Poland’s fiscal structure levies some of the highest fuel taxes in Europe. This has encouraged the existence and growth of a robust black market to evade the heavy taxes.

In the diesel market, Poland has the second highest effective tax rate of 47.87 percent and is right behind Germany, which has an effective tax rate of 48.15 percent. In the LPG market, Poland’s taxation of 38.34 percent is the third highest with Lithuania and Latvia taking the lead. Poland’s taxation rate in LPG is also way above the European Union average of 27.7 percent. In the diesel market, the average taxation across the EU exceeds the taxation in Poland and stands at 49 percent.

Figure 1: Taxes in percentage of total prices in various Eastern bloc countries as of September 2013

poland
Source: Bloomberg

The high tax rates have led to the growth of a black market that affects the fuel sales of local companies including PKN Orlen and Lotos as well as international integrated oil corporations that are operating in Poland. Poland suffers large discrepancies between the disposable income and the taxation levels, further encouraging the existence of off-the-record trade.

It was estimated by PLN Orlen, the local oil marketing firm, that in Poland’s retain fuel market, a 45 percent share is held by unbranded stations. The local firms have a small chunk of this market, leaving an even smaller slice for the international firms to share amongst themselves.

Figure 2: Retail fuel market in Poland

Source: PKN Orlen
Source: PKN Orlen

“In central European countries with relatively low incomes, western multinationals such as BP plc (NYSE:BP) (LON:BP), Statoil ASA (NYSE:STO) or Royal Dutch Shell plc (NYSE:RDS.A) (NYSE:RDS.B) can struggle in the face of black-market traders that are able to sell fuel at a much lower non-taxed price. The large number of Poland’s unbranded filling stations, also known as “white pumpers,” exacerbates the nation’s insufficient deterrents against tax-evasive fuel trade. Government efforts to cut down on contraband fuel retail have so far proved fruitless,” analyzes Philipp Chladek.

Poland has tried to improve this taxation regime. Over the course of the past seven years, Poland has reduced taxes on all products. Taxes reduced on LPG by 1.41 percent, gasoline 95 RON by 8.38 percent, diesel by 0.91 percent, gasoil by 3.66 percent and heavy fuel by 2.48 percent.

Figure 3: Poland taxation on different products as percentage of product price

Source: Bloomberg
Source: Bloomberg

However, better measures are needed if Poland wants to retain investments from giants like BP plc (NYSE:BP) (LON:BP) and Statoil ASA (NYSE:STO). BP, Royal Dutch Shell plc (NYSE:RDS.A) (NYSE:RDS.B) and Statoil hold limited positions in the oil marketing segment in Poland, with shares of 7 percent, 6 percent and 5 percent respectively. If they continue to lose market shares to the unbranded segment who avoid taxes, the companies might just consider cutting back operations in the country. At the very least, Poland should ensure that its taxation rates are at par with the rates on these products across the European Union.