Introduction
Year 2014 has been fiscally safe for Seafarers employed aboard vessels operated in international traffic by enterprises with their effective management in Singapore, due to the fact that their income has been subject to exemption with progression tax method, which results in non-existence of fiscal liability in Poland and lack of obligation to file income tax returns therein, as long as no simultaneous income has been derived or taxable in Poland. Such Seafarer-friendly situation has also subsisted in previous years. Alas, as indicated in the former features, a new double tax avoidance agreement contracted between Poland and Singapore on 4th November 2012 changes the current tax status of Seafarers.
The international agreement mentioned above was ratified on 6th February 2014, therefore its provisions will be applicable to Polish Seafarers as of 1st January 2015.
What will year 2015 change in regard to Polish Seafarers?
The new double taxation avoidance agreement between Poland and Singapore provides that income derived from contractual employment exercised aboard a ship operated in international traffic by an enterprise of a Contracting State shall only be taxed in that State. However, if such income is derived by a person residing in the other Contracting State, it may also be taxed in that other State.
Nevertheless, in accordance with art. 22 point 1a, where a resident of Poland derives income which, in accordance with the provisions of the Agreement, may be taxed in Singapore, Poland shall allow deduction from tax on the income of that resident, an amount equal to income tax paid in Singapore. The method of exemption favorable to Seafarers was therefore replaced by a less preferable method of proportional deduction.
In accordance with a bill ratifying the new agreement (form 1291), an ordinary tax credit method was introduced for all categories of income. In the ordinary tax credit method, a foreign-source tax is accounted for tax due in the state of tax residence, calculated in regard to overall income, in a proportion in which the foreign-source income remains to the entire income of a tax payer. Thus, an applicable tax rate is determined in three steps. At the outset, income derived by a taxpayer from sources in Poland and foreign-source income are summed up. Next, the sum computed in the aforementioned manner is subject to income tax calculation in accordance with scale stipulated in the Personal Income Tax Act. In the third stage, an amount equal to foreign-source tax is deducted from the overall tax, as depicted above. Nevertheless, such deduction shall not exceed the proportion of tax that would be attributable to the foreign-source income in regard to all taxable incomes of a taxpayer.
This change in taxation method stems from numerous Singaporean domestic legislative mechanisms, that might have been leading to tax evasion among Polish residents. The proportional exemption method enables more extensive control over foreign-source income derived by Polish taxpayers, excluding double taxation at the same time.
Advance tax payments
Due to the aforementioned circumstanes, a taxpayer is bound to calculate and pay an advance personal income tax to a Revenue Office with territorial jurisdiction over the place of his or her residence. In such an event, personal income tax is calculated in respect of income derived by a Seafarer, at the lowest rate, i.e. 18%, following substraction of deductible costs, due allowances and national insurance contributions. Advance on personal income tax is payable by the 20th day of the month following a month in which a taxpayer derived income and it is due, unless a Seafarer chooses to claim limitation of advance payment collection and acquires a relevant decision reducing its rate in a fiscal year down to zero.
Abolition relief
Art. 27g of Personal Income Tax Act shall be applicable to income derived by Polish Seafarers in 2015 during employment with Singaporean shipowners. The aforementioned provision envisages an abolition relief, which enables tax deduction, an amount equal to difference between tax computed using a proportional exemption method and tax calculated through an exemption with progression method. Eventually, there will be no tax due neither in Poland nor in Singapore, unless a Seafarer derives income in Poland. Nevertheless, it will still be compulsory to make advance tax payments and file tax returns in a given year, which will result in a budget freeze for a period longer than a year, as each transfer received from an Employer shall be subject to an advance 18% tax rate payment (having subtracted any applicable deductions). The refund may only occur subsequent to filing a tax return (until April 30th of the following year), unless an advance tax payment reduction applies.
Reduction of advance tax payments
On the grounds of art. 22 par. 2a of Personal Income Tax Act, it is admissible to claim a reduction of personal tax income advance payments, which may enable Seafarers to cease making advance tax payments. In such an event, a Seafarer is only liable to file a correct tax return for a given year, i.e., in case of Singapore, year 2015 until April 30th 2016. Tax status of Polish seafarers employed aboard ships operated by Singaporean entities is therefore analogous to the one of Polish seafarers employed with Norwegian shipowners in 2014 (NIS ships, other foreign maritime flags). In regard to Norway, a couple of months have passed until Polish revenue entities adapted a moderately unanimous stance on reduction of advance tax payments collection. This may also be an issue in case of Singapore, as despite the existence of corresponding regulations concerning reduction of advance payment collection, revenue entities attempt to construe tax provisions differently e.g. in regard to Saudi Arabia or Guernsey. Furthermore, it is noteworthy that some revenue entities, such as Revenue Office in Wejherowo, First Revenue Office in Gdynia, First Revenue Office in Szczecin, have initiated investigation proceedings against Seafarers who claimed to reduce advance tax payments in the previous years. Polish seafarers applying to residence-based revenue offices shall at all times bear the aforementioned in mind, which is why it is recommended to determine tax status of a Seafarer prior to claiming a reduction of advance tax payments in previous years. Such conduct may help manage one’s fiscal situation and avoid potential tax-related risks in Poland.
Purpose of the new Agreement between Poland and Singapore
The main purpose of the new agreement is strengthening cooperation between Poland and Singapore in order to reduce tax evasion and fiscal malpractice. The agreement applies to corporate tax and personal income tax of persons involved in bilateral relations between Poland and Singapore. The provisions of the new agreement also pertain to Polish revenue administration entities that shall comply with regulations thereof.
As indicated above, the ordinary tax credit method shall apply to all categories of income the agreement covers. Replacement of formerly applicable exemption and progression method stems from solutions exercised in Singapore, which might had led to tax evasion among Polish residents. The proportional deduction method guarantees more extensive control over income derived by the Polish taxpayers abroad and excludes double taxation of income.
Information exchange
It is worth mentioning that art. 25 of the new agreement broadens the current wording of art. 27, adding regulations compatible with art. 26 point 4 and 5 of the OECD Model Convention, i.e., a so-called, “full information exchange clause”, which concurs with the Ministry of Finance policy. On the grounds of the provision in question, if information is requested by a Contracting State in accordance with that Article, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other State may not need such information for its own tax purposes. The obligation contained in the preceding sentence is subject to the limitations of paragraph 3, but in no case shall such limitations be construed to permit a Contracting State to decline to supply information solely because it has no domestic interest in such information. Wording of the mentioned provision makes it easier for Polish revenue entities to find undisclosed income sources of Polish taxpayers in Singapore.
Conclusions
To conclude this analysis it must be stated that in case of contractual employment exercised from 1st January 2015 aboard ships operated in international traffic by enterprises with their effective management in Singapore, Polish seafarers will be bound to declare their income in Polish tax offices. Meanwhile, on the grounds of art. 27g of Personal Income Tax Act, a taxpayer shall be eligible for an abolition relief. Such relief may only be claimed by way of an annual tax return (PIT-36), therefore Polish Seafarers may either pay advance payments throughout the whole year, or apply for reduction of advance tax payments.
Moreover, despite initial difficulties with regulations pertaining to advance tax payment reduction in terms of Norway 2014, claiming such reduction in relation to income derived during employment with Sinagporean entities should be deemed expedient.
Radca Prawny Mateusz Romowicz
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