WHT under the tax authorities' magnifying glass - what mistakes may expose a firm to an audit?
WHT areas of risk - what does the tax office look out for?
It is important to remember that withholding tax is not only a topic of dividends or interest. In practice, the tax authorities are also increasingly focusing on other categories of cross-border payments - in particular royalties, intangible services (such as consultancy, marketing, research, management services) and industrial facility fees. These areas are also of interest to the tax authorities - especially in situations where the taxpayer benefits from exemptions or reduced rates under double taxation agreements.
It is in such cases that the tax authorities examine in detail whether the taxpayer has exercised due diligence and whether the foreign counterparty fulfils the conditions for being deemed the beneficial owner. The validity and reliability of certificates of residence and the possible intermediation of third parties are also under scrutiny.
WHT audits - how do the authorities work?
The increased interest in WHT is translating into concrete action on the part of the tax authorities. Audits in this area are increasingly detailed and often preceded by data analysis - both from reports filed by taxpayers (e.g. MDR) and from international information exchange.
Recently, so-called targeted audits - focused on a specific risk (e.g. payments for certain services or the use of exemptions without opinion) and conducted in parallel at different taxpayers - often from the same industry or group - have become increasingly common practice.
The authorities are increasingly preparing for audits in advance, using analytical tools and data stored in systems. As a result, taxpayers may be faced with very precise questions and the expectation of concrete evidence that, for example, tax preferences have been applied correctly. This shifts the burden of proof to the taxpayer and requires much better documentation and preparation already at the transaction stage.
Withholding tax - when should extra caution be taken?
From a taxpayer's perspective, particular caution should be exercised with any cross-border payment that is potentially subject to WHT - whether it is a dividend, a royalty, an intangible service or a fee for the use of an industrial facility.
The risk increases especially when:
- the payment exceeds the threshold of PLN 2 million per year (the limit after which obligations related to the pay and refund mechanism may arise),
- the taxpayer does not have an opinion on the application of an exemption or reduced WHT rate,
- the foreign counterparty operates in a holding structure and it is not excluded that it forwards payments,
- the counterparty's documentation is incomplete, outdated or contains elements raising doubts (e.g. a residence certificate from several years ago residence certificate from several years ago),
- the taxpayer has not implemented internal due diligence procedures or is unable to demonstrate how it has assessed the beneficial owner status.
Due diligence in WHT - practical tips on how to protect yourself
With WHT audits becoming more frequent, a proactive approach to tax risk management is becoming crucial. Above all, taxpayers who want peace of mind should ensure well-documented due diligence and the preparation of appropriate internal procedures.
In practice, it is worth considering, among other things:
- implementing a policy of verifying contractors in terms of tax residency and beneficial owner status,
- regularly updating certificates of residency and archiving documents proving the actual performance of services,
- preparing a due diligence procedure - even in a simplified form that shows, that the taxpayer has taken real steps to assess the obligation to collect WHT
- taking advantage of the available protective instruments, such as an opinion on the application of the exemption, an individual interpretation or applications for advance pricing agreements (APAs),
- reviewing and internally auditing WHT settlements - especially in corporate groups where there may be recurrent payments between companies.
The better prepared the taxpayer, the better the chances of a positive audit outcome - or at least a reduction in management's risks and liability.
How can we help?
With increasing audits and complex withholding tax formalities, we support our clients comprehensively - both in assessing risks and in securing settlements.
Amongst others, we help with:
- analysis of WHT obligations and identification of payments that may require tax collection,
- assessment of beneficial owner status and verification of due diligence
- preparation or updating of internal procedures for WHT
- obtaining opinions on the application of the exemption and individual interpretations
- conducting reviews of settlements and documentation - also in the form of a quick audit prior to an audit,
- during tax audits - in contacting the authorities and in preparing answers to questions from officials.
We act not only reactively but also preventively - we help build a safe and transparent approach to WHT that minimises the risk of disputes with the tax authorities.
