2019 is ending in a positive note for the business sectors especially as a result of the communication and transparency of the new government (e.g. the declaration of the new Ministry of Finance regarding the VAT refunds). In the same time, there are more and more news that predict a slowdown of the Romanian economy in the coming years.
During economic slowdowns, when the budget is shrinking, an intense tax collection system is put into effect, with an emphasis on tax audits. This has been especially true during the second half of 2019, when a significant increase in the number of tax audits has been observed (including transfer pricing audits).
When am I exposed to a high tax risk?
Currently, there are in place a series of evaluation criteria with regards to the level of tax risk taken into consideration by tax inspectors during the analysis performed prior to the initiation of tax audits. However, by now, there is no official transparent methodology or calculation method used to evaluate such risk.
From our experience, and given all information available on the National Agency for Fiscal Administration’s (NAFA’s) website, the most important tax risk evaluation criteria are as follows:
- The existence of any aspects in the company’s tax record,
- The start of the insolvency procedure (as you may know, the first thing to happen to a company that files for insolvency is a tax audit that evaluates all taxes due to the state budget),
- Any delays in the submission of tax returns and payment of due taxes,
- The value of taxes (VAT, income tax, excise duties) paid and / or requested for reimbursement.
In addition, for the evaluation of risks associated with transfer pricing, there are also to be taken into consideration the following:
- If the company has performed any intra-group transactions, in the period subject to the tax audit or preliminary analysis,
- If the company has registered operating loss or profit indicators lower than the market average (such profit indicators are estimated by the NAFA upon performing a benchmark study for the respective industry sector);
- If the company has no negotiating power with regards to the intra-group pricing;
- If the company registers intra-group interest rates lower than the market average for loans offered to related parties or higher than the market average for loans received from related parties, etc.
Although there are not yet any legal provisions that cover the evaluation of the tax risk (currently there is a risk evaluation order in effect, however it only applies for VAT registration purposes), our understanding is that there are teams within NAFA working on a draft order. Therefore, in the coming period, all taxpayers should be able to know how exactly the fiscal risk is calculated or evaluated, given that based on such an evaluation, they will be subjected to tax audits or they will benefit from tax reductions, on a case-by-case basis.
What should be noted in the case of companies that have a high fiscal risk is that, during the fiscal inspections, the inspectors focus particular on:
- The deductibility of expenses with services received from third parties and even more on those received from related parties. If such expenses are classified as non-deductible by the tax inspectors, their analysis for the transfer pricing file becomes redundant;
- In most cases, it is wrongly considered during tax audits that when a series of expenses are considered non-deductible - automatically the related VAT will also be non-deductible.
- Complex transactions: transfers of assets, receivables or business transfers, due to interpretable fiscal provisions;
- Related party transactions, especially regarding companies with operating loss or with profit indicators below market level, given that in these situations the tax authorities can impose adjustments to the revenues or expenses related to the intra-group transaction;
- Royalty payments, especially when no benefits can be justified at the level of the company paying the royalty fees.
To which fiscal obligations am I subjected for the year 2020?
First of all, we are talking about new rules of reporting for transactions with tax optimization potential, according to the so-called Directive – DAC 6 or Mandatory Disclosure Regime - which is to be implemented in Romania (towards the end of the year). This will be mandatory as of July, 2020 and it apply to cross-border transactions undertaken in order to reduce the tax obligations performed / implemented starting June 2018.
It remains to be determined (it will be clearer when the implementation project in the national legislation is ready):
- What should be reported? (the Directive mentions that the new reporting obligations apply to the cross-border transactions, but Poland, for example, chose to apply these provisions also to local transactions with tax optimization potential),
- Who will be required to report? (the Directive mentions that any of the taxpayer who carried out the transaction or the intermediaries who were aware of the transaction - lawyers, consultants, etc.),
- Penalties for failure to report are / will be set by each Member State (Poland, for example, has set a minimum penalty of EUR 500,000).
Minimum wage and part-time jobs – January 1st, 2020
Given that it is currently the time to prepare or update the budgets for the next year, you must take into consideration a higher level of wage costs starting the 1st of January 2020 (if you have employees working on minimum wage conditions). The minimum wage will be increased from RON 2,080 RON to RON 2,230 RON (monthly gross wage). Therefore, if you already have commercial contracts negotiated either with related parties or third parties and you did not previously take this cost into account, you must either renegotiate (if possible) the contract, or expect a lower profit level.
One of the good news is that the over-taxation of part-time employment contracts has been eliminated and they will not be taxed at the minimum wage level.
Reporting obligations regarding the real beneficiary
In July 2019, the Law no. 129/2019 regarding the prevention and combating of money laundering and financing of terrorism has been published, and it includes some provisions that amend or supplement other legal provisions.
According to this law, within one year since its entry into force (which is no later than 21st of July 2020), all registered companies must submit to the Registry of Commerce, through their legal representatives, a statement regarding the real beneficiary of each respective company, in order to list them in the Registry of real beneficiaries. The companies exempted from this requirement are autonomous administrations, national companies and other companies that are state-owned (with a majority of shares).
Newly founded companies are already submitting this statement when registering with the National Trade Register Office.
This statement will be submitted either annually or whenever changes regarding the real beneficiary’s identity data occur, within a time frame of 15 days from the approval of the annual financial statements for the annual statement, or from the date when the change of identity data of the real beneficiary occurred.
New VAT regulations – quick fixes
These quick fixes are short-term regulations and will be in effect until the VAT system is finalized, which should take place from July 1, 2022.
The changes that will come into force from 2020 refer to the harmonization of the VAT regime in all Member States regarding simplification measures for chain transactions, stocks available to the customer, as well as for applying the VAT exemption in the case of intra-Community supplies of goods. Certain stricter conditions will be introduced, based on a set of rules for reporting and declaring the respective transactions, as well as a fixed list of the necessary supporting documents, applicable to all Member States.
Besides the abovementioned tax provisions and aspects, it must also be said that, at local level, there are more tax projects requested by the business sector (such as the fiscal group for income tax purposes, 16% VAT rate instead of 19% VAT rate etc.), most of them having already passed the Senate vote and currently awaiting approval at the Chamber of Deputies. We should wait and see if all of these projects will pass the vote or which of them will be approved and will be in effect starting January the 1st, 2020.
At global level, there are a number of OECD recommendations on taxation of digital business, such as Amazon or Google (currently a draft project open to comments) that will be finalized next year. Following the recommendations, it is expected that the OECD member states and the ones that are not members of the OECD but follow the OECD Guidelines (e.g. Romania) - will introduce in the local tax system a series of measures for the taxation of digital businesses.
Globally, the tendency regarding the evolution of legal regulations in the field of taxation has been, in the last years, reflected towards transparency, transparency and even more transparency. The fiscal optimization will be diminished, the room for tax manoeuvres will be reduced and the reporting obligations and fiscal compliance levels will increase.
Locally, if we take into consideration the budget deficit and the reduction of the economic growth, we could estimate that there is a tendency to verify / penalize the taxpayers that have a high level of tax risk. As mentioned previously, starting from June 2019, there has been a visible increase in the number of tax audits at companies with high tax risks (intra-group transactions, services received from related parties, VAT to be reimbursed from the state budget, delays in submitting tax returns etc.).
Therefore, if you classify in the category of taxpayers with high tax risk, you must expect a tax audit and budget your tax adjustments (the ones you can estimate).
In addition, when drawing up the budget, you must also take into consideration the tax measures that are already known to have an effect on increasing expenses (such as increasing the minimum wage, new reporting requirements on DAC 6 or regarding the real company beneficiary, VAT – quick fixes – higher costs associated with the reporting or documenting certain transactions).