CFOs in Romania are cautious: Economy needs investments, not just consumption

Newsroom 12/05/2016 | 10:09

In the financial departments of large international companies that are active in Romania, there is hope for more predictable and sustainable legislation following the rollout of the New Fiscal Code and Fiscal Procedure Code this year.

Ovidiu Posirca

 

However, CFOs fear that the country may see its economy grow aggressively once again based on consumption, while key investments in infrastructure will continue to move at a snail’s pace.

At least, this is one of the conclusions that resulted from a special panel that BR hosted in late March, at its 15th Tax & Law event. The speakers were the heads of financial operations in multinational firms that have to plan budgets in the country on the medium and long term.

 

Oil industry fears new taxes on poor pricing evolution

Let’s take for instance the case of Austrian oil major OMV Petrom, which is anxiously waiting for changes to the taxation framework for the oil and gas sector.

Irina Dobre, financial director of OMV Petrom, said that the government’s intention to tax the profits of oil and gas companies from upstream activities, meaning exploration & production, should take into account the current investment realities.

“This year, we are forecasting a reduction of 10-20 percent in investments, and all this is because our cash flow is very tight,” said Dobre. She added that OMV Petrom had reduced its investments budget from EUR 1.4 billion in 2014 to EUR 900 million last year, due to the collapse of oil prices.

Dobre is hoping that the special construction tax will be scrapped next year, as this measure is included in the new Fiscal Code, underlining the fact that Romania’s potential for onshore oil and gas projects is dwindling.

However, she emphasized that explorations in the Black Sea remain a strategic project for the firm.

“The Black Sea requires huge investments, and for now the final investment decision is still under analysis, which will take another year or two. Of course, the national and international evolution of oil and gas prices will have an influence on that business model, but for us the Black Sea is a strategic investment and is treated as such,” said Dobre.

 

A shot in the arm for life insurance through legislation

For Ciprian Ladunca, CFO and deputy CEO of MetLife, the provider of life insurance and pension products, the main challenge is getting more Romanians to learn about the benefits they could get from such financial products.

“We are talking about Romania, a country where insurance, especially life insurance, is not a word used that often. We are ahead of only Bulgaria, throughout the whole of Europe, in the penetration of insurance services,” said Ladunca.

The CFO added that MetLife has insured 1 million Romanians in one way or another, but certain changes to the Fiscal Code would dramatically expand consumers’ access to this market.

“We are supporting and lobbying in two directions: The introduction into the Fiscal Code of deductibility for life insurance, especially for policies involving protection. This is insurance with a low value and if it is deductible it can reach a larger pool of people that are not protected in any way right now,” said Ladunca.

He added that if more people were insured, the state would not have to step in and provide all the funding in the event of a disaster or major accident.

Another measure the industry is calling for is a 6 percent contribution from the gross wage to go into the pension system, by law. At present, this figure stands at 5.1 percent.

According to Ladunca, MetLife controls USD 1 billion of assets in Romania, with a major impact in the economy, ranging from the increase of stock exchange trading to the enhancement of predictability for the financial market.

 

IT struggling with changes to sole trader (PFA) regulation

One of the immediate impacts of the new fiscal legislation has been felt in the local IT sector, which relies on programmers that work as sole traders (PFA). This was supposed to be a legal option that would provide flexibility for specialists that were paid based on projects.

From this year, sole traders will have to pay income tax of 16 percent, as well as contributions to the healthcare and pension funds.

Gabriel Biris, state secretary at the Ministry of Finance, suggested that the sole trader regime was popular because the taxes were lower.

The prices of IT services are already starting to climb in Romania, following this change, according to Stefan Duhnovnicu, global finance & operations manager at IBM Romania.

“IBM does not work directly with sole traders (PFA), but we have local partners, which for certain niche skills hire sole traders,” said Duhnovnicu.

He said his challenge was to channel projects not just based on skills, where Romania is marking significant growth, especially in terms of niche capabilities, but also on costs.

“The impact of this change on the taxation of sole traders resulted in a 3 percent hike in the rate we receive from our suppliers, and I have personally conducted an informal investigation to see why the prices of services we receive and give have to grow. (…) The projects are dynamic and do not go on forever. The deadlines are very strict, so when I set a team or a programmer a certain target, as sole traders they have the freedom to work during the night, or at the weekend, whenever they want. In opening a SRL, things get more complicated for him or her. We are losing flexibility, along with the increase in costs,” said the IBM official.

Duhnovnicu added that the authorities should at least provide some assistance for IT specialists that used to work as sole traders and are now trying to set up their own firms.

 

Economy needs investments, not just consumption, warn CFOs

With GDP expected to grow by around 4 percent this year, after expanding by 3.8 percent last year, BR asked the three CFOs if the economy risks slipping into a new boom and bust cycle.

“If economic growth were still based on consumption I don’t know if I would be that optimistic, but it is also based on viable projects. I don’t see large-scale projects, but investments in people. We are above the EU average for economic growth, which is a positive thing, but I don’t want to somehow become a consumer, but reach equilibrium in the balance of payments,” said Duhovnicu of IBM.

Ladunca of MetLife said he was optimistic about the economy and commented that investors’ perception of the country was paramount.

Dobre, financial director of OMV Petrom, warned that Romania risks lagging behind other countries if the growth pattern does not include key investments in infrastructure, aside from consumption.

Key changes to tax inspections

Starting this year, some changes have been made to the way in which tax officials carry out inspections. For large taxpayers or for those with second HQs, such an investigation may not take more than 180 days, according to Florin Gherghel, head of the tax department at Noerr Finance & Tax.

He noted that the conclusions of the fiscal authorities following the inspection can be challenged within 45 days.

A new provision in the Fiscal Procedure Code states that if the administrative contestation is not resolved within six months, the taxpayer can ask directly in court for the cancellation of a tax enforcement order.

Luisiana Dobrinescu, managing partner at law firm Dobrinescu Dobrev, added that it takes around one year to challenge a foreclosure decision in court. She said that the controls from the anti-fraud department are based on a procedure that lacks transparency and clear rules.

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