Two years ago the Romanian anti-fraud and tax authorities took the Romanian business environment by surprise, by initiating a thematic tax audit campaign aimed at auditing the tax treatment of purchased gift vouchers, in terms of income tax and social security charges. A very sought after extra-salary employee benefit, companies bought and offered gift vouchers amounting to over RON 1 billion (approx. EUR 200 million) in 2018 alone.
But it was not the actual tax audit that astonished businesses, but rather the inspectors’ approach, who speculated a legislative ambiguity in the tax treatment applicable to vouchers granted by taxpayers to their business partners’ employees, with the view of boosting their own sales.
For at least 5 years, the local tax legislation had the following general rules, which led to the whole uncertainty regarding the gift vouchers tax treatment:
- Firstly, it generally stated that benefits in kind or in cash are considered to be any kind of benefits received by the employee from third parties or as a result of the provisions of the individual employment contract or a contractual relationship between the parties, as the case may be. As such, benefits in kind or in cash had to be taxed with salary tax and social security charges (health insurance contribution, pension contribution, and employer’s contributions), under the same rules as those applicable to salary income. The reporting obligation would also fall with the individual’s employer and not with the third party granting such benefits;
- Secondly, the local tax legislation stated that gift vouchers granted to individuals separate from salary should fall under the category of “income from other sources”, thus being subject to income tax and health insurance contribution only (provided certain conditions are met). Therefore, a more favourable tax treatment was in place for these types of income due to fewer social security charges being owed. The provider of the gift vouchers (payer of income) would have to compute and pay solely the income tax, while the individual would owe and report the health insurance tax (if applicable).
It was this legislative ambiguity that led to questions such as: who should pay the income tax and social security charges, i.e. the company that gave the gift vouchers or the company whose employees received those vouchers? Unfortunately, even today, while tax audits are still being performed, the answer remains “it depends”.
How was the ambiguity speculated?
The above mentioned tax rules were not clear enough and left much room for interpretation. Gift vouchers granted by companies to the employees of their business partners could be treated as either falling under the salary income category (since the individual would not receive such gift voucher, should he/she not be an employee of the business partner) or under income from other sources category (since the gift vouchers were granted separate from salary, with no individual employment agreement existing between grantor and recipient of the gift voucher).
Hence, framing gift vouchers as salary related income would entitle tax authorities to collect more taxes to the state budget (via additional social security charges). This triggered the massive thematic tax audit campaign in the second half of 2019, which is still ongoing. During this campaign, in most tax audits, tax inspectors still consider that the gift vouchers granted by third parties to their business partner’s employees should be seen as benefits-in-kind and taxed with salary tax and entire spectrum of social charges, while the reporting obligation should be not on the third party, but on its business partner (the actual employer).
However, in practice, the business partner might not even know that its employees received gift vouchers from other companies, a situation that lead to a lot of instances in which the gift vouchers were not taxed by the business partner/actual employer as salary tax, but rather as income from other sources, with the third party paying solely the applicable income tax. Even the scenarios of gift vouchers granted directly to the company’s employees were subject to scrutiny, since, under these bonus schemes, different tax treatments apply, depending on whether the gift vouchers are offered for certain public holidays and under limited amounts.
Consequently, the tax audits almost always result in additional tax obligations being established for the individual’s employer, with additional delay interests and penalties.
Proposed impact of the 2021 legislative amendments
Given the public outcry generated by these thematic tax audits that keep on pouring, the Romanian Government amended the tax legislation as of 1 January 2021 in order to clarify the relevant tax treatment.
Law no. 296/2020 stated that all gift vouchers granted by a company to individuals who are not their employees, on a nominal value, for marketing campaigns, market research, promotion on existing or new markets, for protocol, for advertising and publicity, other than the ones qualifying as benefits-in-kind or the ones being non-taxable, are included in the category of income from other sources and, therefore, only subject to the 10% income tax (to be withheld by the income payer) and health insurance contribution (if the case, to be reported by the individual).
As paperwork, the nominal record must include, at least, information on the name, surname, personal ID code/tax ID number of the beneficiary and the value of the vouchers granted to each beneficiary, on a monthly basis.
Unfortunately, this new legislative amendment is still not sufficiently clear, leaving room for interpretations, since it excludes gift vouchers that are treated as benefits-in-kind.
When will this uncertainty end?
Given that we are currently in a period when tax audits are still ongoing or just getting started, while the finalized ones have contrary outcomes, it cannot be concluded that a tax practice is being outlined at the level of the tax inspectors. Moreover, given that the tax litigations tend to last in average 2-3 years or more, a court practice is still unclear in this area. Nevertheless, this is due to change once more case files are to be finalized.
The safest and easiest solution would be for the Ministry of Public Finance (the legislator) and the tax authorities (the auditor and enforcer of the tax rules) to reach a common ground and issue clear tax guidelines on how gift vouchers should be taxed. Unfortunately, given their recent history, these two public institutions rarely tend to see eye to eye in controversial tax matters. Consequently, the business environment is currently waiting for the courts of law to shed light on this topic and, thus, to generate a practice on this gift voucher taxation issue.
What’s to be done?
Usually, long before receiving the fiscal inspection notice, taxpayers should thoroughly assess their fiscal status and situations which could give rise to fiscal controls. Given the different interpretations of the tax legislation on this subject, a more cautious approach could be contemplated. Although ideally taxpayers should prepare for an audit right from the start of a transaction, most of the times this doesn’t necessarily happen. This is why a preventive/preliminary review of the fiscal status of the company is advisable – to identify potential risks and eliminate and/or correct them.
By Razvan Graure, Tax Partner, Musat & Asociatii