Romania’s key pieces of tax policy legislation, its Tax Code and Tax Procedural Code, were substantially amended by the version that entered into force on January 1, 2016, after intensive consultations with representatives from the business community.
The new legislative framework aims to provide clarity and predictability to domestic taxation, to stimulate economic growth and investments, to simplify the tax collection process, and to reduce compliance costs for taxpayers, so that investors can plan their local activities with increased certainty.
With an income tax rate of 16% that is among the lowest in the EU and is the second lowest in the region, one may say that Romania has a tax system favorable to economic activities. The reduction of the (i) dividend tax from 16% to 5% and (ii) of the VAT rate from 24% to 20% (to be further reduced to 19% from 2017) are additional measures designed to create an even more attractive environment for investors.
In addition, the New Tax Code contains specific tax exemptions applicable to holding companies located in Romania and to companies active in the IT sector. In doing so, Romanian fiscal legislation seems to follow global trends. and the Romanian tax authorities are more open than ever to understanding the challenges that the taxpayers face in their daily activities.
Fight Against Tax Evasion – Increased Number of Tax Audits
The complex process that Romanian tax legislation is going through also involves a change in the procedures used to apply the provisions within the Tax Code and Tax Procedural Code. This process is still not finalized, and there are situations when ambiguous provisions could trigger potential exposure in practice. As such aspects may have a negative impact on the business climate, and in particular on investment decisions, tax planning remains crucial for all projects and should be on the agenda of all investors.
The changes in the tax legislation are aimed at encouraging voluntary compliance of taxpayers and to counter tax evasion, especially in the VAT area. The tax authorities also show an increased interest in verifying the economic substance of new businesses by performing thorough background checks whenever a new VAT registration request is submitted or an existing company goes through a change of shareholders and/or directors. This was prompted by a new VAT registration procedure based on pre-defined risk criteria, and, as a result of this new procedure, about 33% of new requests for VAT registration have been rejected.
Also, an exercise whereby existing companies were required to demonstrate their intention and capability to carry out economic activities showed that the tax authorities are keen in following the new procedure and can be quite aggressive in applying it. In 2015, 50% of the existing companies that had received requests to submit documentation proving their intention and capability to carry out economic activities had their VAT codes cancelled or their files sent to the antifraud division.
Focus on Inter-Company Transactions
The trend in transfer pricing developments in Romania reveals the growing interest of the Romanian tax authorities towards related party transactions, which is one of the main areas of tax investigation. Under these circumstances, multinational companies are advised to pay close attention to the arm’s-length nature of the transactions they carry out and the corresponding documentation file, so as to be prepared in case of any transfer pricing disputes with the tax authorities.
In 2016, transfer pricing documentation requirements have changed and now consider the category of taxpayers and the value and type of transaction (i.e., financial transactions, supply of services, or purchases/sales of goods). Transfer prices can be adjusted for taxpayers who (i) fail to substantiate the arm’s-length character of the transactions carried out; (ii) fail to make the transfer price available to the tax authorities during tax inspections; or (iii) provide a transfer pricing file deemed incomplete.