Tax legislation from wishing to reality - Report by Mazars Romania

One of the tax paradoxes in Romania is that steady changes represent the sole constant in this domain

The provisions of the Tax Code are adjusted, amended, changed and supplemented by Government and Parliament with such celerity worthy of a better cause. This process is uninterrupted, irrespective of the political colour of the leading majority or the state of the Romanian and world economy.


To a certain point, this could be natural as the Tax Code regulates taxes and duties applicable in an economy that is a living organism evolving (or devolving) and undergoing incessant changes. So, the Tax Code automatically needs to adjust to such reality. Unfortunately, the changes it faces are mostly made in a hurry, without prior analyses or impact studies, never underlain by a medium- or long-term vision.

However, I do not intend to turn this article into an analysis of the changes occurring in the tax legislation or in the tax strategy conceived by our executives. Topics like these have been and will be approached by taxpayers and tax professionals in extensive materials.

I am going to pinpoint some of the ideas referring to changes to the relevant legislation that should be taken into consideration when the wish is truly apparent for a tax reform.


The introduction of the flat-rate tax in the Romanian tax legislation should be in the forefront. Yes, this is it: the flat-rate tax. What we have practiced since 2005 is a surrogate, a fake flat rate which has been sold to us as something exceptional. As we have seen, this system, although lamely implemented, has been one of the factors conducive to significant economic growth in our country in the period spanning 2005-2008.

Therefore, we should first and foremost proceed to generalising the 16% tax system for all categories of income, no matter their source or the manner in which they are obtained. This may lead to instituting the much craved framework for tax equity which might stimulate taxpayers to focus on developing their business rather than to seeking small exits and alternative solutions to minimise their tax costs.

Certainly, this would mean to eliminate all tax incentives and advantages offered to specific categories of taxpayers, as the salaries of employees working on software development would be. At first glance, this seems wrong but, as I am going to elaborate below, if such measure were not singular, being accompanied by others to which I am further referring, the net effect on this category of taxpayers would be positive, leading to a tax cost lower than the current one.

The elimination of incentives and the generalisation of the 16% tax are based on the idea that the flat-rate tax is essentially a tax incentive from which all players in the economy equally benefit, irrespective of where they operate, of the form in which they carry on their businesses or of the sources from which they achieve income.


The most important measures which I deem necessary to be undertaken in this tax area are the following:

a. Tax Deductibility of Provisions

The fact is well known that, currently, the Romanian Tax Code is rather restrictive as regards deductibility of various categories of provisions. Ideally, the tax legislation would allow for all categories of provisions recorded by a company to be tax deductible as long as the provisions have been created in compliance with the International Financial Reporting Standards (“IFRS”).

Thus, taxpayers would be encouraged to expand their businesses and would no longer pay tax on income which they could not obtain because their customers face financial difficulties, part of their inventories are physically or morally degraded or their transactions have turned into a loss.

So, in my opinion, the State should be solid with taxpayers not only when they gain (requiring tax on their gains) but also when they lose (offering them the opportunity to write off unrealized income from their tax base).

b. Tax Depreciation

If we ask any expert working in the tax or accounting field in Romania about his opinion on the method for calculating tax depreciation, he will fortunately answer that it is quite difficult and/or complicated. True, it is a nightmare because it is based on a bulky catalogue of numerous categories and subcategories of fixed assets having different depreciation periods, being reassessed, such revaluations being either tax deductible or non-deductible, to which changes to the method occurring over the years also add.




The new system should be rather simple, easy to follow and to be implemented by taxpayers, and easy to be checked by tax authorities. What should be done?

- Eliminate the complicated catalogue containing so many depreciation periods and introduce four (4) or five (5) time intervals, at the most, for the calculation of tax depreciation on all assets falling within the category of fixed assets;

- Accept goodwill and company formation and incorporation expenses which are currently non-deductible as tax depreciable;

- Accept, from a tax perspective, the annual revaluation of fixed assets by taking into account the official inflation rate published by the Institute for National Statistics (inflation being thus tax-free).

c. Tax Deductibility of Car Running Costs

The legislation covering this area has ever been unclear and interpretable, being subject of disputes between tax authorities and taxpayers. The causes are numberless and have been generated, on the one hand, by the strong lobby of car producers and traders and, on the other hand, by executives’ wish to extort money from motorists.

For better management of tax deductibility of car costs, the following measures should be considered:

- to impose a maximum ceiling on tax deductible depreciation of cars, e.g. EUR 15,000, which should also operate for VAT;

Although Romania is a country where cars worth more than EUR 100,000 are purchased as company vehicles, the Romanian State is not so rich as to accept its taxpayers to apply tax deductions on such expensive cars.

-to establish a maximum level of tax-deductible fuel expenses, e.g. the equivalent of 60 l / month.

When consumption is higher, the user should demonstrate by means of supporting documents (travel order, mileage report, etc.) that the travels have been for business purposes. In this manner, bureaucracy and additional costs for the preparation of supporting documents for cars given to employees for business purposes, driving approximately 1,000 km per month, will be eliminated. So, when more than 1,000 km are run for business purposes, fuel expenses and the related VAT may be deducted.


The legislation covering this area is, in my opinion, the best approached in the tax zone. However, adjustments should be performed here, too, so as to make taxpayers’ and tax inspectors’ life easier, such as:

- impose a materiality threshold on the transactions for which the transfer pricing documentation is mandatory;

There are cases in which the cost for preparing the transfer pricing documentation is higher than the additional profit tax a company should pay for the expenses generated by the respective transaction, which would be deemed tax non-deductible. Thus, to set a threshold of about EUR 15,000 on transfer pricing documentation for a transaction would be a convenient measure.

- accept the inclusion of companies recording tax loss in the comparative analysis.

In the present-day economic context, it is quite natural for some activities to generate losses and the determination of comparability with companies recording profit only is unreasonable. As I have mentioned above, the State should be a fair partner of taxpayers, both in profit and in loss.





The request for the introduction of the concept of holding company into the Romanian legislation, with advantages from a tax perspective, has been a leitmotif of meetings between representatives of the business environment and of the relevant authorities.

A holding company is a company with controlling shareholdings in one or more other companies, benefiting from a special tax system, i.e. it does not pay profit tax on investment income. Investment income comprises dividends received proportionately to the shareholdings, interest on credits, royalties invoiced for the assignment of copyrights to business partners.

As long as the income is used for another investment, no tax shall be levied thereon, as it is already imposed on the payer of that income. However, tax on dividends will be paid when the owner of the holding company uses amounts thereof for its own consumption.

This system is required for two main reasons:

- stimulation of Romanian (or foreign) enterprisers carrying on business in Romania to maintain their capitals in the country and not transfer them to other jurisdictions;

- development of the services industry (financial and accounting, tax and legal advisory services, etc.) of holding companies that may offer jobs to Romanians (there are countries where the relevant legislation provides for the obligation of holding companies to employ at least one individual of the respective country).

The enactment of such system would render investment more dynamic and would encourage, as I have already said, the maintenance of capitals in Romania.


The fact is well known that the current tax system in Romania discourages salaried work, thus benefiting the alternative services system relied upon authorised physical persons [“PFA” in Romanian] or microenterprises. This is due to the complicated and quite expensive system of social security contributions rather than to profit tax.

Nowadays, any employer paying one of its employees, let’s say, RON 1 worth of net salary must pay in addition approximately RON 0.80 worth of tax and social security contributions (i.e. to the pension, healthcare and unemployment funds, as well as other less significant amounts). In the case of PFAs or microenterprises, the tax cost for RON 1 worth of net income is about RON 0.30 (+/-10%, subject to the income level).

Surely, an anti-abuse legislation exists, permitting tax inspectors to reclassify a PFA or a microenterprise system as salary when they discover that it is actually a disguised employment contract; yet, we should admit that tax authorities rather do not perform such controls than they do.

The solution to such situation is simple and easy to implement: to impose payment of all social security contributions on all categories of income (salary, PFA fees, microenterprise income), all while placing a real ceiling on these contributions at a decent level, such as three (3) times the average salary per economy. I say real because, for the time being, the ceiling operates on the contribution to the pension fund at a huge level, in my opinion, as it is five (5) times the average salary and operates solely on employee’s contribution.

The implementation of such system would discourage the use of alternative remuneration systems of the PFA and microenterprise kind, but placing a ceiling on contributions at a decent level would make the beneficiaries of this income to opt for an employment contract rather than for a structure of a company registered in a country applying a friendlier tax system or in a tax haven.

These would be, in brief, some of the measures that might lead to improving the general tax climate in Romania. Nevertheless, to make them successful, an exhaustively complete tax administration reform in Romania would be more than welcome. However, we shall approach this topic in a future article.