by PricewaterhouseCoopers Auditors & Accountants |
| |
|
Indirect taxation |
|
Direct taxation |
|
Main issues concerning employees |
| |
| ….. The accession clock is ticking away and the deadline for businesses is getting closer – less than 11 months away until the envisaged date of Romania's accession. Joining EU will offer, without any doubt, extensive opportunities, but also serious challenges, for Romanian companies. The EU accession will mean that the fiscal and legal systems will have to be aligned to the acquis communitaire, triggering significant changes within Romanian businesses. |
| |
| |
| |
More than 85% of the changes in the fiscal system regard indirect taxes. This major impact will stem from Romania's accession to the single market and the introduction of a complex VAT system with regards to the intra-comunity circulation of goods.
From a VAT viewpoint, Romania has made substantial efforts in harmonising with the EU 6 th Directive. The current VAT legislation is almost aligned with the EU rules and the draft of the new harmonised VAT law has already been published on the web site of the Ministry of Public Finance. |
| |
| Abolishment of customs barriers and european legislation |
| |
Romania will enter the large European customs area once it joins the EU. As from its first day of Accession, Romania will apply the Community Customs Code and implementing regulation as well as the Common Customs Tariff.
The customs borders between the EU and Romania will be abolished. The transportation of goods between the old EU member states and Romania will be easier as the customs border controls will no longer exist. This will lead to the optimisation of logistic operations and flow of goods and will imply a reduction in operation costs.
The financial situation of companies operating in the large European area will also be impacted by the elimination of customs duties applied to goods imported from the EU member states. Moreover, the average level of taxation applied upon import of goods in Romania for non-EU goods will decrease after 1 January 2007, both for industrial and agricultural products.
The elimination of the customs formalities and of the customs duties in cross border transactions with EU members will lead to an intensification of trade, especially with agricultural products. New strategies and concepts, such as “Just in Time”, will be more easily available.
The adoption of EU preferential systems and the abolishment of the current free trade agreements that Romania concluded will mainly impact companies' sourcing policies. Importers will be forced to re-think their strategy for choosing their suppliers. For instance, starting the Accession date, the customs duty rates applied to products coming and originating from Moldova will increase, while the customs duty rates for imports from Asia or the USA will decrease in certain cases.
On the other hand, Romania will have to apply specific measures such as those regarding the common agricultural policy and the trade defence measures adopted by the EU. This will impose certain barriers to imports of agricultural products and several other goods from outside the EU.
At the same time, physical transport barriers will be partially replaced by additional administrative barriers, mainly in the field of value added tax. The accession will imply new documents and changes in software systems. Both companies and local authorities will have to plan to adapt as smoothly as possible to the new environment. |
| |
| EU accession – VAT considerations |
| |
By eliminating customs barriers, current “import” and “export” regimes will no longer exist for transactions between Romania and EU member states and will be replaced by intra-community acquisitions and intra-community supplies, respectively.
The management of Romanian companies should be aware that these new rules will create a series of administrative costs that should be estimated and budgeted as accurately as possible. These costs arise first of all from the obligation of filing the documentation required by the new VAT legislation (Intra-stat, Recapitulative Statement and other supplementary documentation for justifying the zero VAT rate applicable to intra-community supplies, as well as supplementary information for completing the VAT return). In order to fulfil these obligations Romanian companies must be able to collect and extract relevant data, which would determine important changes in the accounting and IT systems of the companies. Also, companies should train staff in logistics and finance departments to quickly adapt to the requirements of EU legislation and to avoid unforeseen costs related to the obstruction of logistics flows and fines for not fulfilling the legal obligations.
The reduction of the registration threshold from RON 200,000 to the equivalent of EUR 35,000 and the new computation method for this threshold will likely trigger more companies to register for VAT purposes after the Accession date (e.g. banks, insurance companies).
Starting with the Accession date, the Romanian VAT registration system will become more complex and will imply different procedures to be followed depending on the type of registration, as such: |
| |
|
Standard VAT registration of Romanian companies; |
|
Special VAT registration of Romanian companies for intra-community acquisitions (generally by |
| |
public institutions, insurance companies); |
|
VAT registration of foreign companies through appointment of a VAT Fiscal Representative; |
|
Direct VAT registration of foreign companies. |
| |
The new VAT legislation will stipulate for new adjustment rules of the input VAT in the case of capital goods. This adjustment can both favourably and unfavourably impact companies during the adjustment period of a capital good (which is intended to be set for 5 years in case of fixed assets and 20 years for real estate). Thus, companies turning from VAT exempt operations to taxable ones may benefit from deduction of the VAT related to capital goods, which initially represented a cost. Conversely, if companies pass from taxable operations to the exemption regime, the VAT deducted in relation to capital goods may be partially/totally adjusted and thus becomes a burden for the company.
A new VAT exemption will be introduced for sale of buildings which are not deemed to be new. The VAT exemption for these operations is not compulsory, as companies may choose to opt for the taxable regime.
EU accession will bring positive changes in respect of the procedures for issuing and archiving invoices. The standard fiscal invoices will disappear as companies will be allowed to issue invoices in their own pattern by respecting a minimum set of requirements. In addition, Romanian companies will have the possibility to issue electronic invoices and also to archive them in an electronic format. Other opportunities to be brought by the new legislation will entail the extension of the invoicing period and the possibility to issue a summary invoice for all goods delivered/ services rendered to a certain client.
Starting with the Accession date, Romania will adopt new rules regarding the place of supply and the person liable to pay VAT for different kinds of services (e.g. intangible services, transport and intermediary services, leasing of means of transport).
Also, the use and enjoyment rules will be applicable for telecommunications and electronically supplied services, which makes such services provided by non EU suppliers taxable in the country of consumption.
A significant step of harmonisation process is brought by allying the VAT treatment of financial services with the provisions of the 6 th Directive.
Starting the Accession date, a significant improvement is expected on the level of cash flows for companies selling their businesses, or part of them, because such transactions will no longer be subject to VAT, regardless of the type of transfer. Currently, this provision exists only for transfers resulting from mergers and spin-offs.
In conclusion, there is plenty of information readily available from an indirect tax perspective and, as a result, a company can know what to expect in terms of new tax obligations and opportunities and what it has to do to manage its business to prepare for EU accession. |
| |
| |
| |
As opposed to indirect taxation area, the EU Treaty does not specifically ask for harmonization of direct taxes, EU member states retain their fiscal sovereignty provided their legislation does not infringe on the fundamental freedoms of the single market.
The impact on direct taxation of EU accession is mainly in the following areas: implementation until EU accession of the Parent-Subsidiary Directive, the Merger Directive, the Interest and Royalties Directive in the Romanian legislation, compliance with EU Code of Conduct and the possibility to take advantage of the ECJ jurisprudence. |
| |
| The Parent-Subsidiary Directive |
| |
The purpose of this Directive is to eliminate double taxation of profits distributed by group companies resident in one EU Member State to parent companies resident in another EU Member State. The Directive abolishes the withholding taxes on payments of dividends between affiliated parties - since a subsidiary is already taxed on the profits out of which the dividends are being paid, the Directive provides that the dividends must be exempted from tax in the hands of the recipient. If a tax is however imposed on these dividends, the Member State of the Parent company must give credit for the tax already paid in the Member State of the subsidiary against its own tax.
Romania has already implemented the provisions of this directive in its tax system. However, it will only become effective after EU accession. In order to benefit from the Parent Subsidiary Directive certain criteria: minimum shareholding must be 25%, and a minimum holding period for the shares in the subsidiary is 2 years - the minimum percentage is to be gradually lowered to 20% from 1 January 2005, 15% as of 1 January 2007 and 10% as of 1 January 2009.
Implementation of EU Parent-Subsidiary Directive will encourage EU investments in our country by allowing tax neutral dividends distributions to EU parent companies. |
| |
| The Merger Directive |
| |
The Merger Directive offers a tax neutral treatment for mergers, divisions, transfer of assets and exchange of shares between entities located in different EU Member States. The Directive provides that the transfers stated above should not be considered taxable events and should not trigger capital gain tax.
The Romanian Fiscal Code has already implemented the provisions of the Merger Directive and this is expected to encourage cross-border reorganisations between EU countries based companies and Romanian companies upon Romania's accession to EU. |
| |
| The Interest and Royalties Directive |
| |
According to the provisions of the Interest Royalties Directive, EU based group companies will benefit from withholding tax exemption in the area of cross-border interest and royalty payments. Certain requirements also have to be cumulatively met in order to benefit from the advantages of this Directive: the companies involved in the transaction must be tax resident in an EU Member State and should have been subject to corporate tax in the EU and is applicable to related companies (25% shareholding test).
The new Member states benefit from the possibility of transitional periods as regards the application of the Interest and Royalties Directive (eg. Poland and Latvia were granted of transitional period of 8 years, starting from the date of their EU accession). The Accession Treaty provides for a transitional period until 31 December 2010 for Romanian to implement this Directive.
From 1 January 2011, the tax neutrality guaranteed by its application will continue the positive effect of the other directives by encouraging intra-community financing, IP migration, etc.
In conclusion the implementation of the “EU direct tax package” will have as a general effect the continuous boost of economic development by encouraging intra-community transactions, distributions and reorganisations as part of United Europe. It will bring multinationals as well as national companies the opportunity to work in a fair and tax neutral environment and to take advantage of ECJ case law in defending their fundamental freedoms guaranteed by the EU. |
| |
Main issues concerning employees |
| |
From a HR perspective, the accession to the EU would impact the company due to freedom of movement, one of the fundamental principles of EU legislation. The most important change would be in terms of international mobility, as an EU citizen has the right to work as easily in any of the Member States (without the requirement for a work permit). From the experience of the new members, the exception from the work permit requirement is not implemented at the accession moment both ways. Thus, although Romania has already implemented in domestic legislation elimination of work permits for EU citizens as of the accession date, Romanians could still need work permits during a transition period.
However, from this perspective, Romanian companies should be prepared to choose from a wider range of specialists (work force from other Member States), on one hand, and to offer more attractive remuneration packages to its employees in order to attract good specialists and to motivate Romanian employees not to move to other employers from Member States.
The accession to the EU would also solve one of the most controversial issues related to international assignments. HR people often face the dilemma of social security contributions: why should an Italian individual employed in Italy and assignee to Romania contribute to the Romanian social security system after the first year, when he wants coverage from the Italian system? EU regulations protect employees and employers from contributing twice, in home and host country (in the lack of a valid bilateral Social Security Agreement). The employer must file a special form based on which the assignee can continue to contribute to home country system for periods for up to 5 years (the initial term is one year and can be extended).
Thus, Romanian companies can benefit both ways from this regulation: lower costs with expatriates working in Romania and possibility for Romanian employees seconded abroad to continue contributing to the Romanian social security system without paying contributions abroad.
In addition to the work permit and social security issues, from an individual income tax perspective, based on domestic legislation foreign individuals would become taxable in Romania for their worldwide income if they spend here more than 183 days/year or they have their centre of vital interests in Romania for 3 consecutive years. Due to the attractive flat tax rate currently applicable in Romania (16%) more foreign individuals could consider a medium-long term assignment to Romania.
Summarizing the above expected changes related to the Romania's accession to the EU, Romanian companies should be prepared to face the competition of other employers from Member States, in terms of compensation and benefit rewards. On the other hand, the EU labour market would offer advantages in terms of specialists, training opportunities for Romanian employees. |
|
|
