Unlock the Potential of Your Business - the Second Year After Romania's Accession to the EU
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Strada Barbu Văcărescu, Nr. 301-311
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020276 Bucureşti, Sector 2
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+40-21-225 3600
Website
www.pwc.com/ro
The year 2008 started with a major test for the world economy, with some analysts considering it to be the most uncertain and difficult opening period of a year this millennium. The sub-prime crisis, financial markets turbulence, international stock markets falling, increasing oil prices, and lately huge fraud and major production plants relocation (due to cost-cutting exercises) are common themes of the front pages in many prestigious European newspapers. At the same time, older global topics like resistance to globalisation, global warming and population ageing are still widely discussed.
Although Romania has not felt the full shock of the crisis, our country is also affected, though relatively less acutely than more advanced economies. Besides global threats, there are some national economic and politic issues – the pronounced volatility of the RON exchange rate, inflationary pressures, pension reform, fiscal code changes, skilled labour force crisis and rising labour costs, delays in infrastructure modernisation and elections. There is also good news, related to rising foreign direct investment (by more and more well-known international companies), structural funds and increasing purchasing power and private consumption.
In this context, many specialists recommend prudence but, at the same time, there are obviously many opportunities for companies that understand the direction of the economy and can anticipate future trends. We invite you to read in the following pages about some highlights and hot topics, dedicated to all that want to transform 2008 into a sustainable growth year for their businesses in Romania. You can read about transfer pricing, indirect taxes (VAT, customs and excise duties), individual income tax and social security regimes, location selection, and EU funds.
Transfer pricing
The trend in transfer pricing developments in Romania reveals a growing interest of the local tax authorities in transfer pricing, which is expected to become one of the main areas of tax investigation. Under these circumstances, taxpayers are advised to pay close attention to the arm’s length nature of their related party transactions in order to comply with local documentation requirements and be prepared for any transfer pricing disputes with the tax authorities.
The influence of EU accession over the local tax environment is also captured in the latest domestic transfer pricing legislative developments. One may clearly apprehend underlying principles and elements of the Code of Conduct on transfer pricing documentation for associated enterprises in the European Union (EU TPD) in the legislation referring to the local documentation requirements and the advance pricing arrangement (APA).
Local transfer pricing documentation file
As of September 2006, taxpayers have had a formal obligation to prepare a local transfer pricing documentation file covering their related party transactions. Nevertheless, the enforcement of this documentation rule was postponed due to the lack of detailed provisions regarding its preparation. The beginning of this year brought about a notable development in this respect, through the publication of regulations that set out the required content of the local transfer pricing documentation file, additional provisions regarding its presentation to the local tax authorities and the consequences of not preparing such a file.
The content of the local transfer pricing documentation file includes elements from both the master-file and the country specific documentation file provided in the EU TPD. If a master-file is not already available at group level, it will have to be prepared locally. One local particularity worth mentioning refers to the requirement to have local comparables. Regional or pan-European benchmarking studies already available in group transfer pricing documentation are accepted only if there are no local comparables or the set of local comparables is insufficient to allow a reliable determination of the arm’s length range.
There is no obligation to submit the local transfer pricing documentation file on a specified date. However, taxpayers need to make this file available upon request of the tax authorities during a tax audit. The deadline for presenting the file is established taking into account the number of related parties engaged in the controlled transactions, the number and complexity of these transactions and the period during which these transactions are carried out. This deadline is set at a maximum of three months, the taxpayer having the possibility to extend it by another period of equal duration.
Not presenting the transfer pricing documentation file or presenting an incomplete file that does not allow reliable assessment of the compliance with the arm’s length principle can be interpreted as carrying out related party transactions without appropriate supporting documentation. In such a case, the Romanian tax authorities have the right to estimate the taxpayers’ transfer prices without employing the regular transfer pricing methodology. The assessment is rather carried out by reference to three comparable transactions selected by the tax authorities on the basis of the general information available to them. This could result in material additional tax liabilities and related late-payment interest.
Advance Pricing Arrangement
A more proactive approach than post-factum documentation of related party transactions was made possible in September 2006 through the introduction of APAs. Therefore, taxpayers may take the initiative and approach the tax authorities for clarification in advance of the tax treatment applicable to their controlled transactions. The applicant may be any taxpayer that carries out transactions with related parties.
Under domestic tax law, the APA is defined as an administrative act issued by the National Agency for Tax Administration to address a taxpayer’s request in relation to establishing the conditions and methodology to set transfer prices in controlled transactions for a fixed period of time. The application procedure, including both issuance and monitoring of the APA, is a four-stage process that includes pre-filing discussions, filing of the formal request, issuance of the APA and the filing of an annual report to monitor compliance with the terms of the APA.
Taxpayers have the option of applying for all types of APAs: unilateral, bilateral and multilateral. However, bilateral and multilateral APAs can be issued only for transactions carried out with related parties that are tax resident in countries with which Romania has concluded double tax treaties, based on the provisions of the “Mutual Agreement Procedure” article.
The term for issuing APAs is 12 months for unilateral and 18 months for bilateral and multilateral APAs. The APA produces legal effects only for the future, from the fiscal year subsequent to that in which the controlled transaction was concluded. In exceptional cases, the APA may also be applied in the fiscal year in which the request was filed if it is expressly provided or the request was filed prior to concluding the controlled transaction. The APA is generally issued for a period of up to five years. However, the validity period may exceed five years in the case of long-term arrangements (e.g. royalty agreements).
Moving forward in the post-accession phase
The accession to the single market and the removal of customs borders between Romania and the EU brought about many opportunities, but also strengthened the need to stay competitive. In a marketplace characterised by increasing customer demands, local companies face challenges that trigger a significant need to stay competitive. Irrespective of the strategy to gain competitive advantages, companies have to ensure that the architecture of their business model allows an optimal value chain and tax efficient transfer pricing policies. In this sense, we regularly notice migration from a traditional local business model to a centralised business model that takes advantage of EU freedoms.
Indirect tax
Real estate market threatened by VAT?
The impressive development of the Romanian real estate market during recent years has ceased to be a novelty to anyone. However, the new VAT regime applicable as of Romania’s EU Accession in January 2007 has had a significant effect on all businesses in the Romanian real estate market, bringing both important opportunities as well as business restraints.
To tax or not to tax…
Among the most important opportunities brought by the Romanian VAT legislation in force as of the Accession date, we would like to point out the VAT exemption applicable for the sale of real estate properties older than two years, of unbuildable land and the leasing of immovable property. All companies can benefit from these provisions, including those to which VAT represents a cost (e.g. banks, insurance companies, public institutions), as well as private individuals acquiring real estate property from corporate entities.
However, it should be noted that businesses trading or renting real estate property are allowed to opt for their taxation, only by filing a notification in this respect with the relevant tax authorities.
According to the recent changes, the late submission of the notification of opting for taxation for sale, rent and real estate leasing operations does not revoke the right of the landlord/supplier to apply 19% VAT.
An important aspect to be mentioned is that the VAT exemption is not applicable for building land or real estate properties that are not older than two years. Hence, 19% VAT should be applied for such transactions. In other words, the sale of new buildings and building land will always bear 19% VAT, which will determine an increase of expenses and cashflow disadvantages for the buyers, especially for non-taxable persons.
However, during 2007, companies registered for VAT purposes trading real-estate property did not have to prefinance the VAT arising from such transactions, as simplification measures were applicable last year. The supplier was not required to charge VAT, while the customer would account for the tax under the reverse charge mechanism (i.e. account for both input and output tax).
Nevertheless, as of 1 January 2008, such simplification measures for supplies of buildings are no longer applicable. Therefore, real estate developers and buyers should prefinance the VAT, irrespective of whether they are registered for VAT purposes or not.
Transitory measures have been implemented by the amended VAT legislation for the applicability of simplification measures for on-going contracts concluded before 1 January 2008 for the supply of buildings and land. Thus, 19% VAT is applied to the value of the payments transferred or invoices issued after 31 December 2007.
