Recently, the Romanian tax authorities have been scrutinising taxpayers' situations very closely. Also, it is worth mentioning that currently, the tax authorities are mainly focused on the large taxpayers, as well as on certain industry areas (such as oil & gas and financial services).
The tax inspections reveal various issues, findings and non-compliances identified by the tax authorities. Of course, there are some general findings too, which are applicable irrespective of the industry field in which the taxpayers operate and irrespective of the size of the taxpayer. One of these is concerning the deductibility of service expenses. Considering the wide applicability of this issue, in the following I will focus on it in more detail.
Starting 2016, a new tax code has been enacted in Romania, bringing certain legislative changes, inter alia a new deductibility rule applicable for corporate income tax purposes. Until 2016, expenses qualified as deductible if incurred with a view to earning taxable revenues, whereas under the new tax code the deductibility of expenses is allowed if these are incurred for business purposes.
The Romanian tax legislation in force until December 31 2015 also required specific conditions for claiming tax deductibility of expenses incurred with management, consultancy, assistance or other supplies of services for tax purposes, such as:
- the services to be supplied based on an agreement (or other contractual form provided by the law) concluded between the parties;
- the beneficiary to prove that the respective services have been effectively rendered, through back-up documentation such as: progress reports, hand-over reports, timesheets, feasibility studies or any other relevant materials;
- the beneficiary to be able to present evidence regarding the necessity of such services, given the nature of its activities.
Although the Romanian tax legislation in force from January 1 2016 does not mention specific deductibility rules for service expenses anymore, we expect that the tax authorities will continue to request such documents in order to assess compliance with the current legislative provisions – i.e. that services were incurred in relation to the taxpayer's economic activity.
Therefore, this will continue to be a sensitive aspect in tax inspections, considering the subjective nature of the assessment of what constitutes sufficient documentation and the lack of clear guidance in the tax law.
Based on the past experience, this issue was generating high amounts of additional tax liabilities imposed by the authorities as a result of tax inspections. This is why it is recommended that taxpayers have a clear internal policy as regards how to document service expenses and in how much detail. Also, taxpayers should obtain from their suppliers and have available detailed/adequate justifying documentation which can be used to attest the effective rendering of services and their business purpose.
The trend of tax inspections will likely continue during the upcoming period. It can be expected that in the near future the tax authorities will maintain a focus on industry specifics (being oriented on, for example, retail, automotive, oil and gas and financial services) and will likely continue having an inflexible and sometimes aggressive approach. In addition to this, it is expected that the authorities' inspections will frequently exceed the tax area, reaching the penal side of the matters (for instance, in the most recent period this happened in more than 50% of the total number of assessments).
This is why taxes will definitely remain a hot spot for the Romanian business environment.
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