Settlements with the India-based provider of accounting services without withholding tax
Tax Alert 19/2016 | 7 September 2016
The fee for the services of accounting and data processing paid by a Polish entity to an Indian company is not subject to withholding tax - such a conclusion was reached in the decision issued by the Provincial Administrative Court in Łódź (WSA) on 18 August 2016 (No. I SA/Łd 540/16).
This favourable ruling was given in response to the complaint submitted against the individual tax ruling decision issued in January 2016 by the Director of the Tax Chamber in Katowice. In the background situation the taxpayer stated that it was a member of an international tax capital group that intended to introduce a new model of keeping accounts with the use of a shared service centre located in Poland. In line with the model, the taxpayer was to additionally order a related party in India to perform some services. The said services included in particular: support in the processing of receivables and liabilities, accounting reports, support in auxiliary processes for export and import services, tasks related to financial reporting, etc.
The taxpayer pointed out that the activities taken in the scope indicated above in fact constituted the services of accounting support and data processing and therefore, they could not be classified as "technical services" in the meaning of the Polish - Indian double tax treaty ("DTT"). According to DTT, the fee for technical services paid to a company seated in India may be liable to 15% withholding tax in Poland.
In the light of Article 13.4 of DTT, the term "fees for technical services" means payments of any kind as consideration for managerial or technical or consultancy services, including the provision of services of technical or other personnel (other than independent personal activities or paid employment). This term is very specific and it is not used in many other double taxation treaties concluded by Poland.
In the ruling appealed against the tax authorities indicated that the services rendered by the Indian entity for the benefit of the Polish company constituted broadly understood technical services, because undoubtedly, they supported the Polish company in the management process, and they also had an advisory and support nature, which - in the tax authority's opinion - demonstrated their "technical character". The argument underlying this conclusion was that the services in question allowed the Polish company to take business decisions and to plan its future activities more efficiently.
WSA did not corroborate the above opinion pointing out that the services covered by the taxpayer's ruling application could not be decidedly treated as services of a managerial, technical or advisory character. In particular, the court observed that the mere fact that the services at issue were helping make the managerial processes of another entity more effective was not enough to classify the services as managerial. As a consequence, WSA was of the opinion that the obligation to pay withholding tax in Poland would not arise.
WSA's decision is very good news for taxpayers using support services provided by entities based in India. Nonetheless, it does not dispel all doubts arising from the imprecise wording of the double tax treaty with India. Some of the Polish authorities believe that the fee for such services should be subject to taxation in Poland. On the other hand, we are also aware of certain other opinions that are favourable for taxpayers (such as the individual tax ruling issued by the Director of Warsaw Tax Chamber on 13 February 2012, No. IPPB5/423-1151/11-2/AJ)
In view of these discrepancies, applying for an individual tax ruling to confirm lack of withholding tax in Poland seems worthwhile. In addition, it is also possible to request a refund of the tax already paid to tax authorities.