Several countries are making major changes to their tax systems: the US tax reform is one of the biggest, but one-third of the 48 countries tracked in the EY annual Tax Policy & Controversy Outlook are undergoing substantial tax reform as well. The OECD's work on BEPS, as well as the more recent project addressing digital services has made a marked change to the international tax landscape.
Based on studies made public by ANIS (Romanian Employers' Association of the Software and Services Industry) the local IT market is still experiencing a slow evolution: although its export experienced double-digit growth and a value of more than €4.5 billion ($4.9 billion) in 2018, the local demand is not growing constantly. According to ANIS, Romania is the second-largest supplier of software and services in the region, following Poland, and is in the top 10 of the European countries. The paradox is that being one of the main exporters of technology in Europe, Romania is still one of the European countries where digitalisation (especially at the level of the public sector) is low.
Digitalisation has been in the news a lot in the first part of this year, together with its impact on the taxation systems of European countries, since the French digital services tax (DST) was introduced. The reactions to this tax reform covered a large range, from the challenges launched by US President Donald Trump (for example, retaliatory actions on certain French US imports, including wine), to the G7 July 2019 statement that refers to their commitment to reach in 2020 an "agreement to simplify regulatory barriers and modernise international taxation within the framework of the OECD".
The OECD/G20 Inclusive Framework project is to address the tax challenges of the digitalisation of the economy through revisions to existing profit allocation and nexus rules (Pillar 1) and development of new global minimum tax rules (Pillar 2). It is envisaged that the new rules to develop should be administrable and simple and that mandatory arbitration must be a component of this global solution.
Historically, the Romanian authorities have not ignored the potential of the IT sector, including the fact that since 2004 a salary income tax exemption has existed for employees who render IT activities linked to computer software creation – a tax incentive meant to help the IT sector grow. From 2016, the area of application of similar tax incentives was increased, to cover research and development (R&D) activity. We are now in the situation of a mature market, with some paradoxes still to be addressed, for which the tax authorities have some changes in mind.
The Romanian tax legislation is again facing a set of changes this year, and one cannot help wondering if any of the European or global trends will materialise as well, if the Romanian state is going to show more interest in the taxation of digital services, now that the IT sector has reached a certain degree of maturity.
Looking through the proposed amendments to the Romanian Fiscal Code, we identify certain preliminary actions taken in this respect, namely the attempt to introduce specific criteria for confirming Romania as a place of effective management for a business. This initiative should be considered together with the continuing relatively low corporate tax rate (16% in Romania, as compared with the 21.3% average tax rate in the EU countries, and the 23.3% average tax rate for the countries of the Euro area) and the large network of double tax treaties concluded so far by the country. Thus, far from being a disincentive, this new set of rules could be viewed as the part of the global tax reform, where the businesses have an acute need to take into consideration both the location where profit/value is created and the chain for making good use of it. The complexities of the digital era are not yet captured in the legislative initiative of the Romanian authorities, but, following the European trends, we expect this aspect to be soon on the official agenda. For sure this is a topic that should be closely monitored in the coming months.