BR talks to Ioana Petrescu: Government seeks five-year agreement with multinationals over transfer prices

Ioana Petrescu, the minister of finance, says the government wants to reach consensus with multinationals over transfer prices, using deals known as advance pricing agreements, to increase taxpayers’ certainty and raise the tax take. The fiscal authority ANAF is currently hiring people that will be tasked with reaching agreements with multinationals on paying their taxes over the next five years.

She says no new taxes will be rolled out this year and that reinvested profit is due to be exempted from taxation from July 1. Returning VAT to 19 percent would reduce budget revenues by RON 10 billion, while the potential 5 percentage point cut in social insurance contributions would deprive state coffers of another RON 1.5 billion this quarter, according to the minister.

How does the Ministry of Finance intend to increase the tax take?

We have several levers by which we wish to improve collection and produce more money for the budget with the aim of supporting fiscal easing and economic incentives, on the one hand, and ensuring the funding of social protection, on the other hand.

One of the goals embedded in my mandate as minister, which I have mentioned before, consists of introducing a set of measures to support payment compliance. Several aspects will be involved, including the clarification and simplification of the fiscal system, by means of revising the Fiscal Code and the Fiscal Procedure Code. Additionally, we are pursuing a decrease in taxpayers’ compliance costs by keeping them informed and facilitating the payment of taxes and dues using bank cards and online services.

We want to demonstrate transparency and respect for public financial resources. The public and the business community need to see that the money they return to the state is used in a transparent and sensible manner, that it is used to finance sustainable development projects or projects focused on stimulating the economy.

Last but not least, I am aware that the business environment expects predictability from us and measures to be taken based on solid substantiations, relying on impact studies and thorough analysis.

How does the Ministry of Finance intend to reduce tax evasion in Romania which, according to certain statistics, accounts for nearly one third of the country’s GDP? Have you laid out any proposals to stiffen sanctions for tax evasion?

First and foremost, I would like to note the layers in your question. There are separate estimates with regard to tax evasion, depending on the methodology. This is, however, by the by.

What I mean to say is that stiffening sanctions for tax evasion could be one solution – we are taking it under advisement – but I don’t believe this is enough. As I have previously stated, I want to use both measures to facilitate taxpayers’ co-operative compliance, as well as those aiding the fight against tax evasion.

Naturally, there are measures that can be implemented on the short or medium term (improving the predictability and clarification of the fiscal system, decreasing the number of fiscal and non-fiscal taxes and dues, the introduction of cash registers with electronic logs, tax audits and the enhancement of risk analysis methodology, the exchange of good practices with other countries, etc.), but there are also certain measures that will require implementation over a longer term – the consolidation of the Transfer Pricing department within the MPF and the cross-linking of databases within local government.

An important collection source for the budget, still being used below its capabilities but present on our radar, is the implementation and encouragement of procedures allowing us to build a bridge between the state and multinational companies as far as transfer pricing strategy is concerned: “advance pricing agreements”. So far there have not been sufficient ANAF employees to handle these procedures. What does this mean? Basically, one can come to an agreement with multinational companies regarding the way in which they are to pay their taxes and dues over the following five years. This is a co-operative compliance method, an important source for collection enhancement. ANAF has already set in motion procedures for hiring the people to be tasked with such duties.

We are also counting on concrete results from the General Directorate for Fiscal Anti-fraud, a body which, despite not yet being three months old, has been handling a constant volume of tasks.

Will VAT be cut again to 19 percent this year or are you trying to specifically lower VAT on basic products, similar to the pattern of reducing VAT in the milling and bakery sector?

VAT reduction is a long-term objective, included in the Budgetary and Fiscal Strategy for the coming years.

On the one hand, it would cost the budget quite a lot, around RON 10 billion, against a background in which, in 2013, VAT income accounted for RON 51.8 billion (43.5 percent of fiscal income and 26 percent of global income) – budgetary resources which currently cannot be covered by other means.

On the other hand, Romania has one of the highest VAT rates in the EU after the increase in 2010, while VAT tax evasion is the highest, at almost RON 49 billion in 2012, according to the calculations of the Fiscal Council. Such data reveal the need for fiscal easing measures in this area or more stringent limitation measures in order to combat evasion.

With regard to lowering VAT on other basic products, this is a measure we are considering. However, it depends upon the data we obtain through analyzing the outcome of the reduced, 9 percent, VAT on bakery products. We need to take into account the fact that only six or seven months have passed since the VAT decrease on bakery products, and the currently visible effects are those related to price reductions (down 11 percent in January 2014 against January 2013). The impact on lowering evasion or increasing the compliance/collection rate emerges over the longer term. Therefore, performing this analysis is necessary for a longer period of time, as a foundation for our future decisions.

Will SIC (social insurance contributions) be lowered by 5 percentage points for companies? What will be the impact upon the labor market (will it diminish unemployment, or working under the table, and if so by what percentage)?

Reducing SIC would be a measure to support the business environment by alleviating the fiscal pressure on companies. The reduction of SIC by 5 percentage points and exemption from the return of the reinvested tax are topics we will debate with the IMF, the European Commission and the World Bank delegation.
According to our estimates, a 5 percentage point cut in SIC could encourage employment, in the short term, leading to the creation of around 25,000 new jobs.

The cost of lowering SIC by 5 percentage points is estimated at RON 2.6 billion, which would be the income gap to emerge within the social insurance budget. However, if we look at the global picture, the cost will be offset against the background of corporate tax collections, from how the companies spend the extra funds, from the potential growth in recruitment, as well as from the decrease in government costs of social insurance contributions. In sum, we predict that the net cost of the consolidated general budget will amount to RON 1.52 billion (0.2 percent of the GDP) for the second semester of the year.

Impact studies are currently in progress, to ensure the effects on the budget are not too profound and, at the same time, such studies should be of assistance to companies that have been requesting this measure for several years. To pay for this measure, as well as the non-taxation of the reinvested profit, we are considering several options. We are counting on developments in the efforts to fight tax evasion, the collection of the special construction tax, and, once the first five months of this year have been analyzed, we’ll decide whether a decrease in budgetary expenses is necessary or not.

This field, as with the VAT issue, is subject to extensive tax evasion, calculated by the Fiscal Council at RON 19 billion, RON 10 billion higher than the tax evasion figure for 2008.

Will reinvested profit from the current year remain non-taxable?

As we have previously announced, reinvested profit will probably be made tax exempt from July 1, considering the expectations and the benefits this measures will have for the business environment. As I said earlier, this will be a topic of discussion with the IMF, the European Commission and the World Bank.
In comparison with the VAT and SIC decrease, making reinvested profit non-taxable will cost the least and will most likely be implemented this year. The estimated impact amounts to approximately RON 28 million in 2014, if the measure comes into force on July 1.

Will these new tax reductions involve new taxes and dues for the business environment, considering that the tax take will fall in the short term?

Given the current budget structure, we do not intend to introduce new taxes and dues for business players. Additionally, we intend to implement, as far as budget-related expenses are concerned, a better prioritization of investments, with the help of the Public Investment Evaluation Unit. We also want to see a fall in public spending.

What arguments on the subject of tax reduction will you make to the new IMF assessment mission?

We have and can find even more economic arguments in favor of tax reduction.
We need to remember that fiscal easing measures must not be detrimental to the budget deficit targets and, respectively, the structural budget deficit targets. This is worth mentioning because, since discretionary measures are in focus, these will also be reflected in the structural budget deficit, for which Romania has a timetable it must follow.

The arguments we can bring relate to an increase in recruitment and a hike in the employment rate, boosting external competitiveness, the stimulation of more taxpayers’ contributions to the pension scheme, the limitation of tax evasion through SIC and, we hope, the enhancement of budget income collection.

Will the 7 eurocent additional excise duty diminish domestic consumption?

I do not believe that the introduction of the 7 eurocent excise duty for fuels will reduce domestic consumption to a great extent. This will depend upon the value within the excise duty reflected in the final price.
Following consultations with representatives of road carriers and given the existence of a provision on excise duties in the text of a European directive, we agreed to return 4 eurocents from this excise duty in the case of certain vehicle categories. This measure is intended to help licensed carriers whose activity is legitimately carried out on Romanian territory. Factoring in that these transportation expenses are included in the price of goods and services, we will see the public promptly benefit from this measure stipulating the reimbursement of a portion of the excise duty.

During our forthcoming meetings with representatives of road carriers we will set forth the procedure for this reimbursement.

What is the implementation status of the ordinance providing tax breaks for low-income borrowers?

We are currently working on finalizing the draft bill on the subject, about which we will commence large-scale consultations with banks and academics, whose opinions I am certain will count a lot in the matter.
We are conducting analyses and impact studies as we want to cover all the effects that might occur both in the short term, as well as in the long term, and after 2016, when taxpayers will start benefiting from these fiscal facilities. We hope to see this measure adopted this year.

CV Ioana Petrescu

March 2014 – present minister of finance
September 2013 – March 2013 economic adviser to the Romanian Prime Minister
August 2010 – present (on leave) assistant professor, University of Maryland, College Park, School of Public Policy
August 2012 – July 2013 director, international development specialization, University of Maryland, College Park, School of Public Policy
August 2010 – present adjunct scholar, American Enterprise Institute
August 2008 – August 2010 fellow, American Enterprise Institute
2008 PhD in Economics from Harvard University
2007 MA in Economics from Harvard University
2003 BA in Mathematics and Economics from Wellesley College.

Ovidiu Posirca

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