Several positive changes were made to Romania’s fiscal legislation in 2017 and 2018, including the following:
The provisions in the Fiscal Code on the Register of Intra-community Operators were repealed, thus eliminating mandatory registration with the Register of Intracommunity Operators by taxpayers which carry out intracommunity transactions.
The standard VAT rate was reduced from 20% to 19%.
The tax on special constructions (Tax Pole) was eliminated from 1 January 2017. (For agricultural constructions the tax was eliminated from 1 January 2016).
The high excise duty on fuel of 7-euro cents/litre was abolished, giving Romania the fifth lowest fuel prices within the European Union.
The threshold for the microenterprise tax regime has been increased to EUR 1 million, while the possibility has also been introduced to opt for a regular corporate income tax regime under certain conditions.
The threshold for VAT registration has been increased to RON 300,000
The single tax return has been introduced for individuals
Online filing of tax returns by individuals has been introduced, including a tax reduction for those who do so.
From 1 February 2017, the environmental stamp for vehicles was repealed by Law no. 1/2017, also known as the law eliminating 102 taxes. The environmental stamp for the vehicles tax was declared illegal by the EU authorities. Romania had modified the means of collecting this tax three times, on each occasion triggering objections from the European Commission.
Form 088, the aim of which was to help the tax authorities to avoid granting VAT registration numbers to fraudulent companies/ empty shell entities and thus gain better control over who is able to operate as a VAT taxpayer and deduct VAT, was abolished starting from 1 February 2017, the main reason given being that one of the government’s objectives is to reduce the excessive administrative burden on taxpayers. However, even after the abolition of Form 088, it seems that, in practice, the tax authorities continue to require a significant amount of information to assess whether or not VAT registration may be granted.
A new timetable for increasing excise duties on cigarettes (2017-2022) was introduced with gradual increases of 9-10 lei/ year, thus continuing the previous two timetables and keeping the framework of stability and predictability. Nevertheless, as with previous ones, this timetable has already been amended, as from January 2019, in order to fulfill European requirements on excise duties, but with an increase above the required level. The steep 35 lei increase in the excise duty on cigarettes (from 449 lei/1,000 cigarettes in 2018 to 484 lei in 2019) was the highest registered in the last 10 years and it has already produced negative effects increasing illicit trade in January by 2% (up to 17.3%) and causing losses for producers and budget revenues.
Several other amendments have been made to tax legislation for which the necessity or purpose was and is not clear to the business community, such as the transfer of contributions from the employer to the employee and the limitation of deductibility of expenses in the case of receivables sold.
Nevertheless, probably the most unexpected tax legislative initiative for the business community was Emergency Ordinance no. 114/2018, which brought significant changes for important business sectors such as energy, telecommunications, banking and capital markets. Besides the huge additional costs for the players in those sectors suddenly generated by this initiative, a very surprising aspect for the business community was the total absence of consultations with stakeholders and the lack of transparency which characterized it. It is well known that stability and predictability of the applicable legislation - in particular on taxation, but on any relevant matters for businesses in general – is of the utmost importance in order to gain and maintain investors’ confidence and create a healthy environment for business. Consequently, any change in legislation should be adopted only after sufficient consultation with the relevant stakeholders.
Source: Presentation Ionut Dumitru, President of the Fiscal Council, 2018
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 the FIC and Ministry of Finance (MFP) 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. Although the Ministry of Finance has several structures designed to enable consultation with private stakeholders on different areas of interest in relation to public policies (e.g. the Directorate for Public Policy and Monitoring Legal Acts and the Unit for Communication, Public Relations, Mass-Media and Transparency), in practice there is hardly any real process of consultation with the business environment on these issues. 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 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 in connection with VAT and excise duties in sensitive sectors (e.g. tobacco, alcohol, and grain), as well as combatting 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 ultimately hampering the ability of these businesses to generate revenue.
In practice there are still cases, although fewer than in the past, when conflicts of interpretation on fiscal topics generated by legislative inaccuracies lead to the unnecessary instigation of criminal proceedings. 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 time taken to settle criminal cases is excessively long. The experience of Romanian courts with these issues is limited, and this leads to a lack of predictability in the application of criminal law and in settlement decisions. All this, combined with the precautionary measures (seizures and garnishments) inevitably generates major economic losses for taxpayers that can even lead to insolvency, cessation of business and bankruptcy.
The instigation of criminal proceedings has a serious impact on an investor’s reputation and has particularly severe consequences in relations to business partners (associates involved in the implementation of major joint investments, clients, suppliers, financiers, employees, management as well as shareholders of listed companies).
The fiscal authorities often focus aggressively on companies that are large contributors to the budget. This creates a risk of seriously undermining Romania’s image in the international business environment, the media and diplomatic circles, as well as with EU authorities.
If this problem continues, the immediate consequence will be a likely fall in foreign investment in Romania, while existing investors can be expected to reduce their presence, revise their expansion strategy, or even leave Romania altogether in search of a more mature and predictable environment. This would have a significant impact on Romania’s development and the country would become considerably less competitive on the global market to attract and maintain foreign investment.
Clarity, stability and predictability in fiscal legislation as well as in 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 FIC welcomes the MFP’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 Ministry should consider setting up a specific structure (Unit/Office) to organise specialised consultation/dialogue with the business environment, on the preparation/revision of all legislation. This structure should act as a central hub between the experts in the Ministry and the general public, assume the role of contact point and design transparent procedures for bi-directional interaction with external stakeholders.
The FIC also urges the MFP to give the business community more time to review draft legislation, so that companies have enough time to understand and comply with their tax obligations. The FIC also recommends the application of the In dubio contra fiscum principle, based on which each time a legal provision is unclear, it should be interpreted in favour of the taxpayer.
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 Romanian 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, 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. Consequently, their purpose is to facilitate cooperation between the tax authorities and companies by eliminating uncertainty. SFIAs and APAs apply to future transactions and in this context, the legal deadlines for issuing these documents are extremely relevant. Even though these deadlines are in some cases already unsatisfactory for the taxpayer (given the urgency of the transactions), they are also frequently delayed due to internal consultations with the MPF before a tax ruling is issued.
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 5 working days (or 7 working days, if they are large taxpayers) to file their comments on the conclusions of the tax inspection. Afterwards, the tax authorities issue their final report which also contains their position on the comments filed by the taxpayer. By presenting 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 an effective 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 the setting up of 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 MFP, 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.
To help business entities to develop their long-term strategies and to increase transparency, building on open governance principles, the Ministry of Public Finance and ANAF should design and make publicly available an aggregated database/dashboard containing financial/fiscal indicators, with monthly and annual values, detailed at NACE 4 digits level (e.g. monthly revenues for each type of tax in the Fiscal Registry, detailed by type of tax and by a NACE 4-digit code).
Improvement in the process of issuing SFIAs, APAs and non-binding opinions
The FIC proposes that even if a reduction in the existing timeframes 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 and are not delayed. In addition, provided that the consultation process with the MFP before the issuance of an SFIA is upheld, integration of tax ruling practice within the MFP 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 AFIAs) are accepted ex officio if the legally stipulated deadlines 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 tax inspections should be presented to taxpayers before the final discussion. Taxpayers should then 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 authorities' conclusions, by receiving a draft decision before the final document is issued. A reasonable period should then be allowed for the taxpayer to express an opinion on this 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 Romanian courts, would bring two main 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 training 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 Ministry of Finance's and ANAF’s ongoing work to tackle tax evasion and tax fraud, smuggling and counterfeiting. However, tax audits are not always focused in the right way to enhance revenue collection for the state budget. Tax evasion and smuggling, 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.
Revision of the definition of smuggling, based on quantity criteria, should be considered.
Enhancing cooperation between manufacturers and law enforcement agencies would provide additional resources and expertise to government agencies to fight smuggling and tax evasion.
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, courts, 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 the 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 targeting 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 incentives for taxpayers which regularly fulfil their obligations on a timely basis. Experience shows that this type of positive stimulation leads to good results – for example, in the case of local taxes, the reduction granted if payment is made in advance brings benefits every year. However, the FIC recommends a careful analysis of the sensitive balance between incentivising taxpayers and increasing penalties.
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 which 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.
From January 2014, Romania implemented specific provisions favouring the creation of Holding Companies. However, work still needs to be done 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 off-set of profits and losses within a group of companies. This would bring Romanian legislation into line with other EU countries, encourage the setting up of holding companies in Romania and discourage migration to other jurisdictions.
Romania should also adopt the VAT Grouping principle, which allows a number of taxable persons (i.e. a VAT group) to be treated as a single taxable person. Consequently, any activity engaged in by any one of the group members is 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 considered as 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 carried out.
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 has led many to use other EU countries instead (e.g. Germany, the Netherlands, Belgium).
The FIC recommends the introduction of the simplification measures which function 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 requirements. 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, construction and the operation of maritime installations, transportation of offshore goods, etc.) has been unclear in Romanian tax legislation. The tax authorities’ interpretations have been in many cases contradictory, thereby leading to confusion in the business environment, which is confronted with uncertainties and ongoing risks in relation to the tax obligations linked to these operations. Numerous discussions and debates have taken place over several years about the new taxation regime applicable to supplementary income generated from gas exploitation and trading. These have had the effect of slowing development. Exploration has been limited in the past 2 years, while investment decisions have been delayed.
Major offshore drilling programmes ended in late 2015 and there has been a slow-down in onshore development plans. Upstream exploration was limited in 2016 and 2017. We hope exploration will pick up, notably in the offshore sector through the approval of a new fiscal regime that could lead to greater regulatory certainty and boost offshore exploration. However, the recent Offshore Law, which entered into force on 17 November 2018 (Law 256/2018), and which enacted a new fiscal regime for upstream oil and gas, does not eliminate the element of uncertainty for investors.
Considering the high maturity of upstream in Romania, significant investments are required to increase recovery factors from existing fields and to develop new onshore and offshore resources. A clearer fiscal regime is essential if Romania is to take advantage of these natural resources.
The FIC recommends that the Ministry of Finance should draft a Guide in the form of an official document (based on the model of a Memorandum, issued by the UK's tax and customs authority, HRMC) which should provide details of the tax treatment applicable to this type of transaction, from the perspective of VAT, excise duties, customs and expatriate taxation. This would increase transparency and predictability within this sector.
The FIC recommends that enactment of an upstream oil and gas fiscal regime should be preceded by a thorough and transparent consultation process, with participation by investors and other relevant stakeholders. The fiscal regime should consider international best practices as well the specifics of the Romanian environment and should be founded on the following main principles: stability, predictability, neutrality, flexibility, competitiveness to attract investments, as well as efficiency in fiscal administration.
Reinvestment of profit helps a business to grow, boosting economic development and consequently enhancing budget revenue. For this reason, many countries offer tax incentives to companies which reinvest their profit. The current mechanism for implementing the reinvested profit incentive in Romania only relates to specific assets (i.e. assets falling within subgroup 2.1. and 2.2.9 of the Catalogue of the Classification and Normal Functioning Lifespan of Fixed Assets). This provision discriminates between various types of investors.
The FIC continues to recommend extending the list of assets falling under this incentive. One of the most valuable extensions could be to include investments through buying new vehicles (i.e. class 2.3.2 of the Catalogue of the Classification and Normal Functioning Lifespan of Fixed Assets), thus stimulating taxpayers to renew the existing car fleets.
Furthermore, in order to make the incentive more effective, the FIC recommends implementing a carrying forward system which may allow taxpayers to apply the tax incentive at a later stage, if during the current period, the required conditions are not fulfilled.
The mandatory private pension system (Pillar II), currently covering almost 6.8 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 400,000 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, by implication, the reduction of 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 the current 5.1% to the legal, statutory rate of 6%, as set out in Law No. 411/2004, as soon as possible, as well as increasing the fiscal deductibility applicable to employers’ contributions to optional pension funds (Pillar III) from the current 400 euros per year to 1,000 euros per year.
Government Emergency Ordinance no 3/2017, repealed the provisions set out in 2015 in the Fiscal Code (Law no 227/2015) concerning the thresholds applicable for the calculation of employers’ and employees’ social insurance and health insurance contributions. Under the 2015 Fiscal Code, in order to stimulate the employment of highly skilled professionals in Romania and eliminate discrepancies in taxation of employees vs. independent work, the calculation base for employees’ social insurance and health insurance contributions was capped at 5 times the gross average monthly salary (5x2,681 lei during 2016). The employers’ social insurance contribution calculation base was capped at 5 times the average gross salary income, multiplied by the number of insured employees and the health insurance contribution calculation base was capped at the level of the amount on which the individual health insurance contribution was due. These maximum limits were eliminated from February 2017, when employers’ and employees’ social insurance and health insurance contributions became payable on the entire gross salary income earned by employees and these provisions were also maintained after the shift of the social security contributions from the employer to the employees under Government Emergency Ordinance no 79/2017 applicable from 1 January 2018. The result is that there is currently a very high (uncapped) social security cost for employers hiring highly skilled professionals.
The FIC recommends reintroducing the caps for the calculation of the employer and employee social insurance and health contributions which applied before the entry into force of GEO No. 3/2017.
This approach would be in line with practice in most EU countries, which place a cap on social contributions, and would also encourage employment of skilled professionals in Romania.