Taxation

Several positive changes were made to Romania’s fiscal legislation in 2020, including the following:

• A tax allowance was implemented for companies that pay their corporate income tax/ microenterprise tax due by the deadline, for the first three quarters of 2020.
• Tax benefits were granted in relation to the annual building tax, to taxpayers that were required to interrupt their business activity during the state of emergency period/ landlords that reduced rents by at least 50% during the state of emergency period.
• A law was passed allowing the postponement, on request, of the payment of rent for the use of real estate registered as offices, places of business or dwellings, without the possibility to impose interest and penalties.

• Interest and penalties on overdue tax were suspended and were not applied to payments due between 21 March 2020 and 25 December 2020.
• The authorities issued amendments aiming to align national legislation with the European rules applicable since 1 January 2020 for intra-community transactions with goods, to correlate the VAT rules for exports with customs provisions, as well as implementing certain European Court of Justice (CJEU) rulings on VAT exemptions.
• Ancillary payment liabilities that were imposed for the period before March 2020 were cancelled under certain conditions.

• A tax credit was granted to taxpayers that acquired new electronic cash registers. The tax credit can be obtained for any acquisitions made from 2018 onwards.
• Fiscal measures were implemented to maintain and stimulate the level of equity in Romanian companies.
• New provisions on payment facilitation (payment rescheduling) were implemented for budgetary obligations due from the date of the declaration of the state of emergency (16 March  2020), administered by the central fiscal authorities.

• Exemption from the specific HoReCa tax was granted up to 31 December 2020.
• Directive 2017/952 on hybrid tax mismatches that occur in cross-border transactions was transposed into Romanian tax legislation on 31 January 2020.
• DAC 6 was implemented into Romanian tax legislation on 31 January 2020 (the implementation of Directive 2018/822 on the mandatory and automatic disclosure of tax information with regard to cross-border arrangements, which are subject to reporting).

Furthermore, legislation was passed which took effect on 1 August 2020 granting taxpayers paying corporate income tax, microenterprise tax, specific tax or income tax a tax credit for the acquisition cost of electronic cash registers purchased and put into operation. This legislation had retroactive effect, and applies also for electronic cash registers purchased and put into operation during 2018, 2019 and 2020 before the entry into force of this law. For all periods, the tax credit may be obtained for the 2020 year-end calculation and if the tax due is not sufficient to cover the value of the cash registers acquired, the outstanding amounts may be carried forward to be recovered in future periods, for up to 7 years.

New legislation has been passed to stimulate the maintenance/ increase of equity of Romanian companies. The new provisions state that taxpayers paying corporate income tax, regardless of the declaration and payment system, taxpayers paying microenterprise tax, as well as taxpayers which pay specific tax, may benefit from reductions of the corporate income tax / microenterprise tax / specific tax 

A simplified procedure has been published, for granting payment rescheduling for a period of no more than 12 months, without the need to provide guarantees, for main and ancillary tax obligations whose maturity/term of payment fell after the date of the declaration of the state of emergency (16 March 2020).

Consultation between the state authorities and the business community is essential to review both draft legislation and the implementation of existing legislation. This enhances the quality of legislation and supports its uniform application. 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’ interpretations of legislation change frequently and new interpretations are also applied to the past. This means that, in practice, the rules can change unpredictably and dramatically.

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, 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.

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.

On the other hand, in order to help taxpayers get through the problems caused by the COVID-19 pandemic, the tax authorities have implemented certain favourable tax measures such as (i) Granting tax benefits for annual income tax, social insurance contributions and health insurance contributions due by individuals; (ii) Extending the deadline for submitting the Single Declaration for income tax and social contributions due by individuals, the deadline for submitting Form 230, as well as the deadline for payment of the income tax and mandatory social contributions due by individuals until 30 June 2020 (inclusive); (iii) Introduction of certain tax facilities for the stimulus packages/bonuses granted by employers during the state of emergency period to employees whose activity involves direct contact with the public and who are at risk of infection with covid (iv) Granting tax benefits in relation to the annual building tax and the monthly building tax; (v) Cancellation of certain ancillary liabilities (vi) Deferral of tax payments. Furthermore, the authorities have extended certain social protection measures and have issued norms for the regulation of the right to stay in Romania for foreign individuals, starting from 15 May 2020, in the context of the pandemic. All these measures, which aim to support businesses in the current difficult context, are welcome. 

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 their 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.
 

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 case 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.

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.

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.

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.

Given so, the Government Emergency Ordinance no. 226/2020 is a welcome development. This states that VAT amounts requested for reimbursement based on the VAT returns submitted by taxpayers should be refunded without a prior VAT audit. This measure has been extended until 31 March 2021.

Law no. 296/2020 provides for the possibility of corporate income tax consolidation under certain conditions.

This was a long-expected amendment to create a true and authentic holding regime, which will attract groups of companies to Romania.    

The VAT group concept is implemented differently in Romania than in other EU member states. Thus, the benefit of forming such a group is the consolidation of the VAT position (i.e. the off-set of any payable VAT with refundable VAT owed to members of the group).  In addition, supplies of goods and services performed between the members of the group are subject to the normal VAT regime, regardless of whether they are made to third parties or to other members of the VAT group.

Until 2021, foreign companies which used Romania as an entry point to the EU for goods imported from outside the EU were 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).

Consequently, the FIC welcomes Law no. 296 of 21 December 2020, which amended the Fiscal Code to include the concept of VAT global representative. The law states that taxable persons not registered for VAT purposes in Romania, which import into Romania goods that have been transported from a third territory or a third country, may designate an authorised tax representative to fulfil the Romanian VAT obligations.

The tax treatment of offshore operations (i.e. drilling, construction and the operation of maritime installations, transportation of offshore goods, etc.) remains unclear two years after the Offshore Law (Law 256/2018), which enacted a new fiscal regime for upstream oil and gas, entered into force. This law did not remove the uncertainty for investors, and even added a number of barriers. In 2020, the Romanian authorities launched a public debate on draft legislation to radically amend the Offshore Law. The proposed amendments are set to cut many of the tax barriers introduced in the law, which prompted big companies to stop investments, but they have not yet been approved.

Further limitations on the activity of gas suppliers were introduced under Law No. 155/2020, which introduces a 90% tax on the difference between the actual purchase price and the price imposed prior to market liberalisation, as a regulated price. This “windfall tax”, to be applied until 30 June 2021, generates major blockages in the activity of gas supply companies.

Amid numerous discussions which have taken place over several years about the new taxation regime applicable to supplementary income generated from gas exploitation and trading, major offshore drilling projects have been halted.

Considering the high maturity of upstream in Romania, significant long-term investments are required to increase recovery factors from existing fields and to develop new onshore and offshore resources. These investments require a coherent and predictable system of laws, policies and regulations allowing investors to undertake rigorous and efficient planning of investment programmes. The stability of taxes and royalties is essential to ensure investors’ trust, in order to encourage them to invest in Romania.

Reinvestment of profit helps a business to grow, boosting economic development and hence enhancing budget revenue. Consequently, 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 class 2.2.9 of the Catalogue of the Classification and Normal Functioning Lifespan of Fixed Assets). This provision discriminates between various types of investors.

R&D activities represent a key element in any economy, and the benefits derived from these activities are endless. Thus, R&D should be encouraged by the Government, through the provision of  incentives for companies that carry out this type of activity. A viable system to stimulate R&D activities is essential to attract the activities that bring significant economic benefits to Romania.

Currently, the Romanian Fiscal Code offers an R&D incentive; a 50% additional deduction right for the costs incurred for these activities. Moreover, employees carrying out R&D activities are exempt from income tax. In addition, a tax holiday period of 10 years may be granted to companies solely engaged in R&D activities.

The mandatory private pension system (2nd Pillar), currently covering some 7.5 million participant members, must be protected by maintaining legal stability and predictability.

The voluntary private pension system (3rd Pillar), managing the savings of more than 500,000 participants, should be consolidated by gradually increasing tax incentives to facilitate taking up of these funds by more categories of worker. 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.

Government Emergency Ordinance no 3/2017 repealed the provisions set out in 2015 in the Fiscal Code (Law no 227/2015) on 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 compared to 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. These provisions were also maintained after the shift of the social security contributions from the employer to the employee 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.

Under fiscal legislation, excise duties are increased by the inflation rate, on 1 January every year, except for excises for cigarettes which are increased on 1 April each year, according to a timetable, set out in an appendix to the Fiscal Code. Currently, the third timetable for the increase in excise duties on cigarettes is in place (2017-2022), which, when it was adopted, provided gradual increases of 9-10 lei/ year.

Nevertheless, the timetable for 2017-2022 has already been amended three times; in 2018 (EO 114/2018), 2019 (EO 89/2019) and in November 2020 (Law 296/2020) with sharp increases of up to 42 lei (from January 2021 vs. January 2020), far more than the initial envisaged increases of 9-10 lei per year. These amendments have been made to comply with the European requirement of excise duty representing 60% of the weighted average price of cigarettes (WAP), as provided by Directive 2011/64/EU on the structure and rates of excise duty applied to manufactured tobacco. 

Directive 2011/64/EU states that the minimum level of the total excise duty should be 90 euro/1,000 cigarettes and excise incidence 60% of WAP. (This requirement is not applicable if the excise duty level is 115 euros/1,000 cigarettes or above). As from April 2021, the level of excise duty on cigarettes of 563.97 lei is equivalent to 115 euros (the Directive’s second requirement), so the 60% excise incidence will no longer be mandatory. Nonetheless, the timetable ends in 2022 and no predictable framework has yet been set for the next few years.