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The new VAT rate matrix
On 1 July 2020 one of the key changes in VAT classification became binding, i.e. the new VAT rate matrix. This means that the extensive and complicated method for determining the VAT rates for goods based on the Polish Classification of Products and Services (PKWiU) was replaced by a simpler system based principally on the combined nomenclature (CN). How does this change impact the FMCG market?
According to the plan, the changes were supposed to come into effect on 1 April 2020, however, due to the ongoing epidemic conditions, in order not to burden taxpayers additionally with the need to adapt to the changes, the date of their coming into force was postponed by three months.
Nevertheless as of 1 November 2019 taxpayers were able to apply for Binding Rate Information (Wiążące Informacje Stawkowe – WIS), i.e. official documents in the form of administrative decisions specifying the classification of given goods/services and the respective VAT rate on their sale.
We have analysed selected WIS issued by the Director of the National Revenue Information System, presenting our conclusions from the first months of operation of this new instrument.
Taxpayers interested in obtaining WIS
The first WISs were issued in January 2020 (17 decisions). However, since February, a dynamic increase in the number of issued decisions can be observed (which is probably the effect of the fact that the deadline for issuing a WIS is three months). By mid-February alone, approx. 150 WISs were issued, and by the end of February already more than 350 were issued. In March alone the number of WISs that were issued was more than 300.
This trend shows that WIS was an instrument eagerly awaited by the taxpayers as, contrary to the solutions that functioned before it was implemented, it is an official confirmation of the classification applied and VAT rates in a document having the status of a decision.
Confirmation of using a classification or a reduced VAT rate?
An analysis of the issued WISs suggests that in principle taxpayers apply for WIS to confirm the right to apply a reduced VAT rate.
Taxpayers asked about goods or services taxed with a reduced 8% or 5% VAT rate decidedly more often than about the classification of goods or services taxed at the 23% rate.
It is worth mentioning that sometimes in the analysed WIS the need to use the 23% VAT rate was the result of the authorities challenging the taxpayer’s position (e.g. with respect to the possibility of recognizing some dietary supplements as goods taxable at the 5% VAT rate pursuant to item 17 of the new Appendix no. 10 to the VAT Act). However, the vast majority of WISs issued confirmed the classification proposed by the taxpayers in their applications.
In the context of the new VAT rate matrix it is natural to apply for a decision on taxing goods or services with a reduced rate, since the reduced VAT rates cover whole headings of the CN – and not specific subcategories as before.
This means that some groups of goods and services which have before been covered by higher VAT rates are now subject to reduced rates (in some cases even down from 23% to 5%). Introducing the new VAT rate matrix, the regulator adopted the rule of levelling down – i.e. a general reduction in VAT rates when the rate for a given good/service changes.
The most popular bakery products
The best example to illustrate this rule is the taxation of bread and bakery products (including in particular pastries). These products are included under the CN heading 19 (Preparations of cereals, flour, starch or milk; pastrycook products), which is the heading most frequently asked about.
On the grounds of the appendices to the VAT Act binding as of July, such goods, depending on such factors as ingredients (sugar, fat and other additives content) or expiry date, these goods could be taxed at the 5%, 8% or 23% VAT rate.
The new matrix stipulates that in principle all types of bakery goods will be taxed at the 5% rate. Therefore, it is obvious that taxpayers who in extreme cases this means a change in the taxation rate of 18% will want to have official confirmation of the correctness of their actions before changing the tax rate from 23% or 8% to 5%.
In addition, such a change also opens up the possibility of taxing some types of goods which had been taxed at the standard VAT rate at a reduced rate. Under heading 19 of the combined nomenclature are listed, for example, goods such as wafers and biscuits – also those coated in chocolate or other preparations containing cocoa.
Analysis of composition based on the example of preparation of ready meals and dishes...
An analysis of the issued WIS confirms that the tax authorities pay a great deal of attention to analysing the composition of the products trying to classify a given product as accurately as possible to a given subheading.
Classification of goods under heading CN 16 (Preparations of meat, of fish or of crustaceans, molluscs or other aquatic invertebrates) is an interesting example. In the WIS issued, for example, salads with chicken, meat croquettes, cutlets with mashed potatoes and vegetables, baguettes with chicken and hot-dogs were classified under this heading, as the authorities analyse in detail the ingredients in each product – in their classification making use of explanatory notes which indicate that processed foods should also be included under this heading, including so-called “food preparations” that include more than 20% meat.
The above shows a certain departure from treating a given product as prepared food as a whole (previously often taxed at the 5% rate) to analysing which ingredient dominates in the preparation of that meal – and taxing the goods at the rate applicable for the main ingredient.
…and herbal teas
This trend is also well illustrated by the example of taxation of teas. According to the new matrix, tea, as a product classified under the CN heading 09, is taxed at the 23% VAT rate. Nevertheless, in some cases, the issued WIS confirmed that seeds or dried fruit used to prepare the beverage, despite being called “tea” may use the preferential 5% tax rate – as “Oil seeds and oleaginous fruits; miscellaneous grains, seeds and fruit; industrial or medicinal plants; straw and fodder” (CN 12) and “Edible fruit and nuts; peels of citrus fruit or melons” (CN 08).
This shows a correct and factual approach of the authority to the analysed products – despite naming the product in a manner suggesting higher VAT rates, their actual composition is analysed and this is decisive for the adopted classification and respective tax rate.
Summary
Undoubtedly, WIS is an instrument that facilitates the proper classification of offered goods by taxpayers and taxing them with the correct VAT rates.
The good news is that an analysis of the decisions made by the authorities shows that they carefully examine the composition of the products based on the classification guidelines – and more importantly, they base their decisions on factual, and not pro-fiscal grounds.
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