A total of 23 liberal MPs have initiated a draft law for transposing the Council Directive 2016/1164 laying down rules against tax avoidance practices.
The project basically provides for the taxation in Romania of the profits made by multinationals their activities in the country.
Noteworthy: similar provisions, but inspired from the OECD’s BEPS are contained in the amendment to the Tax Code proposed by former Secretary of State in the Ministry of Finance Gabriel Biris, in September. Biris’s proposals were „buried” after a media campaign that presented the initiative overall as an intent of the government to introduce new taxes. At the time, neither PNL, nor the government defended the proposal, nor did they explain it.
The draft proposes for the provisions to be applicable starting on 1 January 2017.
In the event of the adoption of the PNL’s initiative, many of the major companies from Romania will remain without their „tax optimization ” tools.
A study by ANAF made in early 2015 on a portfolio of 2,500 companies concluded that nearly EUR 1 billion were taken out of Romania in the past five years, only by deceiving transfer pricing.
Noteworthy: PNL’s draft reproduces word for word the Directive, the only change being that our lawmakers have taken out the last article of the Directive regarding the date of entry into force.
The scope and the rule limiting the deductibility of interest
The bill initiated by the liberal MPs applies to „all taxpayers who are subject of profit tax in one or several member states, including the permanent establishments from one or more member states, of the entities having the tax residence in a member country„.
The bill stipulates: the exceeding borrowing costs are deductible in the fiscal period in which they are incurred only up to 30% of the taxpayer’s earnings before interest, taxes, depreciation and amortization (EBITDA).
Member states may consider as a taxpayer:
- An entity that is allowed or requested to apply the rules for a group, as defined under the domestic tax law
- An entity of a group, as defined under the domestic tax law, which does not consolidate the members’ results for tax purposes
In such cases, the exceeding borrowing costs and EBITDA can be calculated at the group level and include the results of all its members.
Noteworthy: ANAF had also noticed the „loopholes” of intra-group payments and the President Dragos Doros announced last week that he debates on changing the tax laws so that separate entities having common shareholders can be regarded as a group and placed in the category of large taxpayers.
Calculation and rights granted by derogation
Earnings before interest, taxes, depreciation and amortization (EBITDA) is calculated by adding to the income that is subject to tax in the member state where taxpayer resides, of the amounts adjusted for tax purposes of the exceeding borrowing costs and the amounts adjusted for tax purposes of the depreciation and tax.
EBITDA excludes non-taxable income of a taxpayer.
By derogation, the taxpayer may be given the right to:
- Deduct the exceeding borrowing costs up to EUR 3 million
- Fully deduct the exceeding borrowing costs if the taxpayer is an independent entity
Noteworthy: The threshold of EUR 3 million for the exceeding borrowing costs applies at group level.
The state may exclude the 30% threshold of EBITDA for the deduction of the exceeding borrowing costs in the following situations:
- For loans concluded before 17 June 2016, but the exclusion does not apply to subsequent modifications of such loans
- For loans used to finance a public infrastructure project (of public interest) in the long term, if the project operator, the borrowing costs, assets and incomes are all in the EU.
Taxation at the moment of transfer
According to the draft, a taxpayer is subject of a tax calculated based on the market value of the transferred asset at the time of the transfer, less its value for tax purposes, in any of the following situations:
- The taxpayer transfers assets from headquarters to the permanent establishment from another state to the extent that, due to the transfer, the state where headquarters are located is no longer entitled to tax the assets transferred
- The taxpayer transfers assets from a permanent establishment located in another member state to the headquarters or to another permanent establishment from another state, to the extent that, due to the transfer, the state where the permanent establishment is located is no longer entitled to tax the assets transferred
- The taxpayer move its tax residence to another state, except for those assets that remain effectively linked to a permanent establishment in the first member state
- The taxpayer transfers the economic activity from a permanent establishment located in one member state to another state, to the extent that, due to the transfer, the state where the permanent establishment is no longer entitled to tax the assets transferred.
The bill allows the taxpayer to split the tax payment, under certain conditions. The state may require collateral at the deferral of payment.
Controlled companies that fall within the tax base
According to the draft, if an entity or a permanent establishment shall be treated as a controlled foreign corporation, the state may include in the tax base:
- Undistributed earnings of the entity or the permanent establishment resulting from inauthentic agreements (the entity or the headquarters does not have the assets or would not have assumed risks) established for the main purpose of obtaining a tax benefit
- Undistributed earnings of the entity or the permanent establishment from:
- Interest or income from financial assets
- Royalties or income from intellectual property rights
- Dividends and income from disposal of shares
- Income from financial leasing
- Income from insurance, banking or financial activities
- Income from factoring companies
Arguments of the initiators: the state can charge 4 times more tax
The initiators of the bill state in the explanatory memorandum that the Parliament „has the responsibility to pass this law in order to establish a balance for all entrepreneurs doing business in Romania„.
„Currently, there is an imbalance in the Romanian business environment affecting the competitivity and development of the internal market. While some pay 16% tax on profits, there are companies with activity in several countries that send their profit obtained in Romania to third countries from the world, including via offshore companies. There are many companies active in Romania that bring themselves to zero profit just to avoid paying taxes in Romania.
According to our estimates, the Romanian state could receive up to four times more money if it charged profit tax from companies with activities in several states that obtain profit in Romania,” said the initiators.
