1. What are the most common grounds of fiscal litigations this year?
The current economic climate has made the Romanian tax authorities more aggressive in their approaches in all the fields covered by the tax legislation, from the classic profit tax and VAT, to more specific areas such as customs and excise duties or environment fund contributions. In this context, we note that the taxpayers feel a strong pressure coming from the tax authorities and are more willing or more in need to react and challenge the position of the tax authorities. From our experience, such disputes are either solved during a tax audit, if the taxpayer is well prepared and preferably assisted by a specialist (this would be the best scenario), or in the course of a judicial procedure in court (rather lengthy – up to 2 years).
The most usual fiscal matter which have been going on trial lately include:
- VAT in various contexts, such as VAT charged to individuals on the sale of immovable property, refusal of VAT deductibility during the investment period, challenging the VAT exemptions for intra-Community or export operations, due to the failure of the taxpayer to meet certain strict documentation requirements etc;
- requalification of the nature of some transactions – impacting on both income tax and profit tax, following the substance over form principle regulated by art. 11 of the Romanian Fiscal Code, recently improved.
2. Which are the main fiscal changes impacting SMEs in the current Fiscal Code and what improvement would you see most proper in this respect?
This half of the year came with many important changes brought to the Romanian fiscal legislation and several other changes are expected to come, such as the flat tax in specific areas (for example hotels industry, restaurants, auto repair services) which will surely affect many SMEs.
They all could easily be named facilities in spite of the taxpayer's best interest, because the positive effect can only be found in the politicians' statements.
We are discussing especially about the VAT cash accounting and the micro-enterprise system, already in force.
VAT cash accounting system may bebeneficial to SMEs only when dealing with each other, because otherwise, it creates a competitive disadvantage when dealing with larger companies that do not apply such VAT collection system. The downsides of the new VAT system reside in the rather complex administrative procedures and in the postponement of the deductibility right until the moment of payment of the suppliers' invoices.
Thus, it would be more beneficial if this facility of the VAT cash accounting system were optional, as literally provided for by the European VAT Directive.
Also, starting with 2013, the micro-enterprise system became mandatory for all newly established companies and also for the existing companies having a turnover >EUR65.000. This micro-enterprise tax is particularly unfavorable to companies operating in industries with low profits margins (such as the production industry) and for greenfield companies (that will obtain the first taxable income after at least one year after investment is actually made). Since the current micro-enterprise taxation system does not allow the tax payers to recover the fiscal loss registered during the investment period, the only foreseeable solution to circumvent micro-enterprise taxation system is to establish a share capital above the EUR 25,000 threshold, beyond which the company may effectively opt for the profit tax system.
3. Managers of all industries and companies are referring more and more especially in the last years to “predictability, transparency and the rule of law”. Do you see this as a wish list or there is also a solution, and if so, which?
The private sector and investors, either local or foreign, have always striven for predictability, transparency and the application of the rule of law. When operating with budgets in order to meet certain targets, and a lot of companies do this nowadays, predictability is very important. Also, for lack of transparency in the administrative sector, for instance in matters related to budgetary spending of taxpayers' money, or whenever the letter of law prevails over its spirit, many taxpayers feel that they are effectively hunted by the tax authorities, instead of being guided. This has resulted in foreign investors being driven away from Romania and also in companies applying certain optimization structures, which ended up in less taxes being collected for the state budget.
In the current economic climate, the best wishes of the private sector are hardly being met by the authorities and the light is far away at the end of an incredibly twisted tunnel.
We have a recent bad example, the 85% income tax due by management personnel for the income derived upon termination of the employment agreement.
While the tax authorities make use of their dominant position and scout around to replenish the government coffers, it is quite difficult to see a solution for the implementation of a tax system sustaining predictability, transparency and the application of the rule of law.
4. There were lately several VAT- oriented fiscal regulations, especially related to VAT collection. How does this impact companies (are there industries more impacted by these changes than others?) and from what perspectives?
One of the most discussed measures taken by the Romanian tax authorities is the implementation, starting from 2013, of the mandatory VAT collection system, which affected many companies, as well as accounting software providers and tax and accounting professionals that co-worked to meet this new legislative requirement. This measure came with complex administrative procedures, changes in accounting systems, a lot of uncertainties and many questions.
The system, in the way it was announced, was meant to be a facility given to taxpayers that need to pay VAT regardless of their issued invoicesbeing cashed or not, which frequently forced them to use credit options in order to pay taxes. By this facility, they were granted a 90-dayperiod to cash their invoices and pay the VAT to the state budget. The downside comes after the 90-dayperiod, when, with the invoice cashed or not, the taxpayer needs to pay the output VAT to the state budget. Additionally, on the input VAT side, the taxpayer cannot deduct VAT until he pays its own invoice.
As previously mentioned this measure creates a disadvantage for the companies applying this system wheneverthey deal with large companies, which do not apply this same system. A large company, depending also on business requirements, will try to avoid dealing with companies applying this VAT collection system, in order not to postpone the moment when it is able to deduct its input VAT to the moment when it performs the payment. This would be for example the case of small companies producing various goods (e.g. raw materials, finished goods, assembly products) for large manufacturing entities (e.g. car producers, clothing companies).
5. If we are to place the local fiscal environment within the European frame, are there any differences separating Romania from other countries? What does it make it so difficult locally to be interpreted, applied and acknowledged from the fiscal regulations point of view?
Romania has the advantage of an extensive network of Double Tax Treaties and of a reduced corporate and income tax rate, compared to other European countries (e.g. 25% in Denmark or 33% in France). From this perspective, Romania would be a good country for investors.
From tax rates perspective, the disadvantages comes in relation to social contributions taxes and VAT (within the EU only Hungary with 27%, Denmark and Sweden with 25% havehigher VAT rates than Romania).
However, the main disadvantage comes from the lack of predictability and transparency. The constant change of the tax legislation makes it very difficult, even for professionals, to keep track of past and current provisions in order to properly assess the tax position of a company. Additionally, there is not a unitary interpretation of the legislation and for example, expenses may be deductible or not depending on the personal experience of the tax inspectors auditing a company or on the extent to which a judge is familiar with the specific tax issue at stake.
Furthermore, lengthy audits (sometimes even more than one year), very long administrative and judicial procedures when challenging the results of the tax audits (there may be several years between the end of the tax audit and the time of the irrevocable court solution), and finally another administrative procedure in order for the taxpayer to get back its own money after a positive judicial outcome, make Romania a rather unattractive fiscal location.
