Analysis: Romania seeks tighter control of multinationals' financial data

The government is looking to implement EU Directives on tax avoidance, and is set to receive more financial information from multinational groups active in Romania. Tax experts suggest that large corporations might reassess their business models in order to meet the demands of the fiscal authorities in Romania and across the European Union.

The debates surrounding the tax practices of multinationals have reignited after the center-left government led by Mihai Tudose dropped plans to replace the profit tax with a new turnover tax. The PM said that some companies had been reporting losses for more than a decade, adding that Romania will work with other EU states to tax money that is leaving Romania “without justification”.

“I touched on this subject with President Juncker in relation to the European Directive of last year, which includes among other things a concerted effort by European states for transparency and interconnectivity on the financial data of multinationals or firms that are externalizing their profits, leading to an artificial reduction of the taxable base. It’s a very important directive and we will have to implement it anyway. But here we are talking about a principle that each company pays its taxes where it obtains profit,” said the PM in mid-summer, after meeting with Jean-Claude Juncker, the president of the European Commission, the executive arm of the EU, in Brussels.

EU steps up tax avoidance rules

Last summer, European Directive no. 1164/2016 (ATAD 1, the Anti-Tax Avoidance Directive) was adopted with the aim of establishing rules guaranteeing that taxes are paid where profits and value are generated. This July, ATAD 1 was amended by European Directive no. 952/2017 (ATAD 2), which represents the EU’s commitment to eradicating tax avoidance practices that benefit from discrepancies in the tax treatment of hybrid elements (e.g. forms of financing that mix the characteristics of loans with those of shareholders’ equity) in different EU member states and third countries (non-EU), according to Daniel Pana, director, tax, at KPMG Romania, the professional services firm.

Pana explained that these two directives actually transpose and implement the Base Erosion and Profit Shifting (BEPS) principles launched in 2013 by the Organization for Economic Co-operation and Development (OECD).

This summer, Romania adopted legislation that implements enhanced financial reporting standards for multinationals, transposing Directive 881/2016 on state-by-state reporting for large companies. This applies to groups with HQ in Romania that have consolidated revenues of above EUR 750 million per year.

“The report must contain information relating to each country separately, and tax details such as: income, profits and losses before tax, corporate income tax paid/accumulated, declared capital, undistributed profits, number of employees and tangible assets. The report should also contain details of other entities which are group members such as: state of tax residence and the main economic activities carried out,” Pana told BR.

In short, this reporting method allows the tax authorities to carry out a preliminary risk evaluation concerning transfer pricing, taxable base erosion and profit shifting in other jurisdictions.

Gauging the impact on multinationals

The raft of new EU rules that have to be implemented by each member state will have limited impact on multinationals operating in Romania, because some of the measures are already present in the local legislation, according to Mihaela Mitroi, leader of the fiscal consultancy department at PwC Romania, Moldova and Southeastern Europe.

She says the directives will limit the deductions that companies can make on interest expenses from intra-group loans. Romania’s fiscal authorities already regulate these loans to some extent, but the new directives include fresh restrictions. For instance, interest costs cannot exceed 30 percent of a company’s accounting profit; nor can they exceed EUR 3 million per year.

A fresh provision for Romania included in the directive rules that companies transferring assets such as plants to other jurisdictions will pay tax on the value gap of those assets compared to the moment of their acquisition.

“This rule, which already exists in certain states in Western Europe, will make it harder to transfer manufacturing facilities to and from Romania,” Mitroi told BR.

The new directives also regulate the taxation of profits recorded by subsidiaries in other jurisdictions, in which the profit tax rate is higher or lower than in Romania, and the taxation of subsidiaries from Romania abroad.

Mitroi added that this provision would only apply to companies that have a net annual profit of more than EUR 750,000 or a profit rate higher than 10 percent of their operational costs.

Although some of these measures are already applied locally, multinationals might have to make changes to their corporate structures.

“These new rules are expected to see multinational firms rethink their holding structures within the groups of companies, and also reconfigure transactions carried out by firms belonging to the same group,” Iulia Dragomir, senior associate at law firm bpv Grigorescu Stefanica, told BR.

She added that the main challenge for multinationals will be to reconfigure their operations based on the different ways in which the provisions of the directives could be implemented by each member state.

Getting back to the idea of the turnover tax, which was heavily criticized by the private sector in Romania, the general opinion of tax specialists is that such a move would have hurt the country’s profile as an investment destination.

“If Romania had continued with the implementation of the proposed turnover tax discussed earlier this year, it would have distanced itself from these international provisions and found it impossible to apply them,” said Pana of KPMG.

Mitroi added that the implementation of these directives in Romania does not replace the abandoned turnover tax, which could, in turn, have breached the EU Directive on VAT.

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