Taxing times as recession wreaks Romanian havoc

When it comes to the local fiscal environment and its attractiveness, it all boils down to two fundamentals which perhaps all legal and tax experts agree that Romania lacks: fiscal stability and predictability. With this Tax Insert BR takes a look at some of the latest legislative developments as they have been reflected in recent public discussions such as the Tax&Law event organized by this magazine on October 14.

From the controversial minimum tax to the VAT increase and the even more controversial inclusion on the Registry of Intra-Community Operators, 2010 has brought a lot of changes to the local fiscal scene. And not always those needed in times of recession, whether by local firms or potential investors, tax pundits argue.

When it comes to the way in which the authorities have reacted to the challenges brought about by the economic crisis, the same experts say too little was done and too late. This has made many local businesspeople complain that managing a business in Romania is done in spite of the government’s fiscal measures rather than with its support.

This situation is often cited with reference to high taxes and abusive fiscal inspections, with many taxpaying companies complaining that they are paying the bill for

the authorities’ inability to efficiently collect money and fight tax evasion.Although Romania is in no position to undermine its credibility as an investor-friendly economy, the government’s fiscal bumbling does just that, driving both potential investors and local companies towards other, more attractive markets in the Balkan region. Also, tax specialists say that tax evasion is growing during this period of turmoil instead of decreasing because the barriers put in front of honest taxpayers are too oppressive.

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Foreign investors complain that tax evasion has reached new limits in agriculture especially for wheat and oil beans. Currently, leaders of the top companies active on the local market in the agriculture sector are lobbying Brussels for the right to introduce the reversed VAT mechanism.

Using this fiscal instrument the authorities could ensure greater control over those selling and

buying grain and could take out the middle-man from the equation. Companies in this sector are awaiting a final answer from the European Commission by the end of the year.

The competition between regional countries in luring investors has only been intensified by the recession and without a coherent fiscal strategy for the medium- and long-run Romania is losing ground and credibility. The country could benefit from introducing a holding law, experts say, as Central and Eastern European groups of companies could be interested in locating holdings here.

Investors are calling for holding regulations that involve a unique associate and not taking capital income. Specialists say that Romania has reached a stage at which there are many areas of fiscal flaws which cannot be patched up.

Advisors to Prime Minister Emil Boc announced recently at the Tax and Law event organized by Business Review that currently there is a lot of pressure from the Democrat-Liberal Party (PDL) to reduce the flat tax to 10-12 percent. It remains to be seen what 2011 will bring by way of fiscal measures to restart the Romanian economy, as the current government faces an uncertain future, this week having to survive a vote of no confidence.

Recent legislative developments

• New rules on the treatment of income from professional activities
• Tax incentives for research and development costs
• Changes to the norms to the fiscal code covering individual and corporate tax
• Changes to the norms to the fiscal code covering VAT and excises
• Changes to the norms related to the procedure for issuing a certificate for the deferment of payment of VAT on the import of goods