Authorities approved this summer a series of fiscal measures affecting VAT, the deductibility of provisions and social contributions in the case of independent activities. The impact of the recent measures and the new fiscal initiatives by the government were assessed last week by tax specialists during the eleventh edition of Tax&Law, organized by Business Review.
By Ovidiu Posirca
VAT legislation was modified this July in order to curb fiscal evasion and simplify the VAT system for small and medium enterprises (SMEs), according to Nadia Oanea, coordinator of the fiscal consultancy department at Baker Tilly.
Romania was given exemption from an EU directive that limits the deduction of VAT for the acquisition, renting and leasing of road vehicles that are not used solely for business purposes.
The VAT deduction is limited to 50 percent for the acquisition of road vehicles, fuel acquisitions and maintenance costs. Full deduction remains in place for cars used exclusively for delivery services and passenger transport among other purposes.
The threshold for VAT exemption climbed to EUR 65,000 in a move to simplify the fiscal obligations of small firms.
“It aimed to reduce the number of VAT payers and to increase the compliance on VAT payments,” said Oanea.
Companies that register a turnover of less than EUR 500,000 are set to apply the chargeability of VAT when invoices are collected. This measure, which will be enforced from 2013, aims to sustain the recovery of SMEs, and increase the liquidity and collection of VAT.
“The most dangerous measure for small firms is that large companies – their clients – that buy from them can deduct their VAT only when paying. This creates the need for adjustments in the IT systems and administrative costs. You have to keep records of the invoices from large and small firms,” said Gabriel Biris, partner at law firm Biris Goran. “Small firms should have been given the option right for this system, as it is mandatory.”
Ion Busuioc, general director in the Directorate General of Tax Methodology, Guidance and Assistance to Taxpayers at the fiscal agency ANAF, said the application norms of this measure will be published this month.
If the companies that apply this system do not take delivery, partially or fully, of the goods and services in 90 days of the invoice having been issued, the VAT chargeability intervenes in the 90th-calendar day from the invoicing date, explained Oanea.
Gabriel Biris, partner Biris Goran, argued that reverse taxation would drastically reduce VAT fraud. He said that Romania is able to collect only 54 percent of the VAT that should be normally obtained. This creates a loss of EUR 4 to 5 billion, which is roughly the size of the country’s budget deficit.
“Because of the way VAT works, the fraud opportunity emerges legally, through a different regime of intra-community transactions versus national deliveries. You have an intermediary that buys from the EU without VAT, sells internally with VAT, collects the VAT, doesn’t pay, disappears, and the state has to reimburse,” said Biris.
The Council of the European Union says the VAT design creates a fraud opportunity that results in EUR 110 million annual loss to the EU budget, according to Biris.
British is best for small companies
The Romanian Government is considering a flat rate scheme on VAT, based on the UK model. The rate aims to help small businesses by taking some of the work out of recording VAT sales and purchases, according to Oanea of Baker Tilly. “The government is currently looking at the UK model in which a lower flat tax on VAT is applied against the standard one and this would apply to the turnover or total collection, depending on the tax base for the selected VAT,” said Oanea. “We wouldn’t be interested in this case in deductions, so there would be no difference between deductible and collected VAT.”
Oanea said the main benefit for companies is that they save time, adding that the flat tax rate depends on the sector of activity. Acquisitions of capital goods and intra -community goods, along with the acquisition of services that have reversed taxing, would be excluded from this scheme.
Romania is trying to support companies that have research and development (R&D) operations and has increased the deductibility of these expense from 20 to 50 percent.
“This can lead to job creation and stimulate the hi-tech sector,” said Serban Toader, senior partner at KPMG, the professional services firm. He called this measure “salutary” for the business environment as the Fiscal Code is harmonized with R&D legislation.
KPMG has been doing some development of its own. The firm has been working for over a year on a tax application for smart phones and tablets called Tax Express. The app is in beta mode and is due to be launched later this month.
The fiscal procedure code has this year undergone changes in the operations of transfer pricing and the fiscal authorities are paying close attention to off-shore transactions, according to Cristian Radulescu, partner at Taxhouse – Taxand Romania, an advisory firm.
“The fiscal authority will be able to request a transaction file with countries that don’t have a double taxation system,” said Radulescu. He added that fiscal administrations in the EU have stepped up their cooperation.
This makes it easier for foreign tax inspectors to investigate a case in Romania and the other way around. Radulescu stated the transfer pricing adjustment will continue the growth trend this year. The partner said that an exception to the general order regarding the debt extinguishment order will be introduced from November 1.
“In the case of fines and other fiscal payment obligations established by the fiscal inspection body, those selected by the taxpayer have priority,” stated Radulescu. He mentioned that the authorities have intensified their efforts in fighting fiscal evasion and have expanded the categories of verified taxpayers – inspections have started targeting individuals. The intensification of tax inspections and the development of IT systems are recent trends in this field.
Fiscal body tracks social contributions
ANAF is the body that from July will track the collection of social contributions for the state budget from individuals that report an income from independent sources, according to Ionut Bohalteanu, partner at Musat & Asociatii Tax Advisory.
Income originating from liberal professions, intellectual property that includes copyright and related rights and commercial income are considered independent. He explained that the deceleration of this income, which represents the reference base for social contributions, is made through an income statement at the public pension system. Another statement on the estimated and actual income is needed for healthcare insurance. These contributions have to be paid quarterly in four equal installments.
The partner said that in the case of social insurance, the declared income can’t be less than 35 percent of the average gross salary set at RON 2,117 this year. In addition, this income can’t be more than five times this sum. For healthcare insurance, the difference between total earnings and expenses needed to achieve them, excluding social contributions, or the annual value of the income norm, can’t be less than the minimum gross wage of RON 700. This applies if it is the sole income source as reference for contributions.
Bohalteanu mentioned as exceptions income where tax is withheld at source and some agricultural activities.
He added that people with no income still need to pay the monthly healthcare contributions in order to be insured. The reference base is represented by the national level of the gross minimum wage. In this case, payment has to be made by the 25th of the next month for which the contribution is owned.
Taxing share trading
The fiscal authorities have scrapped the quarterly taxation of investors on the domestic stock exchange as it only led to an administrative mess, according to Alexandru Onuta, manager at NNDKP Consultanta Fiscala.
From next year, investors will have to pay annually for gains on the domestic stock exchange.
“The income obtained by a non-resident on foreign capital markets, from the transfer of shares owned by a Romanian legal entity, doesn’t represent taxable income in Romania,” said Onuta.
Income generated from selling any securities in Romania or abroad is taxed. However, if the income is taxed both in Romania and abroad, fiscal credit can be applied in certain conditions.
Onuta explained that a convention for avoiding double taxation has to be closed between Romania and the respective state and the documents that show the taxes were paid abroad have to be presented.
“Foreigners can avoid double taxation based on a fiscal residency certificate. Not all conventions offer a favorable regime,” said the NNDKP manager.
Authorities approved this July a measure supported by the business community for the introduction of provisions related to the assignment of receivables.
Companies can now deduct the provisions/adjustments for the depreciation of receivables that were acquired from credit institutions for the purpose of being collected, according to Florentina Susnea, general director at PKF Finconta, a fiscal consultancy.
She explained that the collection risks appears in the 30th day from debt maturity and provisioning needs to be set up.
“The principle of prudence obliges us to reflect in the accounting books the provisions at a just value,” said Susnea.
Susnea warned that the amount of receivables in the accounting books of the creditor may not be similar to those of a debtor that has entered into judicial reorganization.
“When the reorganization plan is voted by the creditors, we might end up seeing that we can recover only 50 percent of the amount of receivables,” explained Susnea.
The forced suspension procedure of a taxpayer can be halted if the indebted company can provide a bank guarantee letter to the fiscal body once they contest the procedure, according to Ioana Costea, coordinator of the tax law department at Chiuraiu & Asociatii, a law firm. Companies may have more time to get liquidities, but this procedure runs a major risk.
“Litigation surrounding fiscal receivables lasts longer than the 12-24 months covered by the letter,” warned Costea.
If a company can secure the letter, the money and the mortgage are preserved by the bank, but they can avoid the deduction and replace it with a real guarantee in favor of the bank, added Costea.
Photo: Mihai Constantineanu