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VATable and non-VATable transactions – allocation of input VAT

Everyone dealing with VAT in other EU countries is surprised that so far in Poland the taxpayer making both VATable transactions and activities that do not fall within the VAT regime is entitled to deduct the whole amount of VAT resulting from purchases of goods and services where direct allocation to VATable and non-VATable activities is not possible.  


The above solution has been particularly attractive to municipalities, but also to some kind of holding companies. However, to stop such possibility Ministry of Finance proposed new provisions that come into force from January 20016.


Under new solutions, the taxpayer performing both VATable transactions and activities that do not fall within the VAT scope will be obliged to deduct input VAT in line with the proportion representing the allocation of goods and services to those streams of activities. Then, once input VAT allocated only to VATable activities is established it will be deducted based on pro rata (representing allocation of purchases to supplies subject to VAT and exempt).


The new provisions provide a number of methods to establish the initial proportion – the taxpayer should choose the most appropriate one for his individual situation. The methods refer to (i) average number of employees dealing only with VATable transactions to average total number of employees, (ii) average number of hours devoted only to VATable transactions to total number of hours, (iii) turnover generated from VATable transactions to total revenues, (iv) the surface of the building used for VATable transactions to total surface of the premises.


Throughout the year the taxpayer will be deducting VAT based on initial proportion, established based on data available from the previous year. After the year end the actual proportion will calculated and the deduction corrected.


In general, those new rules will affect municipalities and public bodies performing also VATable transaction. Nevertheless, VAT deduction by certain type of holding companies may also be affected.


Source: International Tax Review/Marta Szafarowska

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