The root cause
While Romania commenced exchanges under the Standard for Automatic Exchange of Financial Account Information in Tax Matters (the AEOI Standard) in 2017, the OECD’s Peer Review of the Automatic Exchange of Financial Account Information, released in November 2022, led to the conclusion that the country’s legal framework does not fully meet the requirements of the AEOI Terms of Reference.
In this respect, Romania’s domestic legislative framework requiring reporting financial institutions to conduct due diligence and reporting procedures needed an additional alignment, particularly in relation to the scope of financial accounts and reportable accounts, as well as the due diligence procedures to identify them and the framework to enforce the requirements.
Following the conclusions of the peer review report, Romania has updated its legislative framework and implemented significant changes as regards the obligations of Romanian reporting financial institutions.
New challenges for Romanian financial institutions
In June 2022, Romania published Government Emergency Ordinance No. 102/2022 amending the Tax Procedure Code. The ordinance updates the existing AEOI legislation to transpose the OECD and European Commission recommendations regarding the implementation of the Common Reporting Standard on financial accounts. Additional amendments to the Tax Procedure Code were introduced in February 2023 through Government Ordinance No. 16/2023.
The following main legislative updates have a practical impact at the level of reporting financial institutions in Romania:
Reporting financial institutions are now obliged to maintain in electronic and/or physical format all the records and documents obtained during tax due diligence procedures and supporting documents of the efforts performed in complying with the Common Reporting Standard or Foreign Account Tax Compliance Act (FATCA) regulations for a period of 10 years from the annual reporting deadline;
The reporting and tax due diligence procedures with regard to the AEOI in terms of reportable accounts have been updated, which, in practice, require Romanian financial institutions to undergo an internal review of their procedures and update their procedures, processes and IT systems to be able to comply with the new legislative requirements; and
The National Agency for Tax Administration should perform inspections regarding compliance with the reporting and tax due diligence procedures set out in domestic legislation, and monitor undocumented accounts reported. Upon request by the tax authorities, reporting financial institutions have a 45-day deadline to provide information and documents related to the measures taken, and any evidence they relied on, for the application of tax due diligence and reporting procedures, special tax due diligence procedures, and additional reporting and tax due diligence procedures for the exchange of information relating to financial accounts, including specifically for FATCA purposes.
Moreover, in addition to the legislative amendments, the Romanian tax authorities have published on their webpages the Common Reporting Standard/FATCA Guide for Romanian Financial Institutions, along with other relevant materials and useful links to offer additional support to financial institutions in their reporting and compliance obligations related to the AEOI area.
Risks of non-compliance with the new AEOI rules
In addition to the reputational risks that reporting financial institutions have incurred with regard to potential non-compliance with the AEOI framework, the recent legislative amendments introduced significative administrative sanctions and fines:
Between €400 and 1,000 (about $427 and 1,069) per each reportable account in the event of inaccurate or delayed reporting;
Between €1,000 and 2,000 per each reportable account in the event of failure to apply the tax due diligence and reporting procedures in terms of FATCA and the Common Reporting Standard; and
Between €4,000 and 20,000 in the event of failure to keep all the documentation obtained during the tax due diligence and reporting procedures for 10 years, failure to provide the tax authorities with the requested documentation within the 45-day deadline, or non-reporting of the financial information related to the reportable accounts.
Final thoughts
Considering the strong focus of the Romanian tax authorities towards ensuring correct implementation of the AEOI Standard and the international tax transparency framework, it is expected that enhanced tax inspections will be initiated at the level of the Romanian reporting financial institutions soon.
More than that, given the significant fines (multiplied depending on the number of instances of non-compliance), it becomes crucial that reporting financial institutions apply due diligence procedures in a consistent manner and maintain with high accuracy any relevant information and documents to be able to provide them upon request to the tax authorities.
