“The pandemic has highlighted weaknesses in each area, and the fiscal framework is essential for a large majority of them. The recent changes made to legislation are, to a large extent, beneficial and necessary, all the more so at a time of instability in society and deep transformation of business. A predictable legal framework remains the crucial goal for any business strategy, but we maintain confidence in the ability of entrepreneurs to adapt through innovation, technology and resilience to the challenges of this new reality," said René Schöb, Head of Tax & Legal, KPMG in Romania.
Three important developments, which are also strategic directions, are notable in these latest changes to the Tax Code.
A real effort to eliminate any tax discrimination or disadvantages that micro-enterprises have, compared to larger companies, with annual income of over 1 million euros, and that pay corporate tax.
These unintentional differences in treatment, which have now been remedied, resulted from errors in the consolidation of tax legislation for the two different tax regimes, but they produced effects that were disadvantageous to small companies.
- A first example was that, unlike companies liable to corporation tax, micro-enterprises could not, in the event of a merger or division, pass on past tax losses for recovery through deduction to the acquiring entity or a new entity resulting from the division.
- Secondly, if they held participations in other firms and received dividends, micro-enterprises paid tax on this income, which had already been taxed.
- Thirdly, if a micro-enterprise had entered into a corporate tax payer scheme during the year and made eligible investments, it was not clear whether and how it could benefit from the reinvested tax exemption.
- Fourthly, micro-enterprises that allowed employees to use the company's cars for personal purposes risked paying taxes and social contributions for this advantage as opposed to corporate tax paying companies in the same position. From 2021, none of these tax disadvantages and risks will exist.
“The accelerated dynamics of the use of technology over the past year and the rapid and profound change in business strategies to adapt to the new market conditions brought about by the health crisis has deepened certain imbalances in the fiscal framework compared to the expectations and needs of the business environment. The adoption of the new provisions of the Fiscal Code contributes to ensuring an adequate legal framework and obviously reduces the uncertainty and complexity of compliance. As a result, Romania's attractiveness to investors is increasing, and this is excellent news for the authorities and companies alike," explains Alin Negrescu, Partner, Tax Advisory, KPMG in Romania.
The trend is towards simplifying corporate obligations, reducing compliance complexity, and granting tax concessions in a less bureaucratic and costly manner
The trend can be observed both at the level of companies and employees. Self-employment has not been forgotten either.
These simplifications are important for all firms, but especially for smaller firms, which were indirectly disadvantaged previously because they could not afford the high compliance costs that large companies absorb more easily. Examples of simpler and clearer tax relief to be applied after the amendment of the Tax Code are as follows:
- If an employee is working remotely, the employer may pay him/her RON 400 per month without additional tax costs, but in particular without supporting documents, to compensate him/her for part of the expenses he/she incurs for utilities (electricity, heating, water and data subscription) or for the purchase of office furniture and equipment. Similarly, if the employer decides to pay the costs of kindergarten or nursery school for an employee’s child, up to a limit of 1500 lei per month, the company no longer has to pay social contributions for this amount, in line with the exemption from income tax granted in November 2020 by Law 239/2020. The burden of social contributions made that benefit entirely unattractive. Another example, specific for this period, is voluntary epidemiological testing of employees. Until now, firms were concerned that the tax authorities might treat this cost as a wage benefit. This is no longer the case, and this risk has been explicitly eliminated.
- The exemption regime for reinvested profit has changed to correct situations in which a firm lost this benefit if the equipment was purchased in a tax quarter in which, for economic reasons or purely on a seasonal basis, profit was low, while the cumulative profit was perfectly justified by purchases.
- Companies have been allowed to use copies of tax returns or certificates issued by foreign companies that have retained the tax as supporting documents for tax credits allocated to taxes paid abroad, unless the competent authorities of the foreign country provide such attestations.
- A clear limit has been introduced, i.e. the average gross wage earned in the economy, for firms wishing to pay employees the cost of holiday or treatment leave. The amount of these advantages, free from tax and social contributions, was not previously limited. In practice, however, in the absence of any clear understanding as to what the tax authorities would consider reasonable, many firms preferred not to give employees "a poisoned gift" to avoid the risk of reconsideration as a wage bonus.
- The turnover ceiling for the application of the VAT on collection system has increased from 2,250,000 lei to 4,500,000 lei, which facilitates access to this liquidity advantage for several micro-enterprises.
- In the case of taxes and charges on buildings, for the purposes of updating the taxable amount on the basis of a revaluation report to allow payment of the standard rate (rather than the punitive rate), revaluation is now mandatory after 5 years instead of 3 years, as in previous legislation. The cost of compliance, in terms of money and time allocated, has become more reasonable.
- The favorable tax regime with regard to social contributions for employees of construction firms has also been extended to those in the sector with management or management contracts, who have been discriminated against on the basis of the legal form of their contract, when the tax regime was otherwise similar.
- Businesses will be able to recover VAT from the state which has been paid but not collected from individuals who owe the money, through a simple procedure with much clearer conditions.
Trend towards alignment of national legislation and related procedures with international taxation
Romania has remained, to some extent, a less sophisticated tax jurisdiction and sometimes unprepared to respond to a high volume of transnational activity, involving both people and companies, although the economy and people have lived de facto in a globalized world for many years. The remaining elements of this state of affairs in the tax system have been almost completely eliminated from 1 January 2021. Some examples are:
• The share applicable to non-resident incomes to be held at source by Romanian companies has been reduced from 16% to 10%, thus eliminating discrimination between Romanians and non- residents, which Romania has in any event accepted through double taxation treaties. The new rate covers interest, royalties, commissions, sports and entertainment activities in Romania, management or consultancy services wherever they are provided, as well as other services provided in Romania.
- An ex officio settlement procedure by the Romanian tax authorities or at the request of a foreign tax authority at the place of effective management in Romania is being made operational for foreign companies. Romanians or foreigners were previously able register a firm anywhere in the world and manage it from Romania, with no adverse fiscal consequences, and without owing and paying taxes in Romania. In recent years, since the Romanian tax system has become quite favorable by European standards, we have also had reverse tendencies: foreign firms wanted to register tax in Romania. They did this but found that they could not benefit from all the provisions available to Romanian companies because tax law referred to “Romanian legal entities” rather than to legal entities resident in Romania. This inconsistency has now been remedied.
- The revised Fiscal Code now clarifies the moment from which an individual will be considered as a tax resident in Romania on the basis of the criterion he/she has fulfilled in order to arrive at this situation, eliminating ambiguities and discretionary interpretations.
- Provisions have been introduced to combat tax avoidance by foreign companies and to discourage transactions with companies resident in countries which do not offer fiscal cooperation. Thus, expenditure incurred as a result of transactions with an entity or individual located in a state which, at the time of the registration of expenditure, is included in the EU List of Non-Cooperative Jurisdictions for Tax Purposes has been made non-deductible. This list comprises territories such as Barbados, Panama, the Seychelles, Trinidad and Tobago, the US Virgin Islands, as well as Turkey, Thailand, Australia, Morocco, Namibia and Jordan.
- Foreign firms will be able to appoint an authorized tax representative instead of registering in Romania for VAT if they import goods followed by intra-Community supplies in Romania. Although it may seem insignificant, this provision could put Constanţa on the map of Europe as the gateway for the entry of goods from all over the world in direct competition with Hamburg or Rotterdam.
- Finally, large groups of Romanian or foreign companies have been granted consolidation for corporate tax, which for some time they had been arguing for. Consequently, they will no longer be required to pay tax on losses when some companies in the group make losses and others are in profit.
Nevertheless, we have also seen some reminders of old trends, which we had hoped had been left behind, such as unpredictability. On 31 December 2020, an Emergency Order postponed two major tax facilities which should have entered into force on 1 January 2021 by one year: the ceiling for the reduced rate of 5% for new dwellings will no longer be EUR 140,000, and the depreciation of 9-month receivables cannot be fully deducted in the calculation of corporation tax.