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IMF Country Report No. 15/112

REPUBLIC OF POLAND

TECHNICAL ASSISTANCE REPORT—TAX ADMINISTRATION—MODERNIZATION CHALLENGES AND STRATEGIC PRIORITIES

May 2015

This Technical Assistance Report on the Republic of Poland was prepared by a staff team of the Fiscal Affairs Department of the International Monetary Fund. It is based on the information available at the time it was completed in April 2015.

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REPUBLIC OF POLAND

Tax Administration

Modernization Challenges and

Strategic Priorities

April 23, 2015

Juan Toro, Allan Jensen, Mick Thackray, Maureen Kidd, and Barrie Russell

Fiscal Affairs Department

REPUBLIC OF POLAND

Tax Administration Modernization Challenges and Strategic Priorities

Juan Toro, Allan Jensen, Mick Thackray, Maureen Kidd, and Barrie Russell

April 2015

Contents

• Abbreviations and Acronyms

• Preface

• Executive Summary

• I. Tax Collection and Compliance Trends

  • A. Tax Collection in Poland Compared with EU Countries

  • B. Effectiveness in Collecting Value-Added Tax in Poland

  • C. Tax Revenue and Performance Analysis

• II. Current Modernization Initiatives

• III. Institutional Reform for Tax Administration

  • A. Organization and Governance in Modern Tax Administration

  • B. Organization Issues in Tax Administration in Poland

  • C. Governance and Management Issues in Tax Administration in Poland

  • D. The Way Forward for Tax Administration in Poland

• IV. Managing Core Tax Operations

  • A. Improving Headquarters Management of Tax Operations

  • B. Tax Audit

  • C. Taxpayer Service

  • D. Large Taxpayer Administration

  • E. Recommendations

• V. Managing Compliance Risks

  • A. Introduction

  • B. New Compliance Model for Medium-Term Implementation

  • C. Compliance Management Initiatives for Immediate Implementation

  • D. Recommendations

• Tables

• 1. 2012 Tax Collections as a Percent of GDP in Selected EU Countries

• 2. Stratification of Taxpayers, and the Audit Focus, 2013

• Figures

• 1. Efficiency of Value-Added Tax Collections in Poland (2012)

• 2. Tax Collections in Poland 2006–13

• 3. Value-Added Tax Gaps in EU Member States 2009–12

• 4. Arrears of Unpaid Tax 2010–13

• 5. Current Organization for Tax Administration

• Boxes

• 1. Summary of key recommendation

• 2. Ministry of Finance Modernization Initiatives Related to Tax Administration

• 3. Organization and Governance Features of Modern Tax Administration

• 4. Tax Administration Direct Reports to the Undersecretary

• 5. Features of the Tax Administration Service

• 6. Scenarios: With and Without the Establishment of a Tax Administration Service

• 7. Main Issues in Core Tax Operations

• 8. Role of a Headquarters Department in Managing Operational Work

• 9. Taxpayers Included in the Large Taxpayer Population

• 10. Illustrative Risk Indicators for Large Taxpayers

• 11. Illustration of a Typical Industry Based Compliance Improvement Project

• 12. Potential Approach for a Risk-Based Value-Added Tax Refunds Examination

• Appendixes

• 1. Tax Administration Performance Indicators

• 2. Measurements Performance at the Tax Chamber and Tax Office Levels

• 3. Measurements at Central Level

• 4. Roles and Responsibilities of the Proposed Management Committees

• 5. Illustrative Function-Based Organization

• 6. Issues for Selected Core Business Processes

• 7. Implementing a Modern Compliance Risk Management Model

• 8. Mitigating Compliance Risks from Informality

• Appendix Tables

• A1.1. Registration Activity in Poland 2013

• A1.2. Overall Filing Compliance in Poland 2010–13

• A1.3. Filing Compliance for Value-Added Tax in Poland 2010–13

• A1.4. Arrears as a Percentage of Collections 2011–13

• A1.5. Audits Conducted by Tax Administration 2011–13

• A1.6. Audits Results 2011–13

• A1.7. Audit Results for Non-Large Taxpayer Office Taxpayers 2011–13

• A1.8. Appeals 2012–13

• A3.1. Performance Measures for Tax Chambers

• A4.1. Outline of Roles and Responsibilities for Tax Administration Service Management Committees

Abbreviations and Acronyms

Preface

In response to a request from Mr. Jacek Kapica, Undersecretary of State at the Ministry of Finance (MOF), a Fiscal Affairs Department (FAD) technical assistance mission visited Warsaw during the period November 12–25, 2014 to advise the Ministry of Finance on selected areas of the tax administration’s modernization strategy. The mission was led by Mr. Juan Toro (Assistant Director, FAD) and comprised Messrs. Allan Jensen, Michael Thackray (both FAD), Barrie Russell, and Ms. Maureen Kidd (both FAD external experts).

The main purpose of the mission was to undertake a broad diagnostic of the tax administration and provide recommendations to improve its efficiency and effectiveness. The mission focused specially on determining whether the tax administration has in place (1) appropriate governance and organizational structures; (2) an effective compliance management approach; (3) strong business processes and effective methods to establish operational targets and measure the delivery of these targets; and (4) an adequate approach to develop, manage, and implement the tax administration’s modernization strategy.

Meetings were held with Messrs. Jacek Kapica, Janusz Janowski (Director of the Tax Administration Department at the MOF), and deputy directors and senior officials from the Tax Administration Department, and key department directors at the MOF. The mission visited the Tax Office of the Mokotow District, the First Mazowiecki Large Taxpayer Office, and the Fiscal Control Office, all in Warsaw. The mission also held meetings with representatives from the private sector, accounting firms and private sector associations.

This report, which has been reviewed by IMF headquarters and incorporates comments from the authorities, represents the final version of the aide-mémoire that was submitted to the authorities in November 2014. It consists of an Executive Summary and the following five sections: (I) Tax Collection and Compliance Trends; (II) Current Modernization Initiatives; (III) Institutional Reform for Tax Administration; (IV) Managing Core Tax Operations; and (V) Managing Compliance Risks.

The mission expresses its gratitude for the outstanding support and cooperation received from the Ministry of Finance staff during its stay in Warsaw.

Executive Summary

This report provides advice on the modernization of the tax administration in Poland. The report addresses selected issues concerning (1) the tax administration institutional reform; (2) the administration and delivery of core tax administration operations, including for the largest taxpayers; and (3) the approach to managing compliance risks to the tax system. To set the context, the report first discusses collection performance of the main taxes in recent years and the approach to tax administration modernization.

Collection performance deteriorated significantly during the crisis and has not recovered. Combined collection of personal income tax (PIT), corporate income tax (CIT), and value-added tax (VAT) in Poland yielded around 16 points of GDP in 2008 and fell to 14 points in 2009. Collections remained stable some years, but then declined to 13.1 in 2013; the projection for 2014 is 13.5 points of GDP. This weak performance contrasts with other countries in Europe that have recovered to pre-crisis collection levels in GDP terms. Tax compliance has also deteriorated. According to a recent study published by the European Commission (EC), evasion of VAT, the main tax in Poland, increased from 18 percent of potential VAT collections in 2010 to 25 percent in 2012.

To improve tax administration efficiency and effectiveness the MOF has spearheaded several initiatives. Institutional reforms have included: strengthening direct reporting of local tax offices to tax chambers (at the provincial level); consolidating administrative support into tax chambers; increasing the focus on taxpayer service; developing competencies in specialized centers; enhancing management and accountability frameworks; and revamping information technology (IT) systems. On taxpayer compliance management, changes have aimed at strengthening risk-based approaches; improving planning and monitoring; standardizing core operations; and enhancing IT support tools.

Most initiatives go in the right direction but are not part of a cohesive and overarching modernization strategy for tax administration and do not address structural weaknesses. Despite the current initiatives, the tax administration organization in Poland will remain fragmented at both the central and operational levels. The draft tax administration act currently under development maintains split responsibilities for tax administration across several departments in the MOF. Therefore, it will not deliver a single headquarters (HQ) to act as the tax administration business owner across the country. Fragmentation will also be maintained at the operational level as the sixteen tax chambers will retain a separate organizational status. Deeper institutional reform is needed.

Formulating and systematically implementing a cohesive modernization strategy is critical to achieve the needed efficiency and effectiveness gains. The strategy must set the vision of the tax administration in 5–10 years from now and prioritize reform initiatives that have the potential for achieving breakthrough improvements in performance. In formulating the modernization strategy, a fresh picture of the current state and end-state of the tax administration must be developed and opportunities and constraints clearly identified.

The establishment of a single, unified, national tax administration should be the key component of the modernization strategy. Effective control of the tax system in Poland will remain problematic if the modernization strategy does not address the most significant structural weakness: the lack of a unified national tax administration. The fragmented organization structure and lack of a single head of the tax administration result in blurred accountabilities and complex lines of command and make effective governance of the tax administration overly complex. This severely limits the chances of achieving improvements in efficiency and effectiveness in tax administration. Establishing a national tax administration is therefore essential.

Pending the establishment of a unified tax administration, priority actions need to be undertaken to improve tax administration’s efficiency and effectiveness.

Appointing an empowered leader of the modernization program supported by a high level reform committee. The scale of the tax reform program in Poland demands political commitment and sustained support. A strong and empowered reform program leader will be needed to manage across departmental boundaries in the MOF and drive the changes necessary to implement the modernization strategy. Reform management arrangements need to be substantially strengthened, including by appointing a dedicated reform program team.

Strengthening both the tax administration at the central level and core business functions. Successful tax administrations allocate at least five percent of total staff resources to the HQ function. Staffing of the HQ in Poland falls well short of this benchmark and needs to be addressed promptly. Core business functions should also be strengthened without delay.

Addressing declining tax revenues, especially for VAT and CIT. Immediate steps should be taken to launch coordinated compliance projects for the high risk industries identified in the National Action Plan; develop an overarching strategy for addressing the informal economy; and consolidate VAT risk analysis using national databases of individual taxpayer data and a much broader range of external data. For CIT, coordinated audits should be undertaken of a range of genuinely large taxpayers selected centrally and based on risk.

Improving compliance risk management. Full responsibility for all tax related audits and investigations should be consolidated into a single MOF department reporting to the Undersecretary responsible for revenue administration—tax and customs. Field audit resources should be regrouped into provincial level teams and geographic jurisdictional restrictions removed. Early action should be taken to establish a genuine Large Taxpayer Office (LTO) responsible for managing compliance of the largest 1,000 taxpayers—they account for around 50 percent of tax revenues. All taxpayer service functions should be consolidated under a single manager and a comprehensive taxpayer service strategy developed. In the medium term, the tax administration should transition to a comprehensive approach to managing compliance risks.

The mission’s key recommendations are summarized in Box 1.