How large is Poland’s corporate income tax gap among SMEs?

This article is a part of Poland Unpacked. Weekly intelligence for decision-makers

The IMF’s findings differ from earlier estimates for Poland, highlighting how strongly the results depend on the methodology used.

The International Monetary Fund (IMF), working with Poland’s Ministry of Finance, has produced a new estimate of the country’s corporate income tax gap. The analysis does not cover the entire corporate sector. Instead, it focuses on small and medium-sized enterprises, defined as companies with fewer than 250 employees. The IMF estimates that between 2019 and 2023, the average corporate income tax gap in this group amounted to 20.3% of potential tax liabilities.

After converting the IMF’s estimates into current prices, the corporate income tax gap among SMEs amounted to around PLN 9bn in 2023. The figure was calculated from IMF data expressed in 2020 prices, using the GDP deflator. This was equivalent to roughly 0.3% of GDP.

Good to know

In the IMF study, the corporate income tax gap is defined as the difference between the amount of tax companies should pay under existing law and the amount they correctly declare and settle. It is therefore a compliance gap – a measure of non-compliance with tax rules.

It may result, for example, from companies failing to report some revenue, incorrectly treating certain expenses as tax-deductible costs, or making other errors or breaches in their corporate income tax filings. Because the corporate income tax gap is, by definition, not directly observable, it is not an exact measurement but an estimate based on available data and the methodology applied.

The corporate income tax gap does not, however, capture every situation in which companies pay less tax. It should be distinguished from the policy gap, which reflects revenue losses resulting from the design of the tax system itself.

Legal measures that reduce a company’s tax liability do not increase the compliance gap as long as they remain within the law. This also applies to legal profit shifting by multinational groups. If such practices comply with existing rules, they are generally not included in the corporate income tax gap. The Polish Economic Institute (PIE), however, uses a different definition in its publication.

Own compilation based on the IMF, European Commission, PIE and HMRC.

Bottom-up and top-down

The IMF study uses a new approach to estimating the corporate income tax gap, based on data from actual tax audits. This is known as the bottom-up method. It starts with the difference between the tax liability declared by companies and the liability established by the tax authorities during an audit.

Because taxpayers are not selected for audits at random, but primarily on the basis of risk assessments, the results require statistical adjustments. These make it possible to extrapolate the audit findings to the broader population of taxpayers.

The top-down approach works in the opposite direction: it estimates the gap “from the top”, using macroeconomic data, primarily from the national accounts. These data are used to calculate a theoretical tax base and potential corporate income tax revenues under the assumption of full compliance. These are then compared with actual tax revenues. The difference between the two is the estimated corporate income tax gap.

A smaller gap at larger firms?

In the IMF study, the size of the corporate income tax gap is clearly linked to company size. Between 2019 and 2023, it was largest among firms with no employees. In this group, the gap averaged PLN 3.14bn a year, equivalent to as much as 39% of potential corporate income tax liabilities.

The relative gap was only slightly smaller among microenterprises employing between one and nine people. It stood at 36%, corresponding to PLN 1.49bn a year.

As employment rises, the share of unpaid tax falls rapidly. Among companies with 10–19 employees, the gap was equivalent to 16% of potential corporate income tax liabilities. For firms employing 20–49 people, it was 11%. In the largest group covered by the analysis, with 50–249 employees, it fell to just 4%.

Evidence from other countries shows that the corporate income tax gap, measured as a share of potential liabilities, can be significantly lower among large companies than among SMEs. This is particularly clear in the UK, where the latest data for the 2024–25 tax year show a gap of 4.3% of potential corporate income tax liabilities among large businesses, compared with 44.6% among small businesses.

This does not mean, however, that large companies account for only a small share of the gap in absolute terms. Because their tax base is much larger, even a low percentage of potential liabilities can translate into substantial amounts. In the next stage of the project, the IMF and Poland’s Ministry of Finance plan to extend the analysis to large enterprises as well.

The broader picture

The IMF figure should therefore not be treated as an estimate of the corporate income tax gap for the Polish economy as a whole. The study does not cover large companies, where the sources and mechanisms behind the tax gap may differ. Most estimates of the corporate income tax gap also exclude legal profit shifting by multinational groups.

The differences between available estimates for Poland are substantial. According to the Polish Economic Institute (PIE), the gap amounted to 51.8% of potential corporate income tax liabilities in 2014, before falling markedly to around 30% in 2019.

The IMF’s latest study, based on tax-audit data, produces lower estimates. Among SMEs, the gap stood at 20% in 2019 and, after modest fluctuations, rose to 22% in 2023.

The European Commission produces still lower estimates using a top-down methodology. Expressed as a share of potential corporate income tax liabilities, the gap fell from 13.7% in 2005 to 9.2% in 2022.

These figures should not, however, be compared directly. The studies differ in methodology, coverage and the definition of the gap. The IMF looks only at SMEs, while the PIE and the European Commission also include larger companies. The PIE estimate also incorporates revenue losses associated with profit shifting abroad.

One of the main challenges of the top-down method is separating corporate income tax and personal income tax payers. National accounts use a broad corporate sector category that does not directly correspond to the population of corporate income tax payers. This matters particularly in Poland, where a large share of business activity is conducted by individuals and taxed under personal income tax rather than corporate income tax.

Estimating the corporate income tax gap using a top-down approach therefore requires isolating, within macroeconomic data, the share of business income that is actually subject to corporate income tax. This requires additional assumptions and adjustments, and any misallocation of income between corporate and personal income tax payers can materially affect the final estimate.

Profit shifting does not explain all the differences

Some of the differences between the available estimates can be explained by methodological differences. But methodology does not account for everything. For example, in the PIE (Polish Economic Institute, a think-tank) estimates, the corporate income tax gap as a share of potential liabilities was falling even as revenue losses associated with profit shifting abroad were rising markedly.

Between 2014 and 2020, these losses increased from PLN 2.3bn to PLN 4.1bn, while their share of the total corporate income tax gap rose from 7.1% to 15.4%. This means that the domestic component of the gap, excluding profit shifting, must have been shrinking even faster than the overall gap estimated by PIE.

This picture differs from the European Commission’s findings. Its estimates also point to a decline in Poland’s corporate income tax gap, but the scale of the decrease is much smaller.

A more recent study by Karolina Konopczak and Aleksander Pawlak, based on company-level tax and financial data, suggests that foreign-owned companies may shift around 20% of their profits abroad – a practice known as profit shifting. The authors estimate the resulting loss of corporate income tax revenue at an average of around PLN 2.6bn a year, equivalent to 6.4% of corporate income tax receipts between 2011 and 2021. Given the methodology used, they themselves describe the estimate as conservative.

What about large companies?

What does this mean in the context of the IMF’s findings? The estimates by Konopczak and Pawlak include revenue losses associated with shifting profits abroad. An important caveat is that they do so regardless of whether the practice involves non-compliance with tax rules. The IMF’s measure, by contrast, would capture only the part of profit shifting that results in tax being understated relative to what is legally due.

To produce a comparable estimate for large companies, other forms of tax non-compliance would also have to be included – the same kinds of irregularities that, among SMEs, contribute to the gap measured by the IMF. This means that estimating the effects of profit shifting alone does not provide a complete picture of the tax gap among large companies, particularly foreign-owned ones.

The available research does not, however, make it possible to determine what the final figure would be, or whether it would exceed roughly 20% of potential corporate income tax liabilities – the level estimated by the IMF for SMEs.

Poland’s corporate income tax gap among SMEs averaged 20.3% of potential tax liabilities between 2019 and 2023. In 2023, this was equivalent to around PLN 9bn at current prices.
The gap is highest among the smallest companies. This does not, however, mean that the problem is minor among large enterprises. The corporate income tax gap primarily measures non-compliance with existing rules and generally does not include legal profit shifting abroad.
Estimates of Poland’s corporate income tax gap vary substantially depending on the methodology and scope of the study. The IMF uses tax-audit data and covers SMEs only, while the European Commission applies a top-down approach. PIE’s estimates additionally include revenue losses associated with profit shifting abroad.