2012 Edition of KPMG’s publication which helps business travellers and their employers with tax planning
This latest edition of KPMG International’s publication Thinking Beyond Borders: Management of Extended Business Travellers again aims to help companies and individuals address some of the tax and social security issues related to deployment of staff abroad, particularly for shorter trips.
As Madalina Racovitan, Partner in KPMG in Romania’s Tax Department and head of International Executive Services explains; “This publication gives detailed information on individual income tax and social security in over 80 countries, including Romania (access the Romania file). Over 20 new countries have been covered compared with last year’s survey. So this annual publication is becoming an increasingly important and comprehensive work of reference for all companies which send their staff abroad.”
In the year since the last edition, there has been little change to the trend towards companies sending employees on shorter business trips often working across several countries, while the traditional model of a longer term posting to one place continues to decline. In the current economic climate, businesses are often keen to reduce the considerable costs involved in a longer term deployment of a member of staff to another country. So they are also looking for more efficient and flexible models. Employees too frequently favour shorter business trips abroad. Long term relocation with family can present considerable difficulties for the employees as well. So shorter trips often suit both employers and employees alike.
Clearly this new pattern of staff deployment brings many benefits. However, as the KPMG publication explains, it can also generate a number of tax and social security risks, making the tax position of companies and their employees a lot more complicated than with the traditional model. It is particularly important to address these issues bearing in mind that tax authorities worldwide have become increasingly vigilant in recent years, in an effort to protect falling budget revenues.
As Racovitan explains: “Once again, this survey should serve as a reminder that employers who send staff abroad even on short term missions need to monitor this travel closely and take advice on the tax and social security position. One of the major misconceptions which many employers have is that an employee only becomes liable to tax in a foreign country if he or she spends more than 6 months there. While this is generally true for salary income paid by the home employer, shorter stays can still generate a number of other potential liabilities. For example, any local income or commissions earned are likely to be subject to withholding tax, while in some cases, the employee’s activities might generate a Permanent Establishment in the country concerned, with associated corporate tax liabilities for the employer. If the employee travels frequently, he or she will also need to keep a close check on the number of days spent in each foreign country visited. A lot of short trips over a few months might lead to the employee becoming a tax resident without realising it!”
As Racovitan adds: “It is also particularly important to keep in touch with legislative changes in all the countries to which employees are sent, whether on short or long term postings. In Romania this year, we have seen significant amendments to legislation on social security, introduced at quite short notice. These generated new obligations for certain categories of expatriate staff and their employers. Failure to comply with legal requirements can generate significant demands from the authorities for back payments and related penalties, which can seriously disrupt a company’s business planning. So getting up to date information in all the countries concerned is critical.”
Racovitan continues: “Moreover, we have noticed recently that more and more Romania-based companies are expanding their operations outside the country. These firms frequently send their staff on short term foreign business trips to develop expansion projects, or to provide services to clients in other countries. Deploying Romanian personnel to other European jurisdictions has become a relatively easy process (especially to EU countries). However, one should not ignore the immigration formalities which still have to be fulfilled for Romanian nationals in certain European jurisdictions, or the social security compliance requirements before or during such short-term business trips (even where we are talking about trips which do not exceed a few weeks).
Racovitan notes: “There are cases where Romanian employers are not aware of local requirements in the jurisdiction where they deploy staff, and, at some point, they are faced with significant penalties or fines charged by the local authorities. In other cases, the employees themselves are faced with either restrictions on entering or staying in a country or are subject to tax, social security or other liabilities, which may significantly disrupt the business or even worse, can change what looked like a profitable project into a disastrous loss-making business decision.”
As Mark Gibbins, Head of Tax Department at KPMG in Romania adds:
“Once again, this year’s Thinking Beyond Borders survey shows how important it is for companies to take tax into account at policy-making level when they make decisions on staff deployment, and to seek expert advice on all the tax and social security implications of both long and short term postings. This is not a matter which should simply be treated as a purely administrative issue- it should be a critical part of a company’s strategic planning.”
About KPMG
KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 156 countries and have 152,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
KPMG in Romania and Moldova operates from six offices located in Bucharest, Cluj-Napoca, Constanta, Iasi, Timisoara and Chisinau. We currently employ more than 650 partners and staff; Romanians and Moldovans as well as expatriates
Romania:
Income tax
Liability for income tax
A person’s liability for Romanian tax is determined by residence status. A person can be a resident or nonresident for Romanian tax purposes.
A resident of Romania generally is defined as an individual who has a domicile in Romania, has a center of vital interest in Romania, or spends more than 183 days in Romania during any 12-month period ending in the fiscal year concerned. A nonresident is generally someone who spends less than 183 days in Romania.
As a general rule, Romanian tax residents are liable to Romanian tax on worldwide income whereas tax nonresidents are liable to tax only on Romanian-sourced income.
An exception to the general rule above is available for non-Romanian nationals who are treated as Romanian tax residents. In the first year during which the residence conditions mentioned above are met, non-Romanian nationals are liable to Romanian income tax only on Romanian-sourced income.
A full tax liability on the worldwide income may occur in the second consecutive year of meeting the residence test.
However, even in the second year, the non-Romanian individual may remain taxable in Romania only on the Romanian-sourced income, provided he/she is deemed as a tax resident in a country with which Romania has concluded a tax treaty for the avoidance of double taxation, and if he/she can obtain a valid tax residency certificate from that country for the fiscal year concerned.
Employment income is generally treated as Romanian-sourced compensation to the extent that the individual performs services while physically located in Romania.
Tax trigger points
Technically, there is no minimum threshold/number of days that exempts the employee from the requirements to file and pay tax in Romania. Under Romanian domestic legislation, nonresident individuals deriving dependent activities in Romania are liable for Romanian personal income tax from the first day of activity in Romania. However, to the extent that the individual qualifies for relief in terms of the dependent personal services article of an applicable double tax treaty, there will be no tax liability. The treaty exemption will not apply if a Romanian entity is the economic employer.
Types of taxable income
For extended business travelers, the types of income that are generally taxed are Romanian-sourced employment income, as well as other Romanian-sourced income and gains from taxable Romanian assets (such as real estate). Fringe benefits and broadly noncash employment income are deemed to be employment income and are taxed similarly.
Tax rates
Net taxable income (a deduction is generally available for compulsory employee social security contributions) is taxed at a flat rate of 16 percent. Nonresidents are also subject to a flat tax rate of 16 percent.
Social security
Liability for social security
Exemption from Romanian social security contributions may be available where a totalization agreement has been concluded between Romania and the individual’s home country, or where EC Regulation 883/04 is applicable.
Compliance obligations
Employee compliance obligations
Generally, annual tax returns are due by 25 May following the tax year-end, which is 31 December. Employment income must be declared and income tax must be paid on a monthly basis by the 25th of the month for the previous month.
No extension to the deadline is available.
All individuals who spend more than 183 days in Romania must submit a questionnaire for determining the fiscal residence of the individual upon arrival in Romania. Also, upon leaving Romania, all individuals who spend at least 183 days abroad within a tax year (whether they are Romanian tax residents or nonresidents) are required to file a similar form.
Employer reporting and withholding requirements
Where an individual is employed by a non-Romanian employer, that employer has no personal tax withholding or reporting obligations. It is generally the employee’s obligation to declare and pay Romanian personal tax on a monthly basis.
The Romanian entity where the individual carries out activity has certain reporting obligations towards the local tax authorities at the commencement and at the end of the business trip.
Other issues
Work permit/visa requirements
A visa and/or a work permit must be applied for before the individual enters Romania, depending on the nationality of the individual. The type of visa required will depend on the purpose of the individual’s entry into Romania. There are various exceptions to the rule. European Union (EU) nationals are not required to obtain visas or work permits in order to live and/or work in Romania.
Double taxation treaties
In addition to Romania’s domestic arrangements that provide relief from international double taxation, Romania has entered into double taxation treaties with more than 80 countries in order to prevent double taxation and allow cooperation between Romania and overseas tax authorities in enforcing their respective tax laws.
Permanent establishment implications
There is the potential risk that a permanent establishment could be created as a result of extended business travel, but this would be dependent on the type of services performed and the level of authority the employee has.
Indirect taxes
Value-added tax (VAT) is applicable at 24 percent (standard VAT rate) on taxable supplies. VAT registration may be required in some circumstances.
Transfer pricing
Romania has a transfer pricing regime, and thus, related-party transactions must observe the arm’s-length principle.
Local data privacy requirements
Romania has data privacy laws.
Exchange control
Romania does not restrict the flow of Romanian or foreign currency into or out of the country. Certain reporting obligations, however, are imposed to control tax evasion and money laundering. Domestic legislation requires financial institutions and other cash dealers to give notification of cash transactions over 15,000 euros (EUR), suspicious cash transactions, and certain international telegraphic or other electronic funds transfers (there is no minimum amount). All currency transfers (in Romanian or foreign currencies) made by any person into or out of Romania amounting to EUR15,000 or more in value must be reported.
Nondeductible costs for assignees
Nondeductible costs for assignees include contributions to private medical insurance or pension funds above certain caps.
