After the authorities unleashed a raft of major fiscal changes at the end of last year, likened by some pundits to a storm, large companies and smaller business owners alike were left with only a short time to amend their business plans following the transfer of social contributions from employers to employees, the approval of the split VAT system and the reduction of income tax from 16 to 10 percent.
Romania’s fiscal system is also integrating more European provisions, with the country already passing a directive aimed at reducing tax avoidance.
The changes were made on the back of a rapidly expanding economy, with GDP growth reaching 8.8 percent in the third quarter of 2017 year-on-year.
“From an economic perspective, 2017 was a successful year despite the fiscal instability,” said Alex Milcev, partner, leader of fiscal and legal assistance, at EY Romania, during a conference organized by the professional services firm in mid-January. However, Milcev warned that some of the fiscal measures passed in the last six months did not necessarily help the business environment.
In January, Romania started to implemented four of the five regulations in the Anti-Tax Avoidance Directive (ATAD) on the limitation of interest deductibility, as well as rules on foreign-controlled companies, corporate exit tax and general anti-abuse rules.
EY experts noted that Romania had implemented this directive before the deadlines set out in the directive, which is January 1 2019 and beyond.
Under the new rules, bank loans will be included in the limitation of deductions for interest paid by companies, depending on EBITDA. The threshold for debt cost deductions has been set at EUR 200,000 and anything above this limit will be taxed at 10 percent of the base.
Meanwhile, Romania has also signed the Multilateral Convention (MLI), which changes the network of existing treaties by synchronized implementation of Base Erosion and Profit Shifting (BEPS) measures, thereby avoiding any bilateral negotiations.
Arcadie Parfenie, senior manager at EY Romania, said that the main purpose of the treaty is the avoidance of double taxation, not reduced taxation or double non-taxation.
Meanwhile, multinational groups that also have local operations will have to develop a Country by Country Reporting mechanism. Companies with consolidated revenue of over EUR 750 million in the previous year will have to submit this report to the tax authorities.
The authorities can issue fines of up to RON 50,000 if the report is submitted late or contains wrong or incomplete data. Companies that don’t submit such a report could face a maximum fine of RON 100,000.
Meanwhile, EU legislators are also working on a taxation system for digital transactions that will redefine the concept of a permanent HQ.
An inspector calls: when might the taxman come knocking?
If a company has posted losses for three consecutive years, a red flag appears and tax inspectors might appear at the HQ, warned Miruna Enache, partner at EY Romania.
“We have seen more questions over expenses from contracts with group companies, management and consultancy fees, and even technical matters. We have also seen questions from ANAF inspector teams on technical assistance contracts, even on contracts with non-affiliated companies, not from the same group,” said Enache.
She added that other controls can be initiated on state aid, the reorganization of firms and the application of fiscal facilities such as reinvested profit, and R&D. Tax inspectors want to check the beneficiaries of certain facilities.
“Going forward, we’ll see more and more the extension of investigations outside the fiscal area, going towards tax evasion. In tax evasion cases, the investigation will not be handled by ANAF, but by prosecutors,” said Enache.
The main fiscal changes impacting the business environment this year include the shift in the payment of social security contributions from employers to employees. Under the new rules, contributions paid by employees will amount to 35 percent of the gross wage, while companies will pay 2.25 percent.
In order to accommodate the move, the gross minimum wage has been hiked to RON 1,900.
Those earning an income from independent activities will have to pay social insurance contributions (CAS) calculated on a base at least the same as the gross minimum wage. In the case of healthcare insurance contributions (CASS), people whose income is derived from independent activities, associations with companies, investments or agricultural activities will be liable for CASS if their combined annual income represents at least 12 monthly gross minimum wages.
Moving to VAT, the authorities decided to make the split VAT system optional after the main business associations warned that additional red tape would be created if it became mandatory.
Under the approved version, split VAT is mandatory only for companies and public institutions that have debts representing VAT and for entities in insolvency. Large taxpayers have to have VAT debts of at least RON 15,000 before they would be enrolled automatically in the new system.
The government also changed the eligibility criteria for businesses to be defined as microenterprises. Firms reporting a turnover of up to EUR 1 million can be included in this category. Until now, this limit had been set at EUR 500,000. In addition, profit tax for these companies has been replaced with a tax on turnover. Experts have warned that the updated tax framework will hit firms that are just starting to make investments and are posting losses in the initial stages.
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