Employers do not always consider the fiscal impact of granting various types of benefits to employees, which subsequently gives rise to disputes with the tax inspection bodies. This is due to the specific legislation in Romania regarding taxation of employee benefits in the form of benefits in kind, which leaves room for interpretation, consequently raising operational enforcement issues.
Benefits in Kind: Old and New Problems
Romania’s Law no. 227/2015 on the Fiscal Code does not limit the types of benefits in kind that are taxable, but only provides examples.
The most common benefit given to employees is the provision of edibles such as coffee, tea, fresh fruit, etc., though another common form of benefit is employer-arranged outings, particularly for recreation and/or socialization.
Other non-individualized benefits include the provision of spaces specially designed for relaxation and recreation to employees at the company’s headquarters, the renting of sports fields, and access to gyms and health clubs.
It is clear that these benefits represent taxable income, but employers usually classify them incorrectly, for tax purposes, and record these benefits as protocol expenses, or – in the best-case scenario – as non-deductible expenses.
In addition, many employers are creative in establishing new types of benefits that are more related to meeting functional needs, such as speeding up the integration of new employees in the company’s activity. An example of this is the arrangement made by an employer for individual meetings between new colleagues and older colleagues in locations outside the employer’s premises. Although the purpose of the employer is not to grant an advantage to participating employees by reimbursing them for meal costs during such meetings, nevertheless, in the opinion of the tax authorities, such expenses represent benefits in kind that are subject to taxation.
More recently, since the beginning of the COVID-19 pandemic, various programs have been instituted to support employees that have worked remotely, such as parenting and personal development courses.
In this case as well, even though the employer’s intention is commendable, these types of courses are seen as employee benefits, since they are not directly related to the activity they perform for the employer.
Moreover, in the tax authorities’ view, all benefits granted to the employee which are not expressly provided for as non-taxable are considered benefits in kind and assimilated to the salary. There is no room for interpretation, and arguments related to the benefits’ purported improvement of the employer’s activity, no matter how justified, are not relevant under the current provisions of the Fiscal Code.
Employers who treat these benefits as taxable, however, face an administrative problem regarding the allocation of the benefit in cases where several employees who have received the same type of benefit are involved.
Romania’s Fiscal Code does not provide a mechanism to allocate the costs incurred with the benefits to each employee and only imposes individual taxation, without taking into account situations where benefits are granted to a group of employees, with each individual employee benefitting in a different amount.
Specifically, the Fiscal Code does not establish whether benefits in kind in the form of food provided by the employer at its premises, or in occasional meetings organized outside its premises involving recreational and entertainment activities, must be highlighted individually or shared equally among the beneficiary employees.
In our opinion, the employer should implement an internal mechanism and/or procedure through which to assess and allocate the value of the benefit in kind to each employee for each month. In addition, this procedure could help differentiate between what is a protocol expense, incurred with customers, and what is a benefit in kind granted to employees, with only the latter being taxable.
Last but not least, the taxpayer should realize that the identification by tax inspection bodies of benefits granted to employees is relatively easy, as most of them are included in the individual or collective employment contract and/or in various internal policies and rules of the employer.
By Felix Tapai, Tax Partner, Maravela, Popescu & Asociatii