The regulations related to the (pre-) pro rata introduced on 1 January 2016 have limited the possibility of deducting VAT for some taxpayers.
Until the end of 2015, local government units were entitled to use a pro rata deduction of VAT in relation to general expenses (i.e. those related to the general functioning of local government units). The deduction of VAT was based on the pro rata indicated in article 90 section 2 of the Act on Goods and Services tax (hereinafter: "the VAT Act"). The aforementioned pro rata, according to the Supreme Administrative Court judgement dated 24 October 2011 (ref. I FPS 9/10), The pro rata is referred to as a share of the annual turnover resulting from the activities in respect of which the taxpayer enjoys the right to reduce the amount of output tax in the whole turnover both in activities in respect of which he enjoys the right to reduce the output tax amount and the activities in respect of which he enjoys no such a right. Simultaneously, activities not covered by the scope of the VAT Act were omitted, i.e. those which constitute a significant part of the revenue of local government units. Consequently, the value of the pro rata in local government units fluctuated up to 90%.
Article 86 sections 2b-2h were introduced into the VAT Act on 1 January 2016. The (Pre-) pro rata regulations significantly limited the possibility of reducing VAT from the so called general expenses in local government units. Due to the introduced amendment, VAT taxpayers who purchase goods and services with the intention of:
when it is not possible to relate these benefits entirely only to the taxpayer’s economic activity, the amount of deductible input VAT is calculated in line with the determination of the use of acquired goods and services for business purposes, with the use of the (Pre-) pro rata .
The VAT Act indicates some methods of the calculation of the amount of the (Pre-) pro rata, including: surface key, personal key, income key or time key.
In general, the taxpayers indicate themselves the method of the calculation of the amount of the (Pre-) pro rata based on selected data. The method should allow the objective determination of the proportion of expenditures attributable to business and purposes other than business activities. First and foremost, the way in which the taxpayers calculate this amount should be defined by the specificity of the taxpayer’s activities and acquisitions.
However, for certain groups of taxpayers the recommended method of the calculation of the amount of the (Pre-) pro rata is indicated in the Regulation of the Minister of Finance of 17 December 2015 regarding the determination of the scope of the use of purchased goods and services for business purposes for certain taxpayers (Journal of Laws of 2015, Item 2193, hereinafter „ the Regulation”).
The Regulation indicates the turnover key, which is defined as the ratio of the annual turnover from business activities multiplied by 100, in relation to income which is made (including public revenue, EU budget funds, funds from foreign sources). Moreover, the Regulation encloses a detailed list of streams excluded in the (Pre-) pro rata calculations.
However, it should be remembered that the VAT Act - a legal act of a higher level, enables VAT taxpayers to apply other (Pre-) pro rata calculation keys. The issue has been the subject of dispute with tax authorities, currently being resolved by administrative courts.
According to the judgment of the Voivodship Administrative Court in Gliwice dated 17 March 2017, ref. III SA/Gl 1376/16: „The Regulation (…) is a lex specialis to the provisions of the VAT Act covering a distinct method of tax settlements for local government units. This means that a local government unit has no alternative of using the surface key as defined in article 86 section 2c point 4 of the VAT Act.”
However, this is an isolated statement and has no basis in the regulations. There are no regulations which would indicate that a local government unit has an obligation to calculate the amount of the (Pre-) pro rata solely on the basis of the turnover key indicated in the Regulation. The intention of the legislator was not to exclude the possibility of using other (Pre-) pro rata keys specified in the VAT Act, such as the surface key or the time key. This statement was emphasized in the justification to the Regulation, which points out that the proposed calculation method “will not limit the alternative methods of the calculation of the amount of the (Pre-) pro rata if the taxpayers consider them more representative. In line with article 86 section 2h of the VAT Act, in the case when the taxpayer, for whom the method of the calculation of the amount of the (Pre-) pro rata is indicated by provisions pursuant to article 86 section 22 (that is provisions of the designed Regulation), considers that the method of determining the proportion indicated based on provisions pursuant to article 86 section 22, does not correspond to the profile of his activity and acquisitions, he can apply a more representative method of the calculation of the amount of the (Pre-) pro rata”.
The majority of administrative courts in Poland (e.g. judgment of the Voivodship Administrative Court in Poznan of 19 April 2017, ref. I SA/Po 1318/16, judgment of the Voivodship Administrative Court in Opole of 10 March 2017 ref. I SA/Op 1/17, judgment of the Voivodship Administrative Court in Wroclaw of 15 February 2017, ref. I SA/Wr 1264/16), in view of the aforementioned statement, have expressed that there exists the possibility of applying an alternative method of the calculation of the amount of the (Pre-) pro rata, when:
Considering the judgment of the Voivodship Administrative Court in Rzeszow of 15 December 2016 (ref. I SA/Rz 881/16), in case the local government unit operates a local market and conducts on its territory:
the local government unit may be able to take advantage of the VAT deduction with the (Pre-) pro rata using the surface key.
In its judgment, the Voivodship Administrative Court (ref I SA/Rz 881/16) argued that the basic method of calculating the amount of the (Pre-) pro rata is as follows in the Regulation, however if this particular method does not correspond to the specific nature of the activity and acquisitions, it is permissible to use an alternative method. In this case, the local government unit indicates the surface method (with reference to the local market and parking) by determining an average yearly surface used for business purposes in the general average yearly surface used for business purposes and outside of them.
In conclusion, it is indisputable that a local government unit is entitled to choose a different method of calculating the amount of the (Pre-) pro rata than the one indicated in the Regulation. However, it is important for the adopted method to be more adequate and objective than the one indicated in the Regulation and to reflect the total expenditures incurred. This does not change the fact that the introduction of the (Pre-) pro rata has effectively limited the possibility of deducting VAT in local government units, and the numerous doubts regarding the calculation of the (Pre-) pro rata generate the risk of an incorrect VAT settlement with the tax authorities.
Magdalena Poznańska, consultant in the Banking&Finance Team, Tax Advisory, at KPMG in Poland