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Fitch: Tax Change Less Severe for Polish LRGs; Impact Will Vary
December 9, 2016 / 9:58 AM / in a year

Fitch: Tax Change Less Severe for Polish LRGs; Impact Will Vary

(The following statement was released by the rating agency) WARSAW/LONDON, December 09 (Fitch) The increase in Poland's personal income tax (PIT) threshold will have substantially less impact in aggregate on Polish local and regional government (LRG) revenues than previously forecast, Fitch Ratings says. Nevertheless, the impact may still be noticeable for LRGs that have been less successful in spending and cost control in recent years. At the end of November, Poland's parliament passed a law to increase the PIT threshold to PLN6,600 from PLN3,000 from January - the first such increase since 2009. This meets a pre-election commitment by the ruling Law and Justice (PiS) party, and an end-November deadline set by the Constitutional Tribunal when it ruled last year that the PIT threshold should be no lower than the minimum subsistence level. Under the new law, the PIT threshold will be set for individuals with reference to their annual earnings, rather than applying to everyone who pays income tax. Those earning up to PLN6,600 a year will be eligible for the maximum threshold, while for those with higher annual earnings, the threshold will gradually drop, reaching zero for taxpayers who earn more than PLN127,000 per year. The Polish Ministry of Finance (MoF) estimates that PIT-generated revenues under this system will fall by around PLN1bn, compared with an earlier estimate of PLN16bn based on the higher threshold applying to all taxpayers. Around half of PIT revenue is distributed to Poland's LRGs, with the bulk going to cities and municipalities (regions rely more on corporate income tax revenues). An aggregate reduction of PLN500m in current revenues would amount to 0.3% of LRGs' operating revenue budgeted for 2016, compared with 5% using the earlier MoF estimate. The direct impact on Polish cities' and municipalities' aggregate budgetary performance in 2017 from lower PIT revenue streams has therefore been substantially reduced. However, the reduction will still be relevant to our credit assessment. The impact on operating performance will vary, and will depend on the level of PIT contributions to current revenues, but also on the number of taxpayers with lower incomes. It will also depend on particular LRGs' policy responses, which may be constrained as budgetary flexibility has dropped as it becomes harder to cut rigid expenditure in areas such as education. As yet, the central government has not announced any system to compensate affected LRGs for lost revenue, and it is unclear if such a system is planned. Falling current revenues may also have a longer-term secondary effect of constraining borrowing capacity, by pushing some LRGs closer to their individual debt limits. These limits state that the ratio of debt service costs to total revenue in an LRG's budget plan should not exceed the ratio of the current balance, plus revenue from asset sales, to total revenue, averaged over the previous three years. Any full effect would therefore take at least three years to emerge, but could have implications for financing flexibility, and investment, over time. LRGs in Poland are currently rolling out investments that they intend to co-finance with grants available under the 2014-2020 EU budget. We think that this process will accelerate in 2017 to make up for low capex in 2016. A majority of LRGs will need to incur new debt in order to tap these grants, most of which are received after the LRGs have initially financed capex themselves. Any additional constraints on borrowing capacity may in some cases reduce or delay investment and the absorption of EU grants. Contact: Maurycy Michalski Director +48 22 330 67 01 Fitch Polska S.A. 16 Krolewska Street Warsaw 00-103 Mark Brown Senior Analyst Fitch Wire +44 20 3530 1588 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email:; Malgorzata Socharska, Warsaw, Tel: +48 22 338 62 81, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. Related Research 2017 Outlook: Local and Regional Governments here Interpreting the Financial Ratios in Local and Regional Government Rating Reports here Polish LRGs Debt Dashboard November 2016 here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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