In the last few years, the Romanian fiscal environment has generally improved. The country has a competitive flat rate of 16% for both corporate and personal income tax, which has brought many benefits to the economy since its introduction in 2005. The flat tax boosted growth and encouraged compliance. In January 2011, legislation on social contributions was incorporated into the Fiscal Code, aiding transparency.
With effect from 1 January 2014, Romania has implemented specific provisions favouring the creation of Holding Companies in the country, such as the participation exemption regime.
Following long standing requests from the business community, from September 2014 the employer’s CAS contribution was reduced by 5%. In recent years, transfer pricing legislation has been clarified and now closely follows OECD and EU guidelines. Provision exists for Advance Pricing Agreements (APAs), although the procedure for applying for them has not yet been fully developed.
Some of the proposals below may have already been taken into consideration in the drafts of the revised Fiscal Code and Fiscal Procedural Code, however we cannot anticipate how and to what extent they will be reflected in the final version of the law.
Consultation between the state authorities and the business community is essential to review both draft legislation and the implementation of existing legislation. This will enhance the quality of legislation and support its uniform application. There have been some good examples of improved communication between the business community and the state authorities, such as the discussions between FIC and MF representatives. However, there is still a continuing problem of legislation being passed quickly, often at very short notice, and with little time for the business community to have effective input.
Furthermore, tax inspectors’ interpretation of legislation changes frequently and new interpretations are also applied to the past. This means that in practice, the rules can change unpredictably and dramatically. Recently, we have witnessed an increase in the number of cases in which the tax inspectors have adopted an abusive and hostile interpretation of legislation.
Moreover, instead of focusing on solving essential problems related to collection, such as fighting fiscal evasion related to VAT and excise duties in sensitive sectors (i.e. tobacco, alcohol, grain, etc), as well as combating undeclared work, for example in the construction sector, the tax authorities often carry out quite aggressive fiscal inspections on taxpayers which are some of the most important contributors to the state budget. These inspections can often last for long periods, disrupting business and hence ultimately harming the ability of these businesses to generate revenue for the state budget.
Frequently, conflicts of interpretation on fiscal topics generated by legislative inaccuracies lead to the unnecessary instigation of criminal proceedings, since the fiscal authorities assume no liability for settling the conflict of interpretation. In most situations the instigation of criminal proceedings is a disproportionate measure in relation to the amounts involved. The criminal law blocks the settlement of fiscal issues, and the settlement time is long. The experience of Romanian courts with these issues is limited, and this leads to a lack of predictability in settlement decisions. All this combined with precautionary measures (seizures and garnishments) inevitably generates major economic losses for taxpayers that can even lead to insolvency, cessation of business and bankruptcy.
The criminal record file impacts upon an investor’s reputation and has particularly serious consequences in relations with business partners (associates involved in the implementation of major joint investments, clients, suppliers, financiers, employees, management and the shareholders of listed companies in particular).
Since the fiscal authorities often focus aggressively on companies which are actually paying the correct taxes, and which are large contributors to the budget, there is a major risk of a significant deterioration in the image of Romania in international business, the media, and diplomatic circles, including with the European authorities.
The immediate consequence will be reduced FDI in Romania with the major risk that even existing investors could significantly reduce their presence or their investment plans, or even leave Romania altogether. This could have a significant impact on the development of Romania which is in global competition with other countries to attract and maintain foreign investment.
The FIC welcomes the MF’s openness to dialogue and looks forward to continuation and enhancement of the consultation process. At the same time the FIC expects a more regular and consistent dialogue with ANAF representatives on the predictability of the law and its uniform application. The FIC also urges the MF to give the business community more time to review draft legislation, so that companies can understand and comply with their tax obligations in a timely manner. The FIC also recommends the application of the In dubio contra fiscum principle, based on which each time a legal provision is unclear, this should be interpreted to favour the taxpayer.
Consequently, the clarity, stability and predictability of the fiscal framework and its implementation and interpretation are critical conditions in investment decisions. Any change in legislation, including its interpretation, should be adopted after consultation and duly applied by the tax authorities only for the future and not retrospectively.
The Fiscal Code and Fiscal Procedural Code represent the backbone of the tax system in Romania. Consequently, a high degree of transparency as regards any potential change to these documents is imperative. At the same time, such fundamental documents should be easy to read, understand and eventually apply by taxpayers. The FIC has contributed to the work of developing new, clear and concise versions of the Fiscal Code and Fiscal Procedural Code. However there are many aspects which require further work and consequently cooperation is a key word which should govern the reform process.
The FIC recommends future enhanced cooperation between the tax authorities and the business environment in relation to any potential changes to the Fiscal Code and Fiscal Procedural Code. In addition, the FIC expects the new draft versions of these documents, scheduled to take effect from 1 January 2016, to be discussed, agreed and adopted on time, to reduce the ambiguity which currently affects the fundamental laws of the Romanian tax system.
To aid fiscal stability, the FIC also recommends the removal of the “de regula” (“as a rule”) clause from Article 4 of the Fiscal Code. In its current form, this Article states that changes to the Fiscal Code may be made only by a Law, that they should take effect only from 1 January of the following fiscal year, and that, as a rule, (“de regula”) they should be announced at least six months in advance. The “de regula” clause has, in practice, allowed the authorities to make frequent changes to fiscal legislation at very short notice. Based on the latest draft legislation, the “de regula” clause has been eliminated. The FIC welcomes this and hopes that the draft legislation will be passed into law in a smooth and timely manner.
The FIC considers that improving transparency should represent a top priority for the authorities as this will lead to an increase in predictability of the national tax environment and is also very likely to enhance trust among current and future investors. A non-transparent legislative process seriously compromises the potential for economic development, mainly because it acts as a deterrent to the attraction of foreign direct investment.
A consistent and coherent interpretation of legal provisions by representatives of the state authorities, aimed inter-alia at eliminating situations where different views have been expressed concerning sometimes controversial retroactive application of certain legal provisions, would greatly contribute to improving transparency.
Tax rulings and Advance pricing Agreements (SFIAs and APAs) are binding on the tax authorities. Consequently their purpose is to facilitate cooperation between the tax authorities and companies. SFIAs and APAs apply to future transactions and in this context, the legal deadlines for issuing these documents are extremely relevant. Despite the fact that these deadlines are in some cases (i.e. given the urgency of the transactions) unsatisfactory for the taxpayer, most often they are not respected by the tax authorities, thus leading to frustration among taxpayers and generating negative consequences for business. The process is also often delayed due to internal consultations with the MF before a tax ruling is issued. Although not formalised, this is a frequent practice.
During tax inspections, the tax authorities issue a draft report and present it to the taxpayer in the final discussion, which marks the closing of the tax inspection. Taxpayers are then allowed 3 days to file their comments on the conclusions of the tax inspection. After this, the tax authorities issue their final report which also contains their position on the comments filed by the taxpayer. By presenting the taxpayers’ comments after the closing of the tax inspection, this process becomes a mere formality which rarely triggers any changes in the tax inspector’s conclusions. Consequently, from a practical point of view, it does not represent a proper mechanism for ensuring the taxpayer’s right to defend its position.
During the administrative process, while the relevant fiscal authority is handling appeals, the taxpayer is not informed about the conclusions which have been reached, but simply receives the tax authorities’ final decision, without having the opportunity to express an opinion.
Creation of a database with non-binding and binding rulings –The FIC recommends setting up a (paid access) database tool (with full respect for the confidentiality principle), bringing together all binding and non-binding tax rulings issued/to be issued by the MF, in its capacity as legislative issuing authority, in connection with the interpretation of each article of the Fiscal Code, the Fiscal Procedural Code, the Accounting Law and any related secondary legislation, in order to normalise and create a unitary approach to the interpretation of the relevant legal provisions by both tax inspectors and taxpayers throughout Romania.
Improvement in the process of issuing SFIAs, APAs and non-binding opinions - The FIC proposes that even if a reduction in the existing terms (e.g. 3 months for a SFIA and 12/18 months for an APA) is not possible, at least measures should be taken to ensure that SFIAs/APAs and non-binding letters are issued within these legally and clearly stipulated time limits. In addition, provided that the consultation process with the MF before the issuance of a SFIA is upheld, an integration of tax ruling practice within the MF could be a solution to streamline the consultation process.
The FIC also recommends the implementation of a “silent acceptance” mechanism based on which these documents (i.e. APAs and SFIAs) are accepted ex officio if the legally stipulated terms are not respected by the tax authorities and no communication is sent to the taxpayer.
Increased relevance and impact of the final discussion during tax inspections - The findings of the tax inspection should be presented to taxpayers before the final discussion. Accordingly, taxpayers should be allowed to prepare their arguments before the closing of the tax inspection and present them to the tax authorities during the final discussion. The authorities should then assume responsibility in issuing a final inspection report that takes into account legal observations brought by the taxpayer.
We also recommend greater transparency in the process of handling appeals, and the creation of a legal framework which will give the taxpayer the right to be informed as to the tax authority’s conclusions, through the sending of a draft decision before the final one. A reasonable period of time should also be allowed for the taxpayer to express an opinion on the draft.
Practice has shown that tax inspection reports and assessment decisions issued upon the closure of tax audits are frequently cancelled later in courts following appeals filed by taxpayers. In these situations, ANAF has had to assume a series of costs, not only in the form of compensatory damages paid to taxpayers, but also in terms of time and resources allocated to litigation which they lose.
A consolidated database with traceability features for each file at the different courts in Romania bringing together the tax decisions and rulings issued by the Romanian courts would bring two benefits: 1. It would lead to an improvement in ANAF’s resource allocation process and a better assessment of costs vs. opportunities and 2. It would assist unitary application of legislation in Romanian courts in proceedings judging the same underlying principle.
The FIC recommends the creation, in partnership with the Ministry of Justice, of a database on existing national jurisprudence on tax issues, allowing traceability of legal actions, from one court to another.
The FIC also recommends the creation of specialised sections in the Romanian courts focused only on tax matters. To assist this process, the FIC recommends specific professional training for judges, with the help and the participation of the institutions required to ensure the institutional framework for the development of judges i.e. the Supreme Council of Magistrates (CSM) and the National Institute of Magistrates (INM).
Tax evasion creates unfair competition, putting those who comply with the law at a disadvantage. The FIC welcomes and supports the MF and ANAF’S on-going work to tackle tax evasion and tax fraud.
However, tax audits are not always focused in the right way to enhance revenue collection for the state budget. Tax evasion, affecting both direct and indirect taxes continues to be a problem.
Penalties for tax evasion should be increased and a list of taxpayers with arrears should be made public.
Reform of ANAF should continue, to eliminate the practical deficiencies in fiscal administration, as well as to create an integrated public IT system connecting different authorities (such as fiscal, health, local administration, legal, and the land registry).
While the need to increase budget revenue and fight tax evasion is fully appreciated by the business community, the FIC recommends a prudent and rational approach as regards future actions to be taken. Consequently, the focus of tackling tax evasion should be on targeting high risk industries and taxpayers based on a prior thorough analysis, rather than placing an additional burden on trustworthy taxpayers which can slow down or even stop their business activities, which in turn generate budget revenue. Aggressive practices can only distort cooperation between the business environment and tax authorities and have the potential to lower the level of trust taxpayers have in the authorities.
Intensified efforts to clamp down on the subterranean economy are a more effective way to increase budget revenue than aggressive targetting of honest taxpayers for auditing. This could also create the potential for a reduction of certain taxes and contributions.
The “voluntary disclosure” concept is a practical solution to increase voluntary compliance. This concept, combined effectively with increased penalties for tax evasion and lower interest for those that comply, could bring significant medium and long term benefits by increasing budget revenue without the need for additional measures.
The FIC recommends a proactive and consistent approach to increasing voluntary disclosure. This approach should include higher penalties for taxpayers which do not comply with their tax obligations and incentivising taxpayers who regularly fulfil their obligations on a timely basis. Experience shows that this type of positive stimulation has positive results – for example, in the case of local taxes, the reduction granted if payment is performed in advance displays its benefits every year. However, the FIC recommends a careful analysis of the sensitive balance between incentivizing taxpayers and increasing penalties.
Since the introduction of the special constructions tax at the beginning of 2014, extensive discussion has taken place about its impact on the business environment, the implementation mechanism, and on the norms for its application. The impact of this tax was underestimated. Its real impact has been approximately 3 times the initial estimate. At the same time, the implementation mechanism still has numerous deficiencies which have been highlighted by the entire business environment.
The FIC welcomes the reduction to 1% of the tax on special constructions. However, the tax still represents a severe tax burden for the business environment, and continues to have a negative effect on the Romanian economy. Consequently, the FIC recommends the elimination of this tax, as it represents a tax on investment.
According to the latest draft legislation this tax has been eliminated and we trust that this amendment will be approved in the final version of the Fiscal Code and applicable as of 1 January 2016.
Refund requests are frequently refused for spurious, bureaucratic reasons. This causes severe hardship to businesses and can even lead to bankruptcy, which ultimately has a negative effect on budget revenue too.
Currently, interest on late tax refunds is only granted to taxpayers under certain conditions and applications are often ignored by the tax authorities, forcing the taxpayer to litigate to recover the interest.
The tax authorities should take steps to ensure swift refunds for companies and individuals who are eligible and should not create unnecessary bureaucratic obstacles or delays.
If delays do occur, the tax authorities should be required to pay interest automatically based on the tax record of every company at the time the refund is made, provided that legal requirements are met.
With effect from January 2014, Romania has implemented specific provisions favouring the creation of Holding Companies. However, work still needs to be carried out to create a true and authentic Holding regime, acting as an attracting force for groups of companies.
Moreover, Romanian legislation only provides for VAT consolidation within a VAT group, which does not allow the VAT advantages provided for under a standard VAT Group structure, as mentioned by the EU VAT Directive. At least 16 Member States in the EU have introduced provisions allowing for the formation of VAT groups into their national legislation.
Legislation on corporate tax consolidation should be passed to allow the compensation of profits and losses within a group of companies. This would bring Romanian legislation into line with that of other CEE countries such as the Czech Republic, Poland and Bulgaria, encourage the setting up of holding companies in Romania and discourage migration to other jurisdictions.
Romania should also opt to adopt the VAT Grouping principle, which allows a number of taxable persons (i.e. the VAT group) to be treated as a single taxable person. Consequently, any activity engaged in by any one of the group members would be deemed to have been carried out by the group. The group's internal transactions should not exist for the purposes of VAT (i.e. they should be transactions falling outside the scope of VAT).
The introduction of a corporate tax consolidation and VAT Group scheme would bring cash flow benefits to companies, creating a competitive tax environment for Romania with a positive effect on budget revenue.
Currently, foreign companies which use Romania as an entry point to the EU for goods imported from outside the EU are required to register for VAT purposes in Romania and declare the transactions performed as such.
In practice this measure has proven to be one of the main reasons why foreign companies have been reluctant to route their imports through Romania and, instead, use other EU countries (e.g. Germany, the Netherlands, Belgium).
The FIC recommends the introduction of the simplification measures known under the concept of Global Representative. This means allowing foreign companies to appoint a Romanian established company to act as their representative in relation to all the goods they import into Romania and subsequently dispatch to other EU countries.
Consequently, foreign companies would no longer be required to register individually for VAT purposes in Romania and comply with local VAT reporting obligations. This could provide a valuable boost to the local economy, especially in Constanta, bringing particular benefits for Romanian transport/logistics companies.
The tax treatment of Offshore operations (i.e. drilling, constructions and maritime installations, transportation of offshore goods, etc.) is still unclear in Romanian tax legislation. The tax authorities’ interpretations are in many cases contradictory, thereby leading to confusion in the business environment, which is confronted by uncertainties and permanent risks in relation to the tax obligations linked to these operations.
The FIC recommends that the MF should draft a Guide in the form of an official document (based on the model of the UK Memorandum of HRMC) which should provide details concerning the tax treatment applicable to this type of transaction, from the perspective of VAT, excises, customs and expatriate taxation. This would increase transparency and predictability within this sector.
Legislation on taxation of these funds is unclear, leading to confusion and discouraging investment. Non-resident investment funds which are not legal entities are exempt from taxation, but this does not apply to foreign based legal entities. The law also creates many uncertainties, for example the possibility that Romanian 16% withholding tax may apply for dividends and interest earned from a Romanian paying entity.
The funds should be exempted entirely from paying Romanian tax. In most EU countries, investment funds which purchase investments on the local capital markets simply pay all their tax in the country where they are based. Also, imposing tax on interest and dividends paid to foreign funds might be viewed as discrimination, since the treatment of Romanian investment funds appears to be more favourable.
Additionally, the system for taxing capital gains derived by non-residents from Romania (which generally involves appointing a Romanian fiscal representative) is excessively bureaucratic and burdensome, causing serious disruption and barriers against bringing foreign capital to the Romanian Stock Exchange – this should be aligned with EU best practice.
The mandatory private pension system (Pillar II), currently covering almost 5.8 million participant members, must be protected by maintaining the current timetable for the transfer of social contributions to private pension funds.
The optional private pension system (Pillar III), managing the savings of approximately 300,000 participants, should be consolidated by gradually increasing tax incentives to facilitate adherence. More significant tax incentives have already been implemented in neighbouring Member States to encourage private retirement savings and, implicitly, the reduction of the pressure on the public pension budget on a long-term basis.
The FIC recommends continuing to increase the contribution rate to mandatory private pension funds (Pillar II) from 4.5% in 2014 to 6% in 2016, as well as continuing to extend the fiscal deductibility applicable to employers’ contributions to optional pension funds (Pillar III) from the current EUR 400 per year to EUR 1,000 per year.
Many companies encounter inventory losses. In relation to food products and pharmaceutical products in particular, companies are required to write off significant inventory due to various quality issues. Fiscal legislation in Romania does not generally permit the company to claim a tax deduction for inventory or other assets written off for the above reasons, or indeed for any reason. Consequently, the profit tax provisions are more restrictive than the VAT provisions.
Companies should not suffer a tax disadvantage when inventory/assets are written off as this penalises the company for carrying out its normal business.
Fiscal deductions should be permitted for inventory or asset write-offs. The profit tax provisions should be aligned with those for VAT.
In addition, the denial of a fiscal deduction for inventory write-offs is discriminatory since other EU Member States permit this type of deduction.
Reinvestment of profit helps a business to grow, boosting economic growth, and consequently enhancing budget revenue. For this reason, many countries offer tax incentives to companies which reinvest profit. However, the current mechanism for implementing the reinvested profit incentive relates to specific assets (i.e. assets falling within subgroup 2.1. of the Catalogue of the Classification and Normal Functioning Lifespan of Fixed Assets). This provision discriminates between investors.
The FIC recommends extending the incentive to other assets (e.g. constructions). This would help those companies which are subject to high taxation (i.e. the tax on constructions) and which may not benefit from the reinvested profit tax incentive.