According to the accounting act, for revenues from economic activities shall also be considered amounts due, even if they have not been received yet. These charges have to be included to the income and taxed. Unpaid invoices for services thereby increasing costs for the entrepreneur who due to issued but not paid invoice has paid their taxes.
If there are problems with the recovery of your charges which were placed in to the income and taxed, tax laws provides tools for creditors to deduct tax. The possibility of correction of paid taxes, reduction in tax receivables, or its refund should be considered in two aspects: value added tax and income tax.
Referring to the issues specified in the Act on goods and services tax, it should be noted that some changes will be made at the beginning of 2013 enabling the creditors to make correction faster than now. In previously binding provisions, taxpayer who has paid VAT from receivables, which in fact was not paid, could make an tax correction after 180 days from the payment period and under a number of additional conditions. The Act of 16 November 2012 on the reduction of some of the administrative burden in the economy, which entered into force on 1st January 2013 introduces significant changes in this regard for the benefit of creditors. The main change in the rules relates to reduce the period for correction by a creditor who has not received his receivables to 150 days from the closing date of payment specified in the contract or invoice the other change relates to the abolition of obligation to notify the debtor of planned tax correction. If the debt is not paid only in part, creditor will be entitled to correct the unpaid part.
To make correction effective and to deduct the VAT paid, it is necessary that the debtor cannot be in bankruptcy proceedings or in the course of the liquidation, the claims have been previously presented in a declaration as the taxable turnover and that both parties were active VAT payers. It should be noticed that there have not passed more than two years from the date of invoice. Possibility of correcting VAT does not apply to situations in which the claims were sold to other entities.
It is also aware that there is the possibility of revising the VAT tax in the case of succession. Director of the Tax Chamber in Bydgoszcz commented on it in his tax interpretation on 19th November 2012, no. ITPP1/443-1020/12/KM.
As regards income tax legislator has provided two options instructing how to make deduction of unpaid invoices. The best option for the taxpayer seems to be possibility of allocating bad debts in the cost of revenue, however, the provisions of the Act on Corporate Income Tax law, provide only a few exceptions to the general rule prohibiting the recognition of uncollectible receivables expenses.
Possibility of allocating bad debts in the cost of revenue requires the proof of default as it is strictly defined in the regulations (art. 23 p. 2 of the Act on Individual Income Tax law and art. 16 p. 2 of the Act on Corporate Income Tax law). This can happen only in the manner prescribed by the tax laws, namely:
provision for irrecoverability, issued by the competent authority of enforcement proceedings,
court order issued in the bankruptcy proceeding or as a result of the bankruptcy petition,
taxpayer protocol stating that the anticipated costs associated with the process and execution of debt recovery would be equal to or greater than the amount.
Above implies that the cost of allocation receivables can be proved only in the case of non-payment in the manner provided for in the act. This means that the taxpayer cannot include the cost of receivables, which demonstrated irrecoverable, in a different way than indicated above (judgment of the Supreme Administrative Court on 5th December 1997, ref. act I SA/Gd 768/96).
Referring to the various ways how to demonstrate the irrecoverability of receivables, it should be noted that a taxpayer wishing to include receivable as uncollectable must have specific evidence showing that the execution was conducted and did not bring the expected results, it cannot confine only to determine that the execution has probably no chance of recovery.
For the tax authorities it is not sufficient the statement of the creditor, who reached from the same debtor receivables through enforcement proceedings and execution involved have been previously pursued other debts and has proven to be ineffective. Creditor is required to submit an action for enforcement of any subsequent receivables previously not enforced. Also a notification in accordance with art. 763 of the Civil Proceedings Code that the execution, for example from a bank account or other item of property, is ineffective will not constitute the basis for the recognition of uncollectible receivables. In such situation it is possible to apply other enforcement measures by which the creditor must apply to the bailiff.
This issue was a subject of letter dated to 30th November 1995 (PO 4/AS-722-837/95) of the Ministry of Finance whose standpoint is still in force, indicating that the basis for recognition as deductible bad debts cannot be a decision on discontinuance of the proceedings, as well as other provisions of the enforcement authorities, from the content of which is not clear that the basis of non-payment was a lack of the debtor’s property.
In addition, the judicial decisions suggest that the condition of evidence the irrecoverability of receivables must be fulfilled in compared to each debts separately, and thus the evidence of irrecoverability of only one of the debts allows including to tax costs only this one specific receivables, not all of remaining receivables of each debtor (judgment of the Administrative Court in Warsaw of 12th July 2007, III SA/Wa 534/07). Similarly, the Supreme Administrative Court in its judgment of 9th January 2009, ref. II FSK 1754 to 1707, and the Administrative Court in Szczecin in its judgment of 6th May 2011, ref. Act I SA / W 132/11, under which “it can not be unequivocally stated that the identity of all of the debtor's debts can be considered to be uncollectible based on one of the irrecoverability provisions issued by the competent authority of execution (art. 16 p. 2 pkt 1 u.p.d.p.) concerning only one of the many debts”.
Referring to the possibility of recognizing uncollectible receivables under bankruptcy law it should be noted that the Law on Bankruptcy and Reorganization clearly indicate what provisions are the basis for the recognition of uncollectible receivables. This may be a decision to:
a) dismissal of the bankruptcy liquidation of assets when the assets of the insolvent debtor is not sufficient to cover the costs of the proceedings,
b) discontinuance of the bankruptcy proceedings involving the liquidation of assets, the assets of the insolvent debtor is not sufficient to cover the costs of the proceedings,
c) termination of bankruptcy proceedings involving liquidation of assets.
Most questionable option of possibility to determine non-payment of a protocol drawn up by the taxpayers is set out in art. 16 p. 2 i. 3 because the regulations do not explicitly define what elements should contain. Provisions of the Act is limited to the determination that it shall state that the expected costs associated with the process and execution of debt recovery would be equal to or greater than the amount claimed and enforced. In determining these costs the costs associated with the use of legal representation by a lawyer and court costs shall be included.
Protocol requirements for offsetting the expenses described as irrecoverable debts were formed in judicial decisions. According to the judgment of the Regional Administrative Court in Poznań from 09th November 2010, ref. Act I SA / Po 589/10: “it is inadequate to only indicate in protocol that the expected costs of the vindication of debts will exceed the receivables The protocol should be reliable - by which is meant a situation that it would be possible to repeat the calculations in case of a dispute with the tax authorities”.
In addition, the list included in the protocol should contain, among others court costs, attorneys' fees, reimbursement of lost wages for the witnesses, the costs of the experts’ study, the down payment, the costs of debt enforcement proceedings, or preparation of the documents date the taxpayer. The protocol should also include information which analysis would allow to undoubtedly estimate if actually costs of vindications of debts will exceed or will be equal to receivables. It is not allowed to include receivables to tax deductible costs under the protocol referred to in art. 16 p. 2 i. 3 of the Law indicated above, containing a statement that as a result of the attitude of the debtor, notice to debtor’s summons before arbitration cannot be served, or ad hoc arbitration competent to settle the claims of the creditor cannot be constituted, as well as when the expected cost of proceedings and execution are not possible to estimate. Necessary part of content of the report is a reliable and, therefore testable statement of expected amounts of legal costs and of enforcement of the sum claimed debts. They have no appreciable importance of the implications of the Protocol.
It should also be remembered that to include bad debts as an expense tax include it should be proven its irrecoverability not later than on the cost of credit. Bearing in mind the requirements set out above it is clear that, as described above can be evidenced only relatively small amounts of debt.
At this point it shall be indicated on another mechanism that allows the taxpayer to reduce tax costs caused by unreliable contractors. Described above recognition of uncollectible receivables allows for direct qualification for the deductible, you can not confuse this with the recognition probabilities of default, which entitles you to count towards the cost of an asset write-downs only.