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55 (150) 2022

Finance

Tax incentives for expansion

By Miłosz Saramak, head of marketing and business development, KR Group and Marta Tchórzewska, vice president of Development and Advisory, Altios International
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All the economic indicators suggest that the world is headed toward another economic slowdown. Certain countries and industries are struggling with particular challenges. The pandemic uncertainty still prevails, and on top of that we are staring down the spectre of an energy and commodities crisis.

Businesses in Poland will have to stand up to similar issues. The Polish economy displays signs of a slowdown. We are also facing the highest inflation in decades, and debt financing is becoming more expensive. Meanwhile, there is creeping uncertainty on macro- and micro-economic prospects.

According to an international study by researchers at King’s College London, during the pandemic there was no decline of creativity among Polish businesses, nor was there an increase in the feeling of uncertainty. And the data shows that many firms from Poland exploited the pandemic-driven reshuffling of supply chains to strengthen their own market position.

Is it likely that some firms will again exploit this period of uncertainty as an opportunity? Undoubtedly it will be a harder task this time, which is also betrayed by the moods among Polish managers. On the other hand, instruments and mechanisms are appearing all over the world to stimulate slowing national economies.

Support instruments around the world

Numerous instruments and programmes have been offered around the world for a long time by central and regional governments to support exporters. Firms from countries like Belgium, France, Italy and the UK can take advantage of such incentives. In Poland such solutions are accessible through programmes of PAIH (the Polish Investment and Trade Agency) and – with a limited range – the Internationalisation of Eastern Poland scheme. Thus, the tax relief for expansion introduced via the Polish Deal may prove to be an interesting solution.

Mirek Rosiński, director of international projects at Altios International, says “Any new instruments realistically supporting Polish exporters are important. This incentive may encourage firms to seek new sales markets and thus help diversify their sources of revenue, which can be a pro-growth factor particularly in times of economy uncertainty. Thanks to this solution, Polish businesses will receive a boost during crisis times.”


Tax break for expansion

For some time, there has been a visible trend in Poland of offering tax incentives to businesses to grow their operations. Polish lawmakers seem to understand that broad marketing expenditures incurred with the aim of generating higher revenue can be costly. Currently, at a time of crisis caused by the pandemic and rapid growth in prices, firms wishing to expand their business are often forced to abandon efforts to seek out new sales markets, valuing stability over investment in growth.

Motivation for expanding operations on national and international sales markets is the aim of a new cost-based tax incentive to be introduced from January, known as ‘expansion relief’, which will be available to all businesses incurring expenditures associated with promotion of their products. Significantly, this relief does not cover activity related to promotion of services, but only products, and this means that taxpayers not producing their own goods will be excluded from claiming this relief. Consequently, taxpayers carrying out distribution sales will not be eligible for expansion relief.
Businesses generating income from operations within a special economic zone or from implementation of new projects based on an SEZ permit will also be excluded from expansion relief.

How does the tax relief work?

The tax relief for expansion consists of the possibility of taking an additional deduction for costs which the taxpayer must incur to expand its sales markets, including foreign markets. This covers expenditures for such items as:

  • Participation in trade fairs, incurred for:

      - Organising an exhibition stand
      - Air fares for staff
      - Food and lodging for staff

  • Promotional and informational activity, including purchase of ad space, preparing websites, press publications, brochures, catalogues and flyers for products
  • Adjusting product packaging to suit customers’ requirements
  • Preparing documentation enabling the sale of products, particularly certification of goods and registration of trademarks
  • Preparing documentation needed to join tenders and to submit offers to other prospective customers.

Under this relief, businesses will effectively be able to deduct 200% of the costs from this list, as the same cost can be deducted once as an ordinary revenue-earning cost and a second time, under the expansion relief, to reduce the tax basis – but for the purpose of expansion relief, only up to the limit of 1 million złotys.

The only condition for taking an additional deduction for these expenditures is an increase in revenue from the sale of existing products or generation of revenue from sale of products not previously offered, or not offered within the given country, within two years from the tax year in which the taxpayer incurred the costs.

If the costs covered by the relief exceed the revenue obtained (a tax loss), the amount of the relief is not lost, as deduction of these expenses can be carried forward over the next six tax years.

A potential problem?

This scheme can pose a trap in the situation where there’s no increase in revenue in the following two years. Then the taxpayer will be required to refund the relief.

Revenue from sale of goods produced by the taxpayer is understood to mean sale of such products for consideration to an unaffiliated entity. No amount or percentage by which such growth must occur is indicated, nor whether the taxpayer must maintain separate records to show an increase in revenue. Given the lack of established practice on this issue, in the current situation it should be assumed that, as in the case of any other tax preference, the taxpayer will bear the burden of appropriately documenting and proving that the given expenditures contributed to expansion of the taxpayer’s business.

Hanna Polańska, tax compliance manager at KR Group, says: “Expansion relief will be available to large firms and SMEs deciding to incur expenditures related to expansion on either foreign markets or the Polish market. The aim for taxpayers and the state is to increase the revenues of firms so that they can continue to grow and hire workers.”

This relief fills in the area of manufacturing, where in the past taxpayers could not count on tax incentives if they did not conduct R&D activity. In this respect they could only draw on R&D relief, functioning since 2016. Claiming the new expansion relief will not exclude being able to benefit from other existing forms of tax relief, such as R&D relief, the IP Box, or incentives for prototypes or robotics.

A step in the right direction, but …

“Entering a new market, building the right strategy, selecting support instruments, and seeking the appropriate partners is a highly complex process, entailing the need to incur various costs depending on the specifics of the sector or the products. Thus, the fixed catalogue of eligible expenses, in a fairly narrow range, poses a barrier to the use of the new expansion relief,” says Mr Rosiński.

The attractiveness of this instrument may also be restricted by the fixed, limited amount of eligible costs. This means that introducing the relief within a business may require more work than the potential benefit is worth. Nonetheless, businesses should view this mechanism as a form of long-term support for international expansion.

Considering how R&D relief has grown and become more attractive over time, hopefully a similar process will occur in the case of expansion relief. It is certainly a step in the right direction.

 

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