ROMANIA: An Introduction
Contributors: Gabriel Biriș, Ruxandra Jianu, Biriș Goran SPARL
When looking at Romania as a potential destination for investment, you will definitely find significant strengths but also some inconsistencies that affect the overall competitiveness of the country. In 2017 Romania was the champion of the EU in terms of GDP growth. 2018 brought moderate but still strong growth, although most of this was at the expense of a higher budget deficit, as was also the case in 2017.
On the one hand, as pointed out in the previous Overview, Romania may be seen as being on the way to becoming a regional business hub. There are several arguments to support this statement:
• tax exemptions for capital gains and dividends (under certain conditions), introduced in 2014;
• a competitive rate of corporate income tax (16% represents one of the lowest tax rates in the EU);
• an extremely competitive flat personal income tax rate of 10% (reduced from 16% in 2018) and a 5% dividend tax (reduced from 16% in 2017);
• a large number of Double Taxation Treaties (DTTs) concluded with various countries;
• a member state of the EU, thus all EU Directives are included in the Romanian Fiscal Code. In addition, decisions of the European Court of Justice fully apply in Romania;
• even though Romania is not a member of the OECD, it has fully implemented its Transfer Pricing Guidelines and fully adhered to the Anti-BEPS plan.
It is worth mentioning that Romania participated in the First Inclusive Framework on the Anti-BEPS Plan of the OECD meeting held in Kyoto in July 2016, being represented by Gabriel Biriș, State Secretary in charge of Fiscal Legislation at the time.
There are still discussions on whether to allow Romanian companies to consolidate their corporate tax returns, and there is already a draft law in circulation. Hopefully, by year end companies which have retained at least 75% of their existing ownership will be able to consolidate, strengthening the position of Romania among other possible holding locations.
On the other hand, stability is lacking in Romania's fiscal legislation and also in the quality of the Tax Administration. First, some of the decisions made in 2017 have been amended in the beginning of 2018. For example, newly established companies are again allowed to opt for the normal profit tax regime (under certain conditions), instead of having to pay turnover tax until exceeding the threshold of EUR1 million per year. The Government has agreed that without the possibility to opt for paying corporate tax instead of the turnover tax, encouraging investment is difficult (as investors will not be able to deduct expenses made during the investment process, before starting production). Also, the deductibility of interest was increased to EUR1 million plus 30% of EBIDTA (previously EUR200,000 plus 10% of EBIDTA).
After a quieter first semester, the frenzy of new tax regulations that had been seen in 2017 restarted in the second part of 2018, with strategic sectors of the economy being severely affected.
The first to be hit were companies that have concession agreements in the Black Sea (mainly Exxon, but also Petrom), where significant resources of gas were identified by these companies during the exploration process in the past years. Just before the decisions to start exploitation of gas were made by investors, the Romanian Parliament (Law 256/17.11.2018) cancelled the stability clause passed in 1999 (no new taxes, no increase of the existing ones) and introduced a new tax – between 15% and 70% of the income (depending on the price). The decisions to start investing in the exploitation were halted.
A second hit was taken by the onshore producers of gas (especially Petrom and the state owned Romgaz). On December 29th the Government passed another Emergency Ordinance (No 114/2018) which limits the sale price of gas produced locally to RON68/MWh for a period of 3 years (with the market price being approximately RON90/MWh, and with Russian gas exceeding RON100/MWh), severely affecting the capacity of these companies to further invest in new capacities or to maintain the production of the existing ones.
EO 114/2018 not only affected the producers of gas, but also the entire electricity sector (producers, traders, distributors) who saw their contribution to the National Regulator (ANRE) increase from 0.2% to 2% of their annual turnover, possibly with retroactive effect. If this happens, an uptake of litigation is expected. The measure will most certainly trigger significant increases in the price of electricity in Romania (for both businesses and households).
There are other sectors affected, such as the telecoms and marketing sectors which cannot use daily workers anymore. Companies managing the compulsory private pension contributions (Pillar II) are also affected. Banks have also been hit. The Government introduced a tax on the financial assets of the banks (including state bonds). This “Greed Tax” applies as a sanction only if ROBOR exceeds 2% (currently this is approximately 3%) and varies between 0.4% and 2% of the total assets. It must be paid quarterly. For the first quarter of 2019, the tax will be 0.3% (1.2% annually).
The market reacted immediately and at the end of January 2019 banks are no longer buying government bonds and the Minister of Finance (who is also heading the ECOFIN as Romania holds the Presidency of the European Council) announced he is going to use the reserve funds in the Treasury, which should last for a maximum of six months.
Despite some positive numbers in terms of GDP growth, there is still friction between Government and its companies/investors. Hopefully, this will not last for long.