Effectiveness of tax operations

11. Performance indicators of tax administration operations also seem to indicate deterioration on taxpayer compliance. Detailed indicators are provided in Appendix 1.

12. There is a large number of taxpayers in Poland. There are over 20 million registered taxpayers in Poland, the vast majority of whom are PIT taxpayers—all PIT taxpayers are required to register and file tax returns. New registrations and de-registrations are broadly in line with demographic norms for Europe. The number of taxpayers controlled by the LTO is very large; this is discussed later in this report.

13. Late filing of PIT and CIT returns is a concern, but nonfiling is at relatively low levels. Data supplied by the Tax Administration Department of the MOF shows high—though fairly steady—late filing rates for PIT and CIT returns over the period 2010—2013 of between 25–30 percent. Late filing of VAT returns is lower, at around 15 percent, but a high number of VAT returns claiming refunds will have reduced this rate (international experience suggest that refunds are rarely claimed late). The nonfiling rate for all three taxes is much lower, at around 5 percent.

14. Arrears of unpaid tax have grown for all four main tax types since 2011, with particularly strong growth in VAT arrears. As noted above, the growth in VAT arrears in recent years has been much stronger than in PIT and CIT (Figure 4) collected by the Tax Administration Department. Growth in excise arrears (under Customs responsibility) has been relatively low. Overall, arrears have grown from 9.2 percent of collection in 2011 to 13.8 percent in 2013. Most of this growth has come from VAT arrears, which grew from 14.0 percent to 22.4 percent, which could indicate widespread missing trader frauds. Write-offs of uncollectable arrears are low; less than 1 percent of collections overall for all taxes. Whilst this indicates strong diligence of write-offs by the Tax Administration Department at the MOF, it is also possible that the growth in debt as a percent of collections partly reflects growing levels of uncollectable debt that should in fact be written off. There is some evidence for this in the distribution of debts (statistical appendix 1, Table 14) in data supplied to the mission by the Tax Administration Department.

15. Audit assessments in the tax administration have increased from 2011 to 2013; however, collectability is unknown. Overall, the number of audits has fallen, from 123,000 in 2011, to 93,000 in 2013. However, the total additional taxes identified has risen from PLN 1.1 billion to PLN 2.2 billion, with most of this increase coming in 2013, when audit assessments almost doubled. This might suggest more effective targeting of audits and/or more effective audits; however, there is a risk that the improved additional assessments are also due to an increase in the incidence of noncompliance and could mainly relate to uncollectable assessments. The great majority of the increase in additional taxes identified in audits comes from audits of taxpayers not controlled by the LTOs. The sharp rise in additional tax identified in audits in 2013 seems likely to have come from a relatively low number of very large cases, as both the percentage of audits with results and the number of audits are largely unchanged.

16. Around 40 percent of taxpayer appeals in Poland are successful. The total number of appeals was around 15,000 in both 2012 and 2013, of which around 40 percent were successful, around half of those at the court level. The total amount appealed increased by about 20 percent from 2012 to 2013.

Recommendations

• Bring together the revenue analysis, currently reported separately, in a single report for tax administration.

• Create a national database of micro level taxpayer returns and payment (especially VAT) for centralized data mining, risk analysis, and revenue and gap analysis.

• Take immediate steps to address the compliance problems in main taxes—following sections discuss and recommend concrete measures.

Issues

34. Tax administration is fragmented. There is no single and unified organization responsible for the whole of tax administration or only for tax administration. The current tax administration department at the MOF is not a unified tax service, nor does it represent the headquarters of the tax administration—it simply coordinates or acts as an intermediary between the Undersecretary and the tax chambers and offices and other specialist offices. As illustrated in Figure 5, no fewer than 11 different points in the MOF have some level of involvement in tax administration. While the Undersecretary has oversight of much of this, this is not unified tax administration. Audit, a key tax administration function, is partially conducted by a department reporting to another Undersecretary at the MOF—the Fiscal Control Department. The diffuse responsibility for tax administration is confusing for taxpayers and increases their cost of doing business.

35. The span of control for the Undersecretary (tax, customs, gambling, and the several responsibilities not related to revenue administration matters) is enormous. The number of direct reports is clearly challenging and complex, and senior level responsibility below the Undersecretary level becomes diffuse. At present, the Undersecretary manages close to 60 direct reports, including responsibilities for customs, excise and gambling regulation and the various other functions not related to revenue administration matters. This impacts the tax administration organization at the central level, where headquarters functions should be performed.

36. The headquarters function is virtually absent. As in any large business, one part of the organization is devoted to developing programs and procedures, supervising implementation through field offices, monitoring results and ensuring a proper allocation of resources. HQ should act as the brain of the tax administration, constantly focused on the core business areas, i.e., registration and service, payment and processing, compliance, audit, enforced collections, policy, and legislation and appeals. The fragmentation of several units at the central level in the MOF dealing with tax administration matters and the broad span of responsibilities of the Undersecretary translates in practice into the absence of a unified HQ, performing HQ functions. To the extent any of these functions are present they are limited, diffused and staffed by less than 1 percent of overall resources. The competence centers will attempt to address this gap to a small extent but are not intended to perform full HQ functions. Tax administrations dedicate a relatively small portion of their resources to activities that are generally described as HQ functions—but much larger than the current allocation in the case of Poland (see Subsection D). Section IV discusses the importance of HQ in more detail as it relates specifically to core business processes.

37. There is no single IT organization dedicated to the needs of tax administration. A further example of fragmentation is IT; responsibilities are managed by five different MOF units involving two Undersecretaries and one Director General. Nowadays, IT plays a substantial role in defining tax administration process design and delivery. Given the scale of IT support to tax administration operations, international practice has geared towards complete control over IT resources by tax administrations—this includes both software and hardware. This has been particularly critical in using the internet for tax administration delivery to ensure high quality on line service delivery and rapid responses to risks.

38. The field network is too large. 400 tax offices overseen by 16 tax chambers is clearly inconsistent with more effective tax administration,⁹ in which IT innovations have reduced or eliminated the need for taxpayers to present themselves at a physical office. In the case of Poland, all core business functions are currently delivered in all offices and there is no consolidation into selected offices of functions that require specialized skills.

39. The LTOs do not focus on the largest taxpayers. The 20 LTOs have a mix of taxpayers that do not represent the top taxpayers in Poland. This is discussed in more detail in Section IV.

Issues

47. There is no single head of tax administration. As described in subsection B, there is no single point of accountability for tax administration below the level of the Undersecretary for revenue. This means that the Undersecretary, responsible for various other functions not related to revenue administration matters, is the only senior official who can view tax administration as a whole. Daily management of tax administration should not be vested in this management level. The coordination role played by the director of the Tax Administration Department is an inadequate replacement for a single head or chief executive officer (CEO) that has full responsibility for tax administration.

48. The ability to assess priorities across tax administration is inadequate. The document on Tasks of the Tax Chambers Directors and Tax Offices Heads falls short as a strategic plan or modernization strategy for the tax administration and does not include a medium-term vision for the organization. As described in Section IV, the National Action Plan is just indicative for the local level. Performance information and regular monitoring are in place with close to 90 indicators tracked by the offices and reported to the tax chambers (see Appendix 2). It is unclear how such an extensive list of indicators is actually evaluated and can be of any real use to address performance gaps—all while creating a substantial reporting burden on offices. This situation limits the ability to set priorities and make decisions about what to do, what can be done differently and what can be stopped—all in the interest of creating some resource space to pursue much needed reform initiatives.

49. Tax chambers and tax offices have excessive local autonomy. Tax chambers and offices can make decisions with limited or no reference to the various departments at the MOF level. The chambers and offices have direct lines of communication to the various departments at the MOF level and to the Undersecretary responsible for tax policy—but this is described as for coordination or advice rather than direction or supervision. Staff allocation across functions can be decided by the tax office—as tax offices are losing their separate organizational status, this is changing. The creation of the Tax Administration Department at the MOF in 2008 established an intermediary office, rather than a management layer between the chambers and offices and the Undersecretary.

50. There is no HQ focus on direction and management of chambers/offices, particularly to ensure consistent operational delivery. Inconsistency across offices is an issue that was identified by business stakeholders and others but the management structure and the size of the field network (with 400 tax offices) makes efforts at standardization close to an impossible task. Further, according to the business community the mission met, a level of differentiation is actually accepted by officials as needed to deal with local circumstance. Modern tax administrations strive to create a level playing field for taxpayers and this generally means the same processes are applied in the same way throughout the country. The Tax Administration Department at the MOF plays a limited role in the development of procedures and instructions and this is a recent development.

51. Staff resources directed to tax administration are not properly aligned to functions. General principles have emerged over the years that help modern tax administration decide on proper resourcing levels for major tax administration functions. For example, taxpayer service/registration should have 15 to 20 percent of staff resources, audit 25 to 30 percent. There is no such approach that governs tax administration in Poland and as a result, resources could be inappropriately allocated across work functions—which can be aggravated by the excessive autonomy of chambers and tax offices.

52. Management committees—in early stages of implementation in the case of Poland—need to be further developed. The committee system plays a major role in binding together a large and diverse organization and promoting effective cross-function working arrangements. The establishment of permanent committees responsible for key management issues and proper documentation of their work provides the vehicle for creating a “corporate memory” of important operational and reform activities and facilitates the transfer of knowledge to new members of the management team. Given the small size of staff at the central level (see subsection D), this good practice will be challenging in the short term but further steps should start being taken in this direction. Appendix 4 provides more detail on governance and committee arrangements.

53. Overall workforce management deserves greater attention. A great deal of the time of the HR central unit at the Tax Administration Department is now consumed with the consolidation of support functions to the chambers and the HR consequences of this change. However, given that staff resources consume the biggest share of the available budget, and the large number of staff, it is essential to develop a comprehensive view of the workforce and the HR policies that will be required for the tax administration reform agenda ahead.

54. The legal framework needs to be reviewed to remove restrictions. The need for a first and second instance review by separate organization units should be dealt with when the tax offices lose their separate organizational status; this will require addressing the possibility of also consolidating core tax operations at the chamber level. The need for the physical presence of tax chambers and offices reflects the administrative structure of the country and there is at present a requirement for a tax administration presence in each region and district/city. Finally the law restricts the authority and ability of tax officers to operate anywhere in the country. This restricts how management can assign its workforce in the most effective way possible. There are a number of legal aspects to consider as the next reform steps are developed. The draft tax administration act may be a vehicle to address some of these problems.

55. The tax administration’s mandate should be focused on national taxes. The additional tasks related to parking tickets, TV licenses, etc. means that staff specialized in tax matters are devoted at least in part to relatively simple, transaction-based work. Other options could be considered. In a review of what taxes should be collected by the tax administration, the question of whether excise should be managed as a separate tax type should also be addressed. Finally, expenditure/budget issues are not usually the purview of the tax administration.

A unified tax administration

56. Establishing a unified national tax administration service should be an immediate priority for the Ministry of Finance. The problems due to the absence of a unified national tax administration have emerged as a recurring theme in this section and the negative impact of this weakness is equally clear in Sections IV and V. This weakness must be addressed urgently to make a sea change in improving efficiency and effectiveness. A proposal on the features of a Tax Administration Service (hereafter referred as TAS in this section) is elaborated in Box 5. The tax administration act under development for 2016 could be the vehicle to make the legislative changes necessary to create the TAS.

57. One of the first steps towards implementation would be to appoint a single head of TAS. This person would then be able to build the new organization and lead the development of the myriad of initiatives needed to move from the current fragmented approach to tax administration to a unified and robust structure.¹² Many countries have nominated a senior official and assigned them responsibility for implementation even before the legal basis for the new organization and position exists i.e. using the position of director of the Tax Administration Department as the interim TAS head until the position can be formally created and filled. The TAS head should be granted all necessary powers to begin to build the new organization.

Improving tax administration in the current context

58. A number of initiatives should begin now—whether an immediate decision is made on TAS or not. As analyzed in this section and sections IV and V, there are a number of weaknesses that can and should be addressed as soon as possible and are not dependent on adopting a unified national structure. Thus, it is still possible to make progress before any decision on structure is made.

59. A modernization strategy should be developed. The end state would need to include the issues raised in this section—organization structure, governance, management, and accountabilities—as well as the operational reforms described in Sections IV and V. Developing the tax administration’s vision for the next 5 to10 years is the first step in the development of the detailed modernization strategy. This work should not be delayed.

60. The appointment of an empowered leader of the modernization strategy supported by a high level reform committee will be crucial for success. The scale of the reform required to realize real change in tax administration in Poland demands the highest political commitment and sustained support. A strong and empowered reform program leader will need to be appointed to manage across departmental boundaries in the MOF and drive the changes necessary to implement the modernization strategy.

61. A modernization team of dedicated senior officials should be established, with full-time responsibility for designing and managing the modernization strategy. International experience has shown that where this is not the case, reform efforts lag, are not coordinated and ultimately fail. Reform program governance arrangements need to also be substantially strengthened.

62. Building a strong HQ to ensure standard methods and monitoring should be a first order priority. HQ is the business owner of all core processes, i.e., registration and service, payment and processing, audit, enforced collections, compliance, and appeals. It is also the focal point for IT, HR, and other forms of needed management support—it is an essential pre-condition to operational improvements.

63. Additional staff will need to be urgently considered to strengthen HQ. International practice has shown effective tax administrations dedicate at least 5 percent of overall staff resources at HQ, to perform HQ functions. It would be unreasonable to think that this sort of quantum leap could be made in short order for two reasons—it would put too much strain on the organization and some time will be needed to determine the right HQ size. It may be that the base for calculation (of over 40 000 current staff) is too large given efficiencies that will be realized through IT, other reforms, and changes to the field network. At present, it is estimated that roughly 200 people (from the two departments) are involved in functions that approximate those of HQ. As an incremental approach to building HQ, these resources (and those assigned to the competence centers) could be directly assigned to the Tax Administration Department at the MOF and initial staffing over the next twelve months could seek to strengthen HQ staff to around 800 to 1,000 people.

64. The legal framework needs to be reviewed to resolve operational impediments. A small legal team could be formed and tasked with a review with a goal of submitting a report to management within three months.

65. The field network should be streamlined. Considerations should be given to grouping delivery of some core business functions at the tax chamber—creating offices with specialized competencies.

66. Governance must be strengthened by establishing strategic management committees. These would include an executive committee (for overall strategy) and committees for operations, compliance, HR, IT, and for reform.

67. Strong working relationships with other parts of national government will be needed. For instance, the relationship with the customs service will remain important and specific initiatives should be developed to build and fully leverage the working relationship, e.g., reviewing the potential for enhancing the exchange of information. The management of VAT refunds is another critical area where tax and customs administration cooperate, as well as on largest taxpayers, usually an overlapping taxpaying population.

68. An overall sequence for these and other reforms should be developed. The reform agenda is complex and not all priorities can be launched at the same time. This obviously creates high risks. Immediate indicative priorities have been described in this section and the reform team needed to be appointed should develop a plan and sequencing of these and other initiatives for discussion with senior management. With elections expected in 2015, it would be a positive step to have a detailed roadmap articulated for the establishment of the TAS, as well as for the several modernization initiatives to undertake pending the establishment of the TAS. Box 6 sets out an indicative prioritization of initiatives under two scenarios: (1) TAS is created and (2) what can (and should) be done without TAS.

Box 6.

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

Create TAS	No immediate decision re TAS
Name interim TAS head and task with building new organization and leading modernization.	Name a modernization leader.
	Review options to vest more authority in position of Tax Administration Department director to allow management authority over tax chambers.

View Table

Create TAS	No immediate decision re TAS
Name interim TAS head and task with building new organization and leading modernization.	Name a modernization leader.
	Review options to vest more authority in position of Tax Administration Department director to allow management authority over tax chambers.

In either scenario:

• ✓ Develop a modernization strategy.

• ✓ Build HQ function.

• ✓ Undertake legal review: identify main issues and time needed to assess.

• ✓ Streamline field network—consider further consolidation.

• ✓ Establish management committees.

• ✓ Create one single LTO for top 1,000 taxpayers.

• ✓ Develop strong working relationships with other parts of national government, e.g., customs.

Current situation

72. Control of tax administration operational work by relevant MOF departments is weak and many key headquarters’ responsibilities are simply not undertaken at the central level. As discussed in Section III, the headquarters function is almost absent. It is clear that the MOF departments responsible for tax administration do not currently exercise effective control over the large network of tax chambers and local tax offices that instead operate largely under the discretion of their local management. The tax law prescribes high level business processes and defines the organization structure for tax chambers and local tax offices (i.e., the number and functions of organizational units required in each office). However, the design of operational business procedures and the allocation of resources across functions are at the discretion of heads of local tax offices. As a result, core business processes are currently not standardized across or within regions, and the central administration has limited information on what is happening on the ground across its 400 local tax offices. Headquarters departments have only recently commenced to develop national business plans and these are still at a very high level, set only broad objectives, and provide little more than general guidance.¹⁴

73. Headquarters does not have a structured performance management system in place and minimal effective performance monitoring and oversight is exercised at the central level. In practice, the planning process remains heavily weighted to bottom-up processes, existing performance measures are generally inadequate,¹⁵ management information systems are underdeveloped, and there appears to be little consequence for local tax offices for lack of adherence to headquarters’ directions. As a result, there is a major disconnect between the high level plans developed at the central level and the activities actually undertaken at the local office level. In these circumstances, there can be no guarantee that corporate priorities are being addressed.

74. Some recent initiatives are aimed at developing standardized business processes across the organization. Tax chambers have been tasked with responsibility for “supervising” the work of the local tax offices in their geographic patch. The chambers have commenced to take a stronger role in business planning (i.e., to develop regional work plans based on national plans), and new organizational units have been formed to quality assure the work of the local offices in respect of some core business functions such as audit. Two new ‘competence centers’ have also been established to assist in the development of standardized national procedures for the arrears management function.¹⁶ These competence centers are located within the tax chamber network but are effectively out-posted headquarters units.

Issues

75. As noted in Section III, successful tax administrations are anchored by a strong headquarters that sets policy and provides specific program direction and guidance to the operational level. Broadly, the role of a headquarters department in managing tax operational work is to provide a management system that delivers clear organizational direction and leadership to operational staff, translates organizational goals and objectives into annual work plans, and assures the effective implementation of those plans. A more detailed description of the tasks typically performed in this regard by an effective headquarters is provided at Box 8.

76. MOF departments responsible for tax administration are clearly under-resourced for a full headquarters role. Section III highlights the relatively small proportion of overall tax administration resources devoted to headquarters functions in Poland. MOF departments responsible for tax administration are currently resourced in line with the more policy oriented departments at the MOF. This does not recognize the extensive operational management responsibilities of a modern tax administration headquarters. As a result, the relevant MOF departments simply do not have the capacity to effectively playa headquarters role.

77. These departments must take greater control of operational work pending establishment of a unified tax administration service. It will take time to design and establish a unified tax administration. In the meantime the relevant MOF departments need to secure greater control over tax administration operations using the resources available to them. This will entail an analysis of the headquarters tasks illustrated in Box 8 to determine priorities. At a minimum, the following steps should be taken in the short term:

• The respective roles, accountabilities and reporting lines for all MOF departments responsible for tax administration, and for tax chambers and local offices, should be clearly articulated and widely communicated across the organization.

• These MOF departments, pending the establishment of the TAS, playing a tax administration headquarters role should take a far stronger role in developing annual business plans and a standardized performance measurement system to facilitate more effective monitoring and control over operational work should be developed.¹⁷ This may require a modest injection of resources into these departments that could be provided by reallocation (or assignation to) from the operational level.

• The development and implementation of standardized business process and procedures across all core business functions should be fast-tracked. Given the accommodation and resource constraints within the MOF, this work could be done by dedicated work teams out-posted to tax chambers using the approach piloted by the new collection enforcement competence centers. Under this approach, the work teams would be located in the tax chambers but would report directly to the relevant headquarters department in MOF.

• The division of responsibilities within the tax administration departments at the MOF needs to be reviewed to better delineate core functions across deputy directors and their respective unit under their supervision. Overlapping functions for core tax operations should be avoided to improve management, accountability and strategic drive of modernizations.

Issues

83. The effectiveness of the tax audit function is seriously eroded as a result of the current organizational arrangements. There are two main issues: (1) responsibility for risk management and the tax audit program is split across two separate organizational entities within MOF with overlapping powers; and (2) the tax auditor workforce is fragmented across sixteen provincial level Fiscal Control Offices and 400 local tax offices. These factors combine to preclude the development of a coordinated compliance strategy as neither department has a complete picture of the risk environment.

84. The lack of an appropriately organized and managed audit program is undoubtedly a major contributing factor to the level of noncompliance in Poland. In most advanced countries, tax audits are performed exclusively by the tax administration staff. These administrations establish their own specialist investigations units whose staff are trained, equipped, and empowered to deal with serious fraud and evasion cases (e.g., carrousel fraud), including cases likely to result in criminal prosecutions. Separate agencies are responsible for investigating other forms of economic crimes and close cooperative arrangements are maintained so that, where necessary, specialist tax investigators can be deployed to support the work of the other agencies in cases involving tax issues. The need for a specialist tax investigation capability to deal with VAT fraud is further discussed in Section V.

85. A fragmented audit capability is less effective in countering noncompliance. There is no single organizational unit that has a complete picture of the tax risk environment; no assurance that the MOF’s enforcement program is properly directed at the highest risks; and no real opportunity to evaluate the overall impact of the tax audit effort. Given the overlapping mandates of the two departments responsible for tax audit, it appears highly likely that there are major overlaps in the separate audit programs. Taxpayers may be treated in an inconsistent manner and confused about the powers of the particular auditors they are dealing with. Both departments claim that close cooperation is maintained to avoid targeting the same taxpayers, but feedback to the mission from taxpayer representatives suggested that this was often not successful. The mission assessed that effective coordination of audit activities across two separate organizational structures at sixteen provincial sites and 400 local tax offices would be problematic at best—especially in the absence of good management information systems. Furthermore, under the current organization, there is little incentive for the local tax offices to enforce collection of additional assessments raised through the fiscal control audits. The mission was advised that many of the assessments raised by fiscal controllers were unrealistic and unlikely to be collectible (e.g., assessments raised in relation to tax fraud cases).

86. The audit program is heavily skewed towards micro and small taxpayers. The risk analysis process and case selection process is relatively weak. The predominance of data from previous audits tends to perpetuate a focus on the same risks. The ‘random audit’ program is not managed centrally and does not reflect a truly random sampling approach. Instead these ‘random audits’ are selected by local offices and therefore reflect a local bias. They are unlikely to fulfill the objective of identifying new and emerging risks. Market segmentation principles are not applied below the tax type/industry segment level. This does not deliver a sufficiently granular analysis of risk. For example, large taxpayers are not singled out for special analysis and the process has not surfaced major compliance risks commonly encountered in the region.²⁰ Instead, all taxpayers are subjected to the same suite of risk parameters. Finally, case selection is only done by local tax offices, of which 380 deal mainly with micro and small taxpayers. The overall result is an audit program that is heavily weighted to the small end of the market and is therefore unlikely to have any significant impact in reducing the overall tax gap (see Table 2 in subsection D).

Table 2.

Stratification of Taxpayers, and the Audit Focus, 2013

Source: Prepared by the mission based on MOF data.

Table 2.

Stratification of Taxpayers, and the Audit Focus, 2013

				Total turnover (sales)		Total VAT paid
		Taxpayers		for each segment (a)		by each segment		Audit focus
Taxpayer segment	Turnover range (a) (PNL)	Number of taxpayers	% of total	Amount (PLN billion)	% of total turnover	Amount (PLN billion)	Percent of total VAT paid	Number of Audits	Percent of all audits
Large	Above 200 million (b)	2,463	0.15	2,504	53.07	84	47.4	1,214	1.92
Medium	40 million - 200 million (c)	9,578	0.57	777	16.46	29	16.55	3,287	5.14
Small	8.5 million - 40 million (d)	34,876	2.06	612	12.96	25	13.91	9,349	14.6
Micro	0 - 8.5 million (e)	1,643,875	97.23	826	17.51	39	22.14	50,096	78.34
Total		1,690,792	100	4,718	100	178	100	63,946	100
Turnover (sales):
	(a) Turnover (sales) includes all sales according to VAT returns, including exports.
The sales ranges in Zloty equals:
	(b) € 50 million and above
	(c) Between € 10 million and € 50 million
	(d) Between € 2 million and € 10 million
	(e) Between € 0 and € 2 million

Source: Prepared by the mission based on MOF data.

View Table

Table 2.

Stratification of Taxpayers, and the Audit Focus, 2013

				Total turnover (sales)		Total VAT paid
		Taxpayers		for each segment (a)		by each segment		Audit focus
Taxpayer segment	Turnover range (a) (PNL)	Number of taxpayers	% of total	Amount (PLN billion)	% of total turnover	Amount (PLN billion)	Percent of total VAT paid	Number of Audits	Percent of all audits
Large	Above 200 million (b)	2,463	0.15	2,504	53.07	84	47.4	1,214	1.92
Medium	40 million - 200 million (c)	9,578	0.57	777	16.46	29	16.55	3,287	5.14
Small	8.5 million - 40 million (d)	34,876	2.06	612	12.96	25	13.91	9,349	14.6
Micro	0 - 8.5 million (e)	1,643,875	97.23	826	17.51	39	22.14	50,096	78.34
Total		1,690,792	100	4,718	100	178	100	63,946	100
Turnover (sales):
	(a) Turnover (sales) includes all sales according to VAT returns, including exports.
The sales ranges in Zloty equals:
	(b) € 50 million and above
	(c) Between € 10 million and € 50 million
	(d) Between € 2 million and € 10 million
	(e) Between € 0 and € 2 million

Source: Prepared by the mission based on MOF data.

87. The tax auditor workforce is too small and is spread across too many sites. In modern tax administrations, at least 25 percent of the workforce is allocated to the audit function that encompasses both risk analysis and field audit. In Poland, the tax audit workforce (4,200 staff) represents only around ten percent of the total staff, and this workforce is fragmented across all 400 local tax offices. Furthermore, the tax auditors have jurisdiction only over taxpayers registered in their own local office and must rely on cooperation from other local offices where information is required from taxpayers not registered in their patch. This creates major logistical problems. These factors combine to dilute the effectiveness of the audit program and no doubt create scope for significant differences in approach across sites. Tax audits are also conducted by the 2,250 Fiscal Control inspectors located at the Fiscal Control provincial audit units, but these inspectors are not solely engaged on tax issues.

88. There is therefore a clear need to re-organize the overall tax audit program in Poland as follows:

• The mandate and powers of tax auditors and fiscal controllers should be revised to shift full responsibility for all tax related audits under one department. This department should have responsibility only for tax enforcement (i.e., it should be separate from Customs and other heads of revenue) and should report to the same Undersecretary as the Tax Administration Department under the current MOF organization structure. It would then be subsumed into the unified tax administration service when that service is established.

• Tax field audit teams should be consolidated at the provincial level similar to the way in which Fiscal Control is organized. This would include extending the jurisdiction of these staff at least to the provincial level and preferably to the national level. Consolidating the audit function into larger provincial audit teams would increase the critical mass of the audit teams, allow for greater specialization and more targeted training, simplify the line of command and improve communication with headquarters, tighten control over audit case selection, and facilitate a shift in audit focus more onto medium and large taxpayers. Any legal constraints related to the structure of first and second instance decisions would need to be identified and removed.

• The tax risk analysis approach should be strengthened and audit case selection centralized. In particular, a far more detailed level of market segmentation should be employed to gain a sharper picture of risks within particular taxpayer populations (especially the top 1,000 genuinely large taxpayers). Better access to third party data should be secured and skills developed in the use of modern analytics such as including data mining. Audit case selection should be centralized with only a small proportion of audit resources made available for locally identified risks. This will result in better targeting and reduced opportunities for corruption.

• Allocation of staff and financial resources within MOF should be reviewed to take account of the workload transferring from the Fiscal Control Department. Ideally, the specialist tax audit workforce should be built-up over time to at least 25 percent of the total tax administration staff.

Current situation

89. The tax administration in Poland is in transition to a new taxpayer service approach. It has embraced the need for a strong taxpayer service program to support a self-assessment tax system and to build community confidence in the tax administration.²¹ A number of impressive taxpayer service initiatives have been rolled-out in recent years including: E-filing of tax returns; modern customer service centers in local tax offices; targeted information campaigns; a seminar program for new businesses; a centralized National Information Center aimed at delivering consistent and accurate advice; a system of general and private binding rulings system to provide greater certainty to taxpayers; and a tax portal through which taxpayers can access information on their own accounts. A new program of personal assistance to all new micro taxpayers for a full eighteen months after registration has also been proposed in the draft Tax Administration Act, but the details of how it would work in practice have yet to be finalized—it will be one of the systems of taxpayer service and support initiatives.

Issues

90. Responsibility for taxpayer services is fragmented across several areas at the MOF tax administration department. There is some confusion around the term ‘taxpayer service’ and a number of filing, verification and payment processing activities are currently labeled ‘direct services.’ Other initiatives more in the nature of taxpayer assistance are managed across different units reporting to different deputy directors at the Tax Administration Department of the MOF. As a result, while good progress has been made on a number of service fronts, they have not been part of any overarching taxpayer services strategy.

91. All genuine taxpayer assistance responsibilities should be consolidated into a dedicated Taxpayer Services manager and a taxpayer services strategy developed. This will help ensure that the overall service program is developed and delivered in a structured way. The strategy should provide for differentiated services tailored to the needs and capabilities of different taxpayer segments; determine the appropriate communication channels for delivery of particular services; and accommodate the development of both general service campaigns aimed at broad sections of the community and more targeted service initiatives delivered as an integral part of compliance improvement strategies addressing specific risks.

92. The taxpayer service strategy should pay particular attention to new businesses as a discrete taxpayer segment. Many countries have developed outreach programs specifically for new businesses in order to promote good compliance behavior right from the start. Typical elements of such an outreach program would include: free seminars conducted in conjunction with other government agencies to help new businesses understand their obligations and entitlements; outbound telephone calls to check if the new business operator is experiencing any problems and to offer help and advice; optional free advisory visits at the taxpayer’s premises to resolve any problems that have emerged; and targeted advisory visits (nonoptional) to the premises of new businesses that are considered high risk.

93. Particular attention should also be paid to businesses that become employers for the first time. The transition to employer status introduces many new obligations and complexities for taxpayers. New employers are a key leverage point for embedding good compliance behavior from the start around obligations to withhold income from employees’ wages and to make social security payments where required—though these last fall within the remit of the Social Security Administration.

94. The proposal to provide personal assistance for new micro taxpayers is a commendable initiative but will need to be managed carefully. Ongoing one-on-one assistance to this number of taxpayers is simply not sustainable. These types of programs are better delivered through dedicated teams of service officers that take responsibility for providing support to groups of taxpayers through a structured program of seminars, outreach visits, and telephone and electronic communication.

Current situation

95. In all legal and operational respects the current LTOs are identical to the broader network of local tax offices. The current network of LTOs was established in Poland in 2004. The network comprises twenty full-functional offices with a presence in every province.²² The criteria for identifying the large taxpayer population are shown in Box 9. In total, this office network is responsible for around 87,000 taxpayers ranging in size from micro businesses to genuinely large taxpayers. As is the case with the broader local office network, each LTO is a separate organizational entity with its own budget and operates with a high degree of autonomy. They have the same management and reporting relationship with the provincial tax chamber and the MOF that applies to all other local tax offices.

Issues

96. The original purpose for establishing the LTOs has not been achieved. In line with international practice, the original intention was to secure tax revenues by achieving a sharp focus on the relatively few taxpayers who account for a large share of tax revenues. In most countries, LTOs are responsible for only the largest 500–1,000 of the largest taxpayers who typically account for 50–70 percent of total tax revenue. However, the criteria adopted for identifying the large taxpayer population in Poland has resulted in the capture of a far greater number of taxpayers (more than 80,000 in total) including a multitude of small and even micro taxpayers.²³ Inevitably, resources are strained to deal with the workloads imposed by large numbers of relatively small taxpayers and the focus on genuinely large taxpayers has been lost. The mission was advised that, in practice, around 80 percent of effort is expended on small and medium sized taxpayers. The loss of focus is perhaps best demonstrated by the fact that the same risk parameters are applied to all taxpayers regardless of size with the result that the audit program is heavily skewed towards the bottom end of the market (see Table 2).

97. A more sophisticated approach to managing compliance of large taxpayers is required. Because of their size, all large taxpayers represent a risk to the revenue and advanced tax administrations develop risk profiles for each and every one. Box 10 illustrates some of the issues that are considered in this risk profiling activity. This individual risk profiling is the main determinate of which large taxpayers will be selected for audit. Auditors in a properly functioning LTO will normally be organized into specialist industry sector teams focused on key client groups such as: information technology and communications; energy; transport; construction; banking and insurance; etc. This allows for the development of specialist industry expertise that is critical to understanding how large businesses operate. Service initiatives are also tailored to the needs of large taxpayers with a particular focus on fast turnaround of technical advice related to large scale projects.

98. The decline in revenue collections signals the need to re-focus on genuinely large taxpayers. It is essential to secure the large share of revenue contributed by genuinely large taxpayers. In Poland, the largest 1,000 taxpayers account for around 50 percent of total tax revenue. A new LTO, responsible only for these top 1,000 taxpayers, should be established without delay. Given the demographics of this large taxpayer population, the new LTO should be located in Warsaw but have national jurisdiction. It should deal only with national taxes (CIT, PIT, and VAT). The best qualified and most experienced auditors from the existing network of LTOs should be recruited for this specialist office.