Transfer pricing has become one of the hottest tax issues today. As it is not an exact science, the topic is hard to approach and creates difficulties, not only when it is studied in-house but, in many cases, also when it is outsourced with reputed advisers.

By this analysis, we do not aim at clarifying the transfer pricing topic in general, as the issue is much to vast, but provide the answer to a question not yet uniformly answered by the business community or tax administration: may the transactions between Romanian legal persons be subjected to transfer pricing adjustments?

1. Legal background

Law no. 76/2010 for the modification of the Fiscal code, with applicability starting 14 May 2010, seems to provide the answer to this long disputed question, clearly establishing that transactions between Romanian legal persons do constitute object of transfer pricing analyses.

The question which remains, however, concerns the transactions carried out before this date, under the circumstance where the Fiscal code as applicable by the respective date used to provide solutions contradicting those provided for under its own application Norms.

2. The dilemma

Prior to 14 May 2010, the Fiscal code used to subject to transfer pricing all transactions between affiliated persons, not distinguishing between Romanian and non-Romanian persons. On the other side, the Norms for the application of the Fiscal code, as they were worded before the said date, used to exclude the transactions carried out between Romanian legal persons from the scope of possible transfer pricing adjustments.

As a matter of legal process, such a ruling is at least defective. This would be due to the fact that the norms, having inferior legal power as compared to the law, must strictly limit to the law in whose support they are issued and cannot contain solutions that are contradictory to those to be reached if applying strictly the wording of the law, as if the norms themselves did not exist.

In this context, there are not few those who may take the view that, in the case under analysis, the norms must be totally ignored and, consequently, the transactions carried out between Romanian legal persons before 14 May 2010 must be subjected to the transfer pricing regulations, as the Fiscal code seems to prescribe.

3. Our approach

On one side, such an approach means to ignore a piece of regulation which, although with less legal power than the law, is still one approved by the government and, thus, must produce legal effects in a state which pretends it is subject to the rule of law. However, not in few occasions, the tax inspectors themselves did solicit the documentation of the transactions carried out between Romanian legal persons before 14 May 2010, simply ignoring the provisions laid down in the application norms.

As we do not hold legal expertise, we choose not to issue an opinion about the legal correctitude of such a conduct from the perspective of the applicability or, conversely, inapplicability of the norms to the Fiscal code. However, we cannot miss from our analysis the provisions laid down under the Fiscal procedure code itself and applicable in the area of interpreting the laws, which pretends that the interpretation of the fiscal laws should follow the will of those who made the law as it was expressed within the law.

Further, starting from the objective to identify the will (intention) of those who made the law, there must be withheld the wordings of the explanatory memorandum to Government decision no 791/2010 which mentions, literally: Law 76/2010 extends the transfer pricing mechanism for the transactions carried out between Romanian and non-Romanian affiliated persons also to the transactions carried out between Romanian affiliated persons.

Thus, in a context where the declared intention of those who made the law was to extend the scope of transfer pricing regulations, there becomes evident the fact the, prior to these regulations, the intention of the law makers was not to subject the transactions carried out between Romanian legal persons to the regulations applicable in the area of transfer pricing.

4. Conclusion

Having said all the above, the only conclusion that may be reached is that, before 14 May 2010, the transactions carried out between Romanian legal persons were framed outside the scope of the transfer pricing regulations. Consequently, any request on the side of the tax inspectors to document the transactions carried out between Romanian legal persons prior to the said date is an abuse and needs to be responded accordingly.

Recent changes in the Fiscal code increase the tax rate on buildings owned by companies, should the buildings, other than those acquired in the last 3 years before the current year or during the current year, have not been revaluated in these 3 years preceding the current year.

Starting 1 January 2012, the tax rate increases for these buildings, being thus established between 10% and 20% of their gross book value. For the sake of clarity, under the current regulations in force until 31 December 2011, the tax rate applicable to the buildings in discussion is between 5% and 10% of their gross book value.

Also with application from 1 January 2012, a higher tax rate between 30% and 40% of the gross book value is introduced for buildings that have not been revaluated in the last 5 years preceding the current year.

Emergency Ordinance no. 37/2011, published in the Official Gazette no. 285/22.04.2011, brings a series of amendments to Accounting law and, secondary, to Company law.

I. Accounting law

1. Subunits without legal personality

Subunits (e.g. branches, permanent establishments) set up in Romania by companies established in states of European Economic Space (EU and EFTA member states) have the obligation to conduct double-entry bookkeeping, up to trial balance, however, they do not prepare financial statements.

Over the time, not few were the occasions where our clients seemed reluctant to publish their financial statements to the trade registry, mostly due to commercial secrecy reasons related to financial performance indicators of the company.  The new regulations come forward to support the commercial secrecy and outline an investigation area referring to the type of investment vehicle to be used: separate legal entity – subject to an obligation to publish financial statements vs. subunit without legal personality – entity that does not prepare financial statements if the mother company is established in an EES state.

2. Simplified accounting system

This system may be adopted by those entities which, during the previous financial year, recorded a net turnover and total assets of maximum EUR 35,000 each.

The system implies the use of a simplified chart of accounts and the presentation of the patrimonial elements in financial statements comprising simplified balance sheet and profit and loss account.

The accounting may be conducted based on civil agreements/conventions concluded under the Civil code with persons having economic university education, who do not necessarily need to be members of the Romanian Chamber of Expert and Authorized Accountants.

3. Legal entities under liquidation

Legal entities under liquidation submit to the tax authorities, within 90 days from the end of each calendar year, an annual accounting report.

4. Minor offences and administrative fines

Failure to comply with the obligation to audit the annual financial statements and the annual consolidated financial statements is subject to an administrative fine between RON 30,000 and 40,000 (previously, the fine was set between RON 400 and 5,000).

Also, failure to comply with the obligation to prepare and approve accounting policies and procedures is subject to an administrative fine between RON 300 and 4,000 (in the past this irregularity was not deemed to constitute a minor offence and, therefore, was not being fined).

II. Company law

There were abolished those legal provisions enabling third parties to request the dissolution of the company if the latter did not submit its financial statements to the trade registry 6 months after the legal term.

The recent amendment comes in a context where the financial statements are no longer to be submitted to the trade registry, but (only) to the taxing authorities.  Leaving aside the pure administrative part, namely the submission of the financial statements to one authority or another, such a regulation removes the main risk area existing in the past in respect of a potential decision not to publish the financial statements, thus enabling an easier adoption of the business decisions.

1. The decision of the European Commission and the next steps

On the 4^th of May 2011, the European Commission adopted the decision for Romania’s authorization for application of reverse charge for supply of the following categories of products considered to have a high risk of tax fraud: corn, wheat, rye, sunflower, barley, rape, sugar beet, soya, two-row barley.

Pursuant to this decision, discussions will follow at the level of the member states within the European Council, the final decision belonging to the latter.  The simplification measure will be applied only after the communication of the European Council’s final decision.

2. Short history

As measure to fight against tax evasion, the Emergency Ordinance no 54/2010 establishes the application of simplification measures for supply of goods within the following categories: cereals, technical plants, vegetables, fruits, meat, sugar, flour, bread and bakery products.  These measures will enter into force starting with the 10^th day following the European Council’s communication for approval of the exemption for applying these provisions and will be applicable until the 31^st of December 2011.

The simplification measure applies only for taxable supply of goods having the place of supply in Romania as per Fiscal code’s provisions, which are carried on by persons registered for VAT purposes in Romania.  The simplification measure presumes the application of the reverse charge mechanism, meaning that the supplier issues VAT-free invoices mentioning on them the application of the reverse charge mechanism.  The buyer will calculate the VAT evidencing it on the invoice and in the sales/purchases ledger and will report it both as input and output VAT in the VAT return.

Emergency Ordinance no. 117/2010, published in Official Gazette no. 891/30.12.2010, effective with 1^st of January 2011, brings a series of modifications both to Fiscal code and Fiscal procedure code.

I. Fiscal procedure code

• taxpayers will declare and pay the income tax related to income obtained by employees carrying out their activity at fiscally registered secondary offices (with more than 5 employees) to the tax authority where the headquarters are established; the transfer of the fiscal file and the amendment of the fiscal sheet will be performed by the tax authorities;
• however, the competence regarding the fiscal registration of the secondary offices as payers of tax on salary income and other income assimilated to salaries stays with the tax authority where the secondary office is situated;
• following the abolishment of the quarterly/semi-annual payment of salary income tax and social insurance, particular taxpayers (microenterprises, individuals who are assessed as employers, associations, foundations) will compute and declare on a monthly basis the said duties;

II. Fiscal code

1) Profits tax

• the period of non-deductibility of fuel expenses is lengthened to 31^st of December 2011;

2) Income tax

• abolishment of the provisions regarding the tax exemption of the counter value of coupons representing gift tickets granted free of charge to individuals according to the legal provisions;
• the period of non-deductibility of fuel expenses is lengthened to 31^st of December 2011;
• in case of income obtained from independent activities, the annual income tax is no longer calculated by the taxpayer, but by the tax authority, by issuance of an assessment decision; for this purpose, the taxpayer has to submit the statement regarding the realized incomes until 15^th of May of the year following the year in which the income is obtained;

3) Income tax for microenterprises

• all profits tax payers may opt for payment of income tax starting with 1^st of January 2011, if they fulfil the size criteria under the Fiscal code;

the option may be exercised until 31^st of January of every year for which this tax regime is to be applied, if the criteria under the Fiscal code are fulfilled at 31^st of December of the pervious year;

4) Withholding tax

• dividends obtained from Romania by legal persons residing in a EU or EFTA member state who are not fulfilling the minimal holding and participation criteria in the share capital of a Romanian legal person for tax exemption, are subject to 16% withholding tax (increase from 10%);

5) VAT

• the period of non-deductibility of VAT related to the acquisition of road vehicles and of fuel is prolonged until 31^st of December 2011;
• declaration in the VAT return of the tax differences established by the tax inspectors and communicated to the taxpayer until the date of the return;
• introducing simplification measures (reverse charge) for transfer of greenhouse gas emission certificates;
• in case of acquisitions of transportation means which are not new, performed by persons registered for VAT purposes in accordance with art. 153¹ of Fiscal code, the tax authority issues, with a view to license the respective transportation means, a certificate attesting the VAT paid in Romania or the non-payment obligation, as the case may be;
• services rendered free of charge are not treated as supplies for remuneration (no need to calculate output VAT) if they are carried out in relation to the economic activity of the taxpayer;

6) Social insurance

• starting with 1^st of January 2011, the mandatory social insurance contributions due by individuals and legal persons in respect of employment activities are regulated by the Fiscal code;
• the monthly taxable base for the employee’s social insurance contribution, respectively for that of the employer, may not exceed 5 average gross salaries (RON 10,110), respectively 5 average gross salaries multiplied with the number of employees;
• it is expressly mentioned that there are not included in the taxable base of the social insurance contributions:

-          the daily allowance granted during the delegation/assignment period in another town, in Romania and abroad, for business purposes, in the limit of 2,5 times the daily allowance granted to employees of public institutions;

-          meal tickets, holiday tickets, nursery tickets and gift tickets granted in accordance with the law;

• the social insurance contributions are declared by the taxpayers until 25^th of the month following the month for which the social insurance contributions are due, by means of a single return “Return for payment of social insurance contributions, income tax and nominal evidence of insured persons”;
• the single return is submitted by electronic means; by way of exception, until 1^st of July 2011, the single return may be submitted in paper format;
• individuals and legal persons who are assessed as employers must submit to the health insurance authorities, until 15th of February 2011, a statistic return regarding the contribution for medical leave and indemnity outstanding as at 31st of December 2010 and unpaid by 31st of January 2011.

1. Envisaged persons

Based on the provisions of the controversial emergency Ordinance no. 87/2010 all taxpayers who, before 30 September 2010 inclusive, were subjected to the lump sum income tax, must submit two annual profits tax returns, one for each of the following periods:

• 1 January 2010 – 30 September 2010
• 1 October 2010 – 31 December 2010

“Taxpayers who, before 30 September 2010 inclusive, were subjected to the lump sum income tax” are all those who were subject to the provisions of art. 18 par. (2) Fiscal code, no matter if they paid or not, effectively, lump sum income tax.

2. Submission term

The submission term is different depending on the period the tax return refers to:

• Until the 25^th of February 2011, for period 1 January 2010 – 30 September 2010, and
• Until the 25^th of April 2011, for period October 2010 – 31 December 2010. In case of taxpayers who close financial year 2010 until the 25^th of February 2011, they will submit the annual profits tax return until this date.

3. Certification of the annual profits tax returns

There are still in force the provisions of the Fiscal procedure code according to which the annual profits tax returns of the taxpayers must be certified by a tax consultant, except for taxpayers who have audit requirements. Consequently, all taxpayers being subject of the provisions of art. 18 par. (2) of Fiscal code shall need to ensure the certification of two annual profits tax returns until the submission term.

4. Exceptions

Taxpayers who were not subject to the provisions of art. 18 par. (2) Fiscal code are not compelled to submit two annual profits tax returns – amongst others, those in temporary inactivity, those incorporated during the year, foreign persons performing activity in Romania through an association without legal status.

We approach in this issue a subject that the legislative does not feel the need to regulate properly, but which, due to the contrary financial interests that it generates on the market, constantly returns to the attention of the business environment. That is the contribution to construction workers’ social protection fund, as it is regulated by Law no 215/1997 regarding the Social House of Builders (“The Law”).

1. Legal framework

The Law aims to provide greater social protection for the construction workers during the interruption of activity caused by bad weather conditions, stating that they are entitled to receive, during business interruptions, an allowance representing 75% of the average gross salaries earned in the last 3 months prior to the interruption of activity.

Under the Law, financing of the above allowance shall consist of :

• contributions of workers and economic units engaged in construction or construction material manufacturing activity, as well of
• “0.5% of the estimated value of the building as per the construction documentation”.

2. Weaknesses in the legislative process

• The Law does not contain any provisions in respect of the persons liable to pay the contribution of 0.5%.
• The Law does not reveal the obligation to pay such a contribution and, in a context where the originated social protection system is complementary to the (mandatory) unemployment insurance system, not few may embrace the approach that the payment obligation is conditional upon the decision of the economic agents engaged in construction activity to ensure their employees in the welfare system created by the Law.

3. Attempts to remedy the deficiencies

Approximately 2 years after the entry into force of the Law, in 1999, the Ministry of Public Works and Planning, the Ministry of Labour and Social Protection and the Ministry of Transportation have proposed, through a concerted effort, to clarify the situation, issuing the Specification no. 5122, 1384, respectively 178.

According to Specification, “the 0.5% share on the estimated value of the building as per the construction documentation is due by the investors or owners…”

As regards such a clarification, we consider that the Norms of legislative technique are flagrantly violated, whereby the normative orders are issued with a view to the execution (implementation) of primary legislation, and should not bring any addition to the latest.  In this context, the very legality of the Specifications is from our perspective questionable.

Apart form the above, remains the dilemma regarding the mandatory or voluntary character of the contribution.  It seems that in this approach, the Social House of Builders has not had the support of Ministries, and was forced to clarify the situation itself by means of its website. Thus, on its website, the Social House of Builders announces that “the obligation to pay the 0.5% share is unconditional upon the quality as member of the Social House of Builders of the constructor executing the construction works”.

4. On the other side…

… even institutions of the state expressed in time their disagreement regarding an approach that the contribution to the fund for construction workers social protection is in all cases mandatory.

It is famous the case when Mures Court of Accounts, Subsequent Financial Control Department, investigated Tarnaveni Local Council and the responsible persons because “in addition to the amounts paid to the contractors, based on invoices and their work report, it was also ascertained that a share of 0.5% (applied to the invoiced amounts) was paid to Social House of Builders”.

Then, as long as institutions of the state challenge the mandatory nature of the 0.5% contribution, why would not private investors challenge it, as well?

Willing to support as much as possible the business decisions which, irrespective the quality of the applicable legislation have to be taken by the investors, we would like to mention that the Law dose not impose any sanction, such as interest or late payment penalties, for the non-payment or late payment of the contribution to the social protection fund for construction workers.

Obviously, there still remain to be noted the provisions of the common law, grounded on which the Social House of Builders may still claim damages.

5. Reflections

13 years after the entry into force of Law no 215/1997, we still wait for one or other institution to regulate, unequivocally, the issue of social security contributions for construction workers.

Why is there so important to clarify these aspects? Because, leaving aside the financial interests of one category or another, such laws, forgotten in immemorial times and never properly regulated, through the financial and administrative burden they place on the business environment, in general, not only blur the attractiveness of the unique quota (much publicized these days), but may even exert a (bad) influence on investment decisions in a time when the annual foreign investments came to be little above the level registered for the year … 2003.

Romania has decided not to make use for the moment of the option mentioned under art. 211 of Directive 2006/112/EC which rules that member states may decide that VAT due upon importation of goods from non-EU territories and states need not be paid at the time of importation.

Consequently, VAT due for the import of goods is payable to the customs authority at the time when goods pass the Romanian frontier, whereas the payer could recover the tax either by way of deduction from the VAT payable at the end of the period or, if the payer is in a negative VAT position, by way of state refunds.

In a context where the authorities’ weak capability to refund VAT keeps, for over 2 years, the first line of the agenda of all meetings between the representatives of the business environment and those of the public authorities, the question inevitably arises if the payment of import VAT can be avoided.

The answer lays in the provisions of Order of the Ministry of Public Finances no. 500/2007, recently amended by Order of the Ministry of Public Finances no. 2287/2010 and is affirmative in case of “large importers”, understood to be those companies who carry out imports, other than those of products subjected to harmonized excises, exceeding in value the threshold legally established.

Thus, the threshold established under Order no. 500/2007 was being of RON 150 million but, probably, following the reduction in international trade due to the global crisis, it has been reduced to RON 100 million as of the date of enforcement on 20 September of the provisions of Order no. 2287/2010.  The threshold relates to the value of imports carried out in the previous calendar year or in the last 12 months preceding the month when a company solicits the taxing authorities the issuance of a certificate for the deferral of import VAT payment.

Hence, in addition to the observance of the thresholds previously mentioned and with a view to the issuance of a certificate for the deferral of import VAT payment, the applicant company must make the proof that if fulfils a number of eligibility criteria mentioning, amongst others, the lack of overdue tax liabilities, the registration for VAT reasons at least 1 year before the application for the certificate.

Summarizing, the avoidance of import VAT payment in a context characterized by a poor reimbursement of tax from the state budget may bring important cash-flow benefits, demanding as such a thorough analysis from the perspective of this incentive’s implementation by the eligible companies.

Emergency Government Ordinance no. 58/2010 for the modification of the Fiscal code was published in Official Gazette no. 431 of 28 June 2010. The Ordinance comes into force on 1 July 2010, introducing radical changes to the Romanian tax system.

1. Standard VAT rate

The standard VAT rate increase to 24% (previously, 19%).

2. Dependent vs. independent activities

The definition of dependent activities (of a salary nature) is being provided for under the Norms for the application of the Fiscal code ever since 2004. Its introduction in the Fiscal code (as well) by means of the Ordinance announces the intention of the Government that is to stop “tolerating” the avoidance of income tax and social insurance by way of utilizing structures such as authorized persons, copyrights, free-lancers instead of employment agreements.

Shortly, any activity may be reconsidered as dependent activity and subjected to tax accordingly, based on the substance over form principle, if it fulfils at least one of the criteria set by the Ordinance. For clarification, such criteria take into account, amongst others, the existence of a subordination relationship towards the income payer, the use of a material base owned by the income payer, the lack of own working capital of the provider, the undertaking by the income payer of the provider’s travelling expenditure, payment of compensations such as that for rest holiday or temporary work incapacity.

It is to be mentioned that, in case of the reconsideration of an activity as dependent activity, income tax and social insurance are jointly due by the income payer and the provider.

The base of calculation of the social insurance is caped at 5 average gross salaries per economy. The obligation to calculate, withhold, declare and pay the social insurance stays with the income payer.

3. Fiscal credit (avoidance of double taxation)

Only taxes (on profit or income) paid in a state that is signatory of a double tax treaty benefit from fiscal credit in Romania.

4. Tax on dividends

Dividends distributed/paid by a Romanian legal person towards another Romanian legal person are subject to tax at a 16% rate (previously, 10%). It is to be mentioned, however, that such dividends are tax exempt if a minimum 10% participation is held in the last 2 years before the dividend payment.

5. Copyrights

The lump sum that is deductible for the purpose of calculating income tax decreases from 40 to 20% of the gross income.

6. Meal vouchers, redundancy payments and others

Amongst others, meal vouchers, holiday vouchers, redundancy payments received by persons whose employment agreements are closed as a result of collective lay-offs, interest relating to overnight deposits/current accounts, interest relating to deposits constituted on the basis of the legislation regarding saving and lending in collective system for housing field shall be subject to tax. The applicable tax rate is 16%. As regards meal vouchers and holiday vouchers, these continue to be exempt from social insurance.

7. Shares held in publicly listed companies

Capital gains relating to the transfer of shares is subject to tax at a 16% rate regardless the kind of shares and the holding period (previously, the gains relating to the transfer of shares held in publicly listed companies for a period longer than 365 days were subject to a reduced 1% tax).

Emergency Government Ordinance no. 54/2010 regarding anti-avoidance measures was published in Official Gazette no. 421 of 23 June 2010.

1. The Register of intra-community trade operators

The Ordinance introduces the Register of intra-community trade operators which is set up and functions starting 1 August 2010 within A.N.A.F.

The Register shall cover records regarding all taxable persons and non-taxable legal persons that carry on intra-community trade, respectively

- intra-community acquisitions of goods or services,

- intra-community supplies of goods, including triangulations,

- intra-community supplies of services.

At the moment of VAT registration, the registering person request the taxing authority also the registration within the Register of intra-community trade operators if it intends to carry out one or more trades such as those listed.

Persons already registered for VAT shall solicit the registration in the Register before carrying out any of the previously mentioned trades.

The application for registration in the Register, respectively standard form 095 approved by Order of the president of A.N.A.F. no. 2101/2010, published in Official Gazette no. 429 of 25 June 2010, shall be accompanied by certificates of criminal record of the shareholders (save for joint stock companies) and administrators issued by the competent authorities of Romania with a view to registration in the Register of intra-community trade operators, according to art. 11 par. (3) of Law no. 290/2004 regarding the criminal record.

As a general rule, the registration in the Register of intra-community trade operators produces effects starting the date of communication of the decision for the approval of registration issued by the taxing authority. By way of exception, the applications submitted before the date when the Register is set up, 1 August 2010, produce effects starting this date.

The carry out of intra-community trades by persons required to register within the Register of intra-community trade operators in absence of a registration constitutes minor offence and is subject to administrative fine from 1,000 to 5,000 RON.

2. Simplification measures

The Ordinance broadens the scope of application of simplifying measures while including the following categories of goods: cereals, technical plants, vegetables, fruits, meat, sugar, flour, bead and breading products.

It is worth noting that the legal provisions instituting the simplifying measures enter into force starting the 10th following day after the communication by the Council of European Union of the approval of the derogation for the application of these provisions and are applicable by 31 December 2010.