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Miruna Enache |
Over the last decade, one of the main scrutiny items in tax audit cases (from a corporate income tax perspective) and the reason for tax disputes has been the deductibility of services expenses. The Romanian taxpayer has to prove its compliance with the legal requirements in this respect (having written contracts signed with suppliers and documentation to support the effective provision of the services as well as their necessity for its business). However, the tax authorities have become, in recent years, increasingly active and aggressive in this respect, focusing on intra-group administration and management expenses, where the legislation disallows the deduction of stewardship costs (including costs for administration, management, control, consultancy and other similar functions).
Generally, the support documentation should be linked to the activities performed by the supplier and be relevant to the business of the beneficiary, but as the law does not specify exactly the type/volume of documentation to be available for deductibility purposes, the inherent risk of an aggressive approach of the tax authorities during a tax audit often crystallises. The non-deductibility risk increases in case similar services/functions exist in the organisation of the beneficiary or are provided to it by other suppliers, where a clear delimitation of the activities and related benefits will be required.
In case of a tax dispute, the Romanian taxpayers have to follow the difficult and uncertain path of litigation, where, as a last resort, the European Court of Human Rights (ECHR) has become increasingly active and influential. The ECHR has become more and more important in tax matters, also since its rulings are taken into account by national courts and arguably also influence tax policies of member states of the Council of Europe. Many of its decisions have strengthened the rights of European citizens in tax disputes.
From a tax perspective, article 1 of the First Protocol to the European Convention of Human Rights is the most important one, as it defines the right to property as well as the right of states to tax their citizens. According to case law of the ECHR, taxes are compatible with the Convention if they are imposed according to law, if they pursue a legitimate purpose, if they are reasonable and non-discriminatory, and if the means employed are not disproportionate to the ends involved. Whether or not, for example, the requirements of the tax auditors with respect of the documentation of the services expenses are reasonable and their actions proportionate, remains however to be demonstrated and substantiated (too often in court) in each specific case.
Miruna Enache
Ernst & Young
Website: www.ey.com/ro
