Minimum tax on turnover - a new tax proposed by the Romanian Government

During the last month, several fiscal budgetary measures designed to ensure long term financial sustainability for Romania have circulated in various economic forums, shaking the business environment as well as private citizens working in specific economic sectors.

On September 19th, the Romanian authorities published the draft legislation, however the final legislation is yet to be approved. Currently, the draft legislation is under review by the Constitutional Court of Romania, after several parties in the Romanian parliament challenged its constitutionality.

One of the proposals that would have the most impact on Romanian businesses is the introduction of a minimum tax on turnover. This tax is envisaged to be introduced from January 1 2024 and would target taxpayers who recorded during the previous year a turnover higher than €50 million, except for specific categories such as NGOs and financial institutions for which a separate tax on turnover is proposed to be introduced.

In short, taxpayers who record a corporate income tax lower than the minimum tax on turnover would be obliged to pay the corporate income tax at the level of the minimum tax on turnover. The minimum tax on turnover is to be computed as 1% of the total revenue adjusted for tax purposes.

Considering the 16% Romanian corporate income tax rate, this new tax would primarily impact companies with a profitability ratio below 7% (assuming a fiscal profit equal to the accounting profit), including companies in a tax loss position (tax losses being able to be used only by offsetting future profits exceeding the level of the minimum tax).

Notably, the minimum tax on turnover is not a new concept if looking at the broader picture of the fiscal framework around the EU. To enhance financial stability and avoid potential tax evasion associated with aggressive tax practices, several EU member states have already introduced similar concepts in their legislation.

For example, in Hungary, for certain taxpayers, the tax legislation provides for a minimum corporate tax base of 2% of the total revenues (adjusted for tax purposes). Taxpayers can either choose to pay corporate income tax based on the minimum tax base or include a statement in the CIT return providing additional financial details, based on which the tax authorities can decide whether to initiate a tax audit or not.

Spain has also introduced a minimum taxation rule for companies with a net turnover of at least €20 million as well as for companies taxed under the special consolidation regime, regardless of turnover. The so called “minimum tax rule” provides for several tax rates and computation rules depending on the category of taxpayers, however the base rule refers to a 15% on the taxable income adjusted for tax purposes.

More recently, Poland has introduced a new tax obligation for taxpayers who have declared tax losses or negligible income, that will come into effect starting January 1 2024. The Polish minimum income tax is 10%, which is applicable to a tax base that is to be determined under two alternative mechanisms (depending on operational revenues and specific related party transactions).

Unlike regulations in other jurisdictions (including Romania), the Polish legislation considers the specifics of the businesses. It provides exemptions for entities whose profitability in any of the three prior years was no less than 2%, or for taxpayers who recorded over a 30% decrease in revenues, among others.

Considering the significant impact that such legislative measures would have if passed, Romanian taxpayers should start calculating the additional cost that the minimum tax on turnover would bring to their business.

It is expected that in particular cases, for example, taxpayers applying with a business model of high turnover but a low profitability ratio (e.g., group entities operating under a cost+ model, industries with significant investment expenses, etc.), the new tax on turnover would represent such a burdensome cost that it could impact the viability of the business itself. The impact on tax consolidation is another interesting development, as will be the overlap with the new legislation (also in draft phase) for implementing the BEPS 2.0 minimum taxation.

To this end, it is highly recommended that taxpayers assess the impact the minimum tax on turnover would have if implemented as soon as possible, to have time to prepare if the tax is implemented and applied from January 1 2024 as expected.

Moreover, for businesses operating in other jurisdictions where similar taxes are already implemented, consultation with their related parties from such jurisdictions on how the business was impacted may clarify the ramifications of implementing the minimum tax on turnover and how to deal with or mitigate the consequences.