Latest Developments in the Romanian Tax and Fiscal Environment

Martie 2008

HUBERTUS EICHLER - Partner, German & Austrian Desk GABRIEL SINCU - Partner, Head of Tax & Outsourcing Services VASILE ANDRIAN - Senior Manager, Head of Audit Services ADRIANA DUNCEA - Senior Associate Lawyer, Head of Legal Department MAZARS HEMMELRATH

Although the talks about the flat-rate tax are far from coming to an end, the Romanian economy has entered the fourth year since this taxation system commenced being implemented. Even if the new system has not been to everybody’s satisfaction (which is actually impossible to attain), the conclusion may be reached that it has been one of the motive powers of economic growth in the last few years.

Certainly, there are some who have maintained that, given the political and economic background in recent years, economic development has been inevitable and could have followed a progressive line even in the absence of the flatrate tax, arguing that such development was already noticeable in 2004.

At the same time, others have stated that the flat-rate tax system has been applied only into halves because a correct and complete implementation of this system would have yielded better results, giving some solid arguments in this respect:

• the relaxation in the sphere of income tax has not been doubled by a reduction of social security contributions which are among the highest in the region. This fact has stimulated the pursuit of alternative solutions to the payment of salaries beyond the average (through microenterprises, authorised natural persons or even tax havens), leading to the extension of the expected taxation base;
• the maintenance of a preferential taxation system for certain categories of income, such as revenue from the sale of real estate, for which special interest groups have succeeded in obstructing the introduction of the flat-rate tax against a much lower tax on the total realised income;
• the maintenance of a special treatment applicable to the micro-enterprises which continue benefiting from a lower income tax, as their total income is not subject to the flatrate tax system.

However, viewed from the perspective of a tax consultant who is contacted by Romanian or foreign investors every day, the flat-rate tax represents an important element which upsets the balance in favour of investment in Romania. Under such circumstances, we may say that the flat-rate tax can be deemed a success... not absolute, yet a success.

It goes without saying that things get more complicated for us if the flat-rate tax becomes a trend in the EU Member State which formerly belonged to the communist bloc (after the Baltic countries, Slovakia and Romania, Bulgaria has taken a step toward this direction, while the Czech Republic intends to apply it), as the competitive advantage will gradually disappear.

Given all this, investors are interested in the stability of the business environment in Romania rather than in obtaining tax incentives. Unfortunately, in this area we are not yet Europe’s awardees... on the contrary.

Article 4 (1) of the Tax Code states that “this Code shall be varied and amended only under law, six months before it comes into force.” Furthermore, paragraph (2) of the same Article provides that “any variation or amendment to this Code shall become effective as of the first day of the year following the year in which it has been adopted under law.”

Regrettably, since 2004, these provisions have not only been disregarded but they have also been trampled over. In the best of cases, the amendments brought to the Tax Code were published three-to-four months in advance, but Government have not only once interfered by issuing emergency ordinances without taking into consideration the abovementioned provisions.

In such conditions, when the rules of the game are changed while players are in action, ever more investors prefer the safety of a stable taxation system to the detriment of an illusory flat-rate tax which undergoes rather frequent and unexpected changes.

The players on the Romanian economic stage cherish the hope that, once it has become a member of the European Union, Romania will succeed through the agency of its Executive in conferring greater stability on the business environment and that any changes which may occur will be transparent and predictable so that they should no longer bear down on the business circles active in this country.

 

But what is to be new in the tax legislation in 2008?

Looking back to the past, we can say that 2007 has represented a turning point in the Romanian economic life because Romania’s accession to the European Union has brought about significant changes in the Romanian legislation, the tax legislation included, in an attempt to harmonise it with the European legislation. Two thousand and seven has been the year in which all the players (either traders or authorities, be they natural or legal entities) on the Romanian economic stage have had to learn fast new rules, understand the new mechanisms and manage to operate them.

As it is natural, 2008 is not expected to bring about major, radical changes in the taxation system like it happened in the past year. The changes which are to occur this year refer, generally, to nuances and clarification of the existing legal provisions, or to the correction of potential errors of the past. Certainly, as we are going to point out below, some new elements have been introduced into the tax legislation, which may exert major impact on the activity of certain categories of business entities.

An important amendment brought to the current tax legislation refers to the contributions to the social security fund: although tax rates have already been increased, owing to the cancellation of the existing thresholds the total amount of such contributions is to be greater in 2008 than in 2007. The decision made in this regard has an electoral tinge because elections will take place this year and the Executive have had to seek out a source for the increase of pensions. Nevertheless, this amendment does not represent the topic of this article which is to focus only on the changes occurring in the taxes and contributions regulated by the Tax Code.

Title I of the Tax Code, which refers to general definitions, does not contain essential changes. They only bring legislative provisions in harmony with other applicable legislative acts or with provisions of other Titles of the Tax Code.

Title II which regulates profit tax contains new elements regarding the non-taxable income obtained by non-profit organisations, also including other elements of income which are not subject to taxation.

In reference to the taxation of companies, the provisions of Title II state that the expenses made by administrators or similar persons for transportation and accommodation during business trips shall be tax deductible. The category of similar persons includes directors who carry on their activity under agency contracts, as well as natural persons who have been posted to another company for a definite period of time.

1

2

The tricky lag LUCIAN CROITORU Adviser to the Governor - BANCA NAŢIONALĂ A ROMÂNIEI Lucian Croitoru, Adviser on monetary policy issues to the National Bank of Romania Governor, talks about the NBR’s next moves and explains why the decrease ofthe policy rate hasn’t been reflected into lower interest rates on bank loans. mai mult... The turnaround CRISTIAN SPORIS Secretar de Stat - MINISTERUL ECONOMIEI ŞI FINANŢELOR Cristian Sporis, Secretary of State at the Ministry of Public Finance, in charge with the national treasury and public debt, explains how the state managed to borrow money at the lowest costs in the last seven years and how it turned from a clear market taker into a player with a strong position on the market. mai mult...