Firms face taxing times during fiscal frenzy

Romania has implemented a series of measures this year to streamline business practices locally in order to attract foreign investors and bolster its competitiveness, but companies are now facing the difficult challenge of balancing this with other not so friendly initiatives that have bloated the fiscal code, tax specialists told BR.

By Ovidiu Posirca

Inefficient government bureaucracy, tax rates and regulations were some of the main causes of concern for companies doing business in Romania. The conclusions are those of the latest Global Competitiveness Report issued by the World Economic Forum (WEF).

The unsolved debt crisis in the Euro zone and the weak recovery of the Romanian economy were also reflected in the WEF ranking, in which Romania fell one place, ranking 78th out of 144 countries. However, in the EU 27 the country came just above Greece, which is the least competitive country in the union.

Romania still lags behind in the transparency of government policy making and the burden of government regulation, ranking 136th and 118th respectively. Favoritism in decisions made by government officials and the efficiency of the legal framework in settling disputes are other areas where the country does poorly, ranking 128th and 133th. It is clear that Romania still has to put a lot of effort into dealing with murky government decisions and to further strengthen its judiciary.

Since the start of the crisis, all the governments formed in Romania have pledged to improve the country’s competitiveness in order to boost economic growth and create jobs. So far, the authorities have moved cautiously in order to prevent a fiscal slippage. The country is being closely watched by the IMF, World Bank and the European Commission, so this could in theory build the perception of a stable country for doing business.

So far, the authorities have changed the fiscal provisions for social contributions and VAT, in addition to setting new deduction mechanisms for provisions and certain expenses. Going forward, the Ponta government wants to incentivize companies that hire unemployed people and to increase the deductibility of R&D expenses to 50 percent.

Keeping up with the fiscal changes

The Fiscal Code was modified this year through four government ordinances, leading to significant amendments on numerous occasions. The requirement to publish changes six months in advance of their implementation has not been respected for a long time, according to Florin Gherghel, head of the tax department at Noerr Finance & Tax, who outlined some of the fiscal updates.

The most noteworthy changes include the deduction of 50 percent of maintenance costs and fuel acquisitions, as well as a 50 percent VAT deduction for the purchase, leasing and renting of a car. This deduction also applies to car maintenance and fuel expenses.

The list of deductible provisions has been extended with rules on the depreciation of payables from credit institutions for their recovery, to certain limits.

One of the most significant changes was the increase of the VAT exemption threshold to EUR 65,000 for small companies, a move that cut red tape and gave the fiscal agency ANAF some breathing space, according to Alexandru Cristea, tax partner at Tuca Zbarcea & Asociatii Tax.

“It is common knowledge that this administrative body is the ‘Achilles’ heel’ of the Romanian fiscal system, having been on numerous occasions overworked and left with insufficient resources,” said Cristea.

Tempered effects

A measure that had long been awaited by the business community was the payment of VAT after invoices are collected for companies with a turnover of less than EUR 500,000. This will be implemented from next year and specialists say it will not have a significant impact on the budget revenue.

“The measure supports small and medium enterprises, helping them to find solutions to possible existing bottlenecks in the business environment during the crisis,” stated Cristian Bogaru, partner and co-founder at law firm Hammond, Bogaru & Associates.

The visible outcome of this measure would be the release of arrears and there might be a collection gap in the first months of implementation, according to Luisiana Dobrinescu, partner at law firm Dobrinescu Dobrev.

“As the obligations related to taxable individuals will be laborious and hard to follow, it is likely that the budget revenue will grow from increases and late payment penalties, as a result of fiscal inspections,” said Dobrinescu.

Ionut Bohalteanu, partner at Musat & Asociatii Tax Advisory, doesn’t believe this initiative will lead to major changes in the budget revenue on the medium and long term. He argues this is an exceptional system, both from the perspective of targeted taxpayers and the operations it is applied to.

“Given its absolutely exceptional characteristics, this system may become the reverse of what it should have been, a way to relieve taxpayers from their obligation to finance the state at its own expense,” said Bohalteanu.

As the budget revenue will remain more or less the same once this measure is enforced, there are certain issues looming for companies.

“There will be limited situations on the commercial fluxes of invoicing when the supplier is a regular contributor, who doesn’t apply this system, but the beneficiary does. In this case, the supplier will have to pay the VAT when the invoice is created, while the beneficiary will deduct it only on payment,” explained Cristea of Tuca Zbarcea & Asociatii.

Gherghel at Noerr warns this measure will be hard to implement, especially for buyers of goods and services from companies that use VAT payment when invoices are collected. They will have to keep a separate section on their books for each supplier category for VAT deduction, and mistakes can be made. If they are spotted during tax inspections, VAT becomes non-deductible (depending on the timing of the inspection) and late payment penalties and interest will be charged.

“The duration of any tax inspection will be extended as the fiscal teams will need to make additional verifications, under the conditions that such an inspection has already lasted pretty long and started with a delay,” explained Gherghel. He added that it is difficult to estimate if the amount of VAT raised for the budget will drop, but the management of this measure by the fiscal authority will surely become tougher.

Promised stimulus

The Ponta government announced in July its intention to increase the deductibility of research and development (R&D) expenses from 20 percent to 50 percent. The PM said this would stimulate innovative investments and create high-paying jobs. This was one of five measures put forward by the government to help the ailing business environment.

Although the PM pledged to swiftly implement the proposals, only the VAT payment on collected invoices was adopted. Authorities still had to negotiate the quintet with the IMF and it remains unclear whether they will be adopted by year end.

Romania hosts a handful of multinational IT firms that were attracted by skilled human capital and the relatively young market, and some are considering the development of R&D functions locally. For instance, this spring US chip maker Intel inaugurated an R&D software center in Romania.

“An increase in the deductibility of these expenses will lead to a drop in profit tax, which is beneficial for a company involved in this field, where the results are quantified after the expense was incurred,” said Gherghel of Noerr.

Although this facility is already available, companies need the correct framing of costs as the Ministry of Finance has frequently requested the opinion of the National Authority for Scientific Research, within the Ministry of Education, according to Alin Chitu, tax senior manager at Tuca, Zbarcea & Asociatii Tax.

He stated that the Romanian authorities had obliged companies to do research in Romania and use the results for themselves, against the stance of the EU authorities.

“This is very hard to implement at multinationals that have specialized structures for R&D services for the interest of the group, without benefitting directly from the results, and the costs are allocated on the basis of a key allocation to all the benefiting companies,” said Chitu. He warned that in numerous cases companies simply gave up trying to obtain this facility.

Bohalteanu of Musat & Asociatii Tax Advisory says that the increase in deductibility should come with more a more flexible implementation mechanism in order to generate results.

Aside from this measure, which is in obvious need of improvement, Romania has in place a state aid scheme for the IT&C industry that creates jobs locally.

“State aid is granted through a 40/50 percent reimbursement of salary costs (including wage taxes) for the creation of at least 200 new jobs for a minimum of two years, in the case of innovative investments or those in which the IT&C component has a minimum 20 percent share,” said Gherghel of Noerr.

He believes that these measures will allow Romania to become more competitive in the IT sector, as new fiscal facilities are hard to come by these days.

Employment needs a helping hand

The government intends to eliminate social contributions for healthcare, pensions and unemployment benefit for companies that hire jobless people who are either under 25 or over 55. This measure would apply for one year if the employee is kept on for another one.

The unemployment rate in Romania has hovered around 7 percent this year, but young people and those close to retirement are particularly hard hit. The job occupancy rate for people between 15 and 24 stood at 21.9 percent in the first quarter, while in the 55 to 66 bracket it is slightly higher at 39.3 percent, show data from the National Statistics Institute.

Tax specialists believe this measure would have positive results and could reduce the level of unreported labor.

Bogaru of Hammond, Bogaru & Associates said however that it runs a legal risk because it will allow companies to offer these people a two-year determined contract.

“Up to now, the condition to maintain the facility was for the hired people to be on the payroll for five years, which was discouraging for employers given the difficult economy,” said Dobrinescu of Dobrinescu Dobrev.

The country had already approved a fiscal measure in 2010 geared towards the creation of jobs, but the adverse economic conditions precluded a significant hike in employment, according to Bohalteanu of Musat & Asociatii Tax Advisory.

“The reduction of the financial burden representing the percentage of social contributions that an employer has to pay could stimulate the economy and employment,” said Bohalteanu.

Fiscal consultants say that the government’s intention to exempt companies from penalties if they pay their debt to the state in the last quarter will help firms remain solvent.

“A similar measure was introduced for the first time in August 2011 and was beneficial for the state budget and taxpayers,” stated the Dobrinescu Dobrev partner.

Chitu of Tuca Zbarcea & Asociatii Tax added this measure would have a positive impact on taxpayers and the budget revenue because companies will try to take advantage of the “amnesty” and pay their debts.

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