Parliament has ruled that compensation received by management for termination of their contracts is not subject to the 85% income tax rate (except for A.S.F – the Authority for Financial Supervision of insurance companies). At the same time, several aspects of Romanian tax legislation and practice have been found to be in breach of EU law, and four rulings have been sent by the EU Commission to the Romanian Government requiring changes. One of the most important is that the Romanian authorities have been told to speed up VAT reimbursements, which can currently take more than 6 months.
There has been considerable commentary in the media about the application of the social security health contribution to income earned by individuals from rent. At the same time as the tax burden for patients is being increased, the quality of the medical services delivered in the public health system is being reduced. A minimum package of medical services to be provided by the public system has been launched for consultation.
Another development which will be of particular interest to business is likely changes to the way transfer pricing audits are carried out by the Romanian tax authorities, following the recent publication by the OECD’s Global Forum on Transfer Pricing of a Draft Handbook on Transfer Pricing Risk Assessment. The Draft Handbook makes suggestions as to how tax authorities should carry out their risk assessment process to select those taxpayers which will be subjected to transfer pricing audits, based on a red-flag approach. For example, the Handbook suggests tax authorities might look at firms which have recorded losses for several years in a row, transfer or use of intangibles to/for related parties, marketing or procurement companies located outside market countries or countries where manufacturing takes place, or failure to obtain the profitability that would be expected of similar companies.
Although Romania is not a member of the OECD, we expect that the Romanian tax authorities will nevertheless take into account the OECD recommended methodology in their local risk assessment process for transfer pricing audits. So it is likely that we will see a different approach to the selection process of taxpayers which will be subject to a transfer pricing audit, and possibly also to the level of detail applied during the audit process.
It will be interesting to see whether the Romanian tax authorities might balance transfer pricing audits with a policy of encouraging self-declaration of Transfer Pricing adjustments. Italy took such a position some time ago when a deadline was given to taxpayers to prepare their transfer pricing documentation, in exchange for waiving transfer pricing related penalties for past periods. The experiment proved to be a successful way of enhancing budget revenue and encouraging compliance with limited costs for the tax authorities. Could Romania do something similar?