastructure, crowded classrooms, a lackluster private sector, and health and social services cut off for those most in need.
For Poland, it is estimated that between 2010 – 2015 the government was losing 25 percent of VAT revenues (PLN 40 billion/€8 billion) to large scale VAT fraud, under-reporting, avoidance, and other forms of evasion. This was robbing the government and people, the social capital needed to invest in critical health, education, welfare and infrastructure.
How Poland Took Action
Improving tax compliance became a key priority for the Polish Government to prevent leakage . The government undertook a series of reforms which included the creation of the National Revenue Administration (NRA).
Formed in March 2017, the NRA is accountable to the Ministry of Finance comprising of the former departments of Customs, Value Added Tax (VAT) and Corporate Income Tax. With over 400 tax offices nationwide, the NRA faced a number of challenges, including measuring the new organization’s performance, applying a modern holistic compliance risk management approach to cover all the major taxes, and administering all taxes to which taxpayers were liable in one office, which were previously administered in a number of different offices.
The World Bank, financed by the European Union’s (EU) Directorate General for Structural Reform Support (DG REFORM), was helping Poland implement a modern measurement, monitoring & evaluation (MME) system and compliance risk management. Based on the recommendation provided, a central Large Taxpayer Office (LTO) was created and organized along modern principles with a cooperative compliance approach – in particular, working in partnership with the largest taxpayers, with a turnover in excess of €50 million, who were likely to ‘get it right’ the first time.
This concept encourages the taxpayer and tax administration to work collaboratively to reduce errors on tax returns and provide tax certainty for taxpayers. Tax certainty is critical to attract private investment as companies need to know with “certainty” how much it needs to pay, how and when to pay it, and know that their competition is doing the same.
In the area of monitoring and evaluation, the Bank team undertook a performance assessment of the NRA using the World Bank’s TAX DIAMOND tool, which involved assessing the operational effectiveness of various aspects of the NRA’s operations and site visits to the customs and tax offices located throughout Poland. This methodology has been shared with the NRA enabling them to assess their effectiveness over time.
Reorganization of the NRA was one component. At the same time, in 2017, several pieces of legislation—introducing changes to VAT and excise legislation—were initiated by Poland to strengthen the position of fiscal services against fraudsters’ aggressive tax planning. Reforms continued in 2018: the implementation of a voluntary split payment for VAT, a law to prevent the use of the financial sector for tax fraud, a register of public receivables, an on-line cash register, and a package focusing on the tobacco product trade.
Results
Actions taken by the Polish administration have seen the VAT Gap more than halved between 2015 and 2018 from 25 percent to 9.9 percent with Poland recognized as one of the top three performers in the EU in reducing the VAT gap.
With World Bank support, the NRA have developed their own performance dashboards and have improved tax compliance and managing debt. The new LTO was created in January 2021 and is working collaboratively with the largest taxpayers in Poland.
It is too early to quantify in revenue terms the benefit of creating the LTO since corporate tax returns for 2021 have not yet been filed and because of the economic downturn caused by the COVID pandemic. However, the reorganization will lead to positive revenue benefits, as has been the case in other countries that have adopted this approach.
Poland’s experience is important not only within the context of the EU but knowledge spillovers that can be applied globally. The Compliance Risk Management report that was used as a template for the Bank’s tax administration work in Latvia will be used going forward in Nigeria to help their Federal Inland Revenue Service to develop a compliance risk management system for VAT.
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The authors are part of a team that supported the Measurement, Monitoring and Evaluation Project. The project was implemented by the World Bank in collaboration with the EU’s Directorate General for Structural Reform Support (DG REFORM).
To learn more, please read:
Story: Improving Poland's Tax Compliance with a Holistic Approach
Case Study: Poland: Sealing the Tax Gap (Building Effective, Accountable, and Inclusive Institutions in Europe and Central Asia : Lessons from the Region) by Artur Gostomski, Director of Large Business Department, Ministry of Finance of the Republic of Poland; Grzegorz Poniatowski, Vice-President, Centre for Social and Economic Research (CASE), Poland
Webinar: Sealing the Tax Gap: Improving Tax Compliance in Poland
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