(Emergency ordinance No. 125 / 2011 amending Law 571/2003 on the Fiscal Code, published in Official Gazette No. 938 / 30 December 2011)

The Emergency ordinance enters into force from 1 January 2012 with certain exceptions.

The main amendments to the Fiscal Code include the following:

Definitions

Fiscal value

New provisions have been introduced regarding the determination of the fiscal value of assets and liabilities by the taxpayers (credit institutions) that apply the International Financial Reporting Standards (IFRS) for accounting purposes.

Profits tax

Fiscal rules for taxpayers that apply the IFRS accounting regulations

A new Article has been introduced regarding tax rules that have to be taken into consideration by taxpayers applying IFRS accounting regulations when determining profits tax.

These new rules relate inter-alia to the fiscal treatment of amounts recorded in retained earnings from specific provisions or from the update with inflation rate or from other adjustments, further to the implementation of IFRS accounting regulations.

Regarding differences between the value of the specific provisions recorded on 31 December 2011 and the depreciation adjustments recorded on 1 January 2012 according to IFRS, the differences are assimilated, as the case may be, to income or expenses having a specific tax treatment.

By exception, such tax adjustments in 2012, will not be considered for computing advance tax payments due by credit institutions in the future.

Taxable income

The favorable differences resulted from the evaluation of participation titles and of bonds issued on a long-term are no longer mentioned as non-taxable income for profits tax computation purposes.

Income from cancellation of the reserve recorded upon the contribution in kind to the capital of other legal entities represents non-taxable income.

Deferred profits tax and income representing a change in the fair value of real estate investments recorded by the taxpayers applying IFRS are non-taxable.

Deduction of expenses

The expenses resulted from the unfavorable differences in value of the participation titles or long-term bonds are no longer mentioned as non-deductible expenses for profits tax computation purposes.

Starting 1 January 2012, 50% of fuel costs of vehicles used exclusively for passenger transport (under certain conditions and exceptions) are tax deductible expenses.

Fiscal depreciation

The expenses representing the fiscal value remained un-depreciated of the replaced components for depreciable fixed assets/intangible assets are considered as deductible expenses. The fiscal value of the fixed assets is adjusted with the fair value of the replaced new components.

Other aspects

According to the newly introduced provisions, the legal entities which are dissolved with liquidation during the fiscal year are required to submit the annual tax statements and pay the profits tax by the date of submission of the financial statements.

Income tax

Income of individuals from the sale of waste (e.g., paper, glass, metal, etc.) through specialized waste collection units, for dismantling purposes, under national programs conditions, are assessed as non-taxable income.

A 50% threshold is introduced for individual freelancers for the deduction of expenses representing fuel for motor vehicles used exclusively for transporting people under the conditions set by the Fiscal Code.

Taxpayers who carry out freelance activities for which net income is determined based on income quotas are required to fill in only the section on receivables, as per applicable accounting rules, in the “General ledger for receivables and payments”. If their gross income exceeds EUR 100,000 in the last fiscal year, they are obliged to determine the annual net income in real system, starting with the next fiscal year.

The deadline for the declaration of the estimated income / income quota for the above taxpayers is 31 January inclusively.

It is also assessed as income from disposal of property usage, the income derived by owners from rental of rooms located in their own homes, with a capacity of tourist accommodation ranging from 1 to 5 rooms inclusively. The income tax is determined based on annual income quotas, established as per the provisions of the Fiscal Code.

Income from renting of rooms to tourists in homes with an accommodation capacity of more than 5 rooms is assessed as income from independent activities, and subject to tax based on income quotas or real system.

In addition, rules have been introduced for determining the net annual income of taxpayers deriving such income during the fiscal year if the number of rooms rented exceeds 5.

VAT

Special limitations of the deduction right 

Starting 1 January 2012, the deductibility of input VAT for purchase of vehicles exclusively used for passenger transport (under certain conditions and exceptions) and the purchase of fuel for such vehicles is limited to 50%.

Adjustments of input VAT related to capital goods

New clarifications have been introduced regarding capital goods for which deductible VAT can be adjusted:

• tangible fixed assets that are fiscally depreciated for a period of less than 5 years are not considered capital goods (e.g. certain types of road vehicles); and
• tangible fixed assets that are subject to lease contracts are deemed as capital goods at the level of the lessor / financer if the minimum limit of the normal period of use is equal to or more than 5 years.

The person liable for the payment of VAT

Under the new provisions for supply of goods / services by a taxable person that is not established or registered for VAT purposes in Romania, the person liable for the payment of VAT through the reverse-charge mechanism is the beneficiary that is VAT registered in Romania. Previously, the application of the reverse-charge mechanism by the beneficiary was contingent on its registration through a local fiscal representative.

Special exemption regime for small undertakings

Taxable persons registered for VAT purposes in Romania that did not exceed the EUR 35,000 threshold during the previous calendar year may opt for deregistration for VAT purposes between the 1st and 10th of each month in order to apply the special exemption regime, under the condition that they do not exceed the exemption threshold for the current year. The previous deadline applicable for such request was 20 January of the following year.

As an exception, taxable persons that request deregistration for VAT purposes during 2012 do not have the obligation to carry out input VAT adjustments for goods / services acquired up to 30 September 2011.

Provisions regarding the registration/cancellation of registration for VAT purposes

Registration for VAT purposes

Taxable persons not established or registered for VAT purposes in Romania may apply for VAT registration if they carry out imports of goods in Romania or certain VAT exempted operations without the right to deduct.

Cancellation ex officio of the registration for VAT purposes

Under the new provisions, tax authorities will cancel the registration for VAT purposes ex officio of a person in the following cases also:

• crimes committed by the associates / administrators of the taxable person or by the taxable person itself, mentioned in the tax record;
• failure to submit VAT returns within a semester;
• if no purchases and supplies of goods / services were declared within 6 consecutive months.

However, based on certain documents, such a taxable person may apply for VAT registration from the date of termination of the situation that led to the cancellation of the VAT registration.

De-registration from the Registry of Intra-Community Operators

Under the new provisions, the tax authorities will de-register ex officio from the Registry of Intra-Community Operators certain entities, e.g. taxable persons and non-taxable legal entities whose VAT ID number has been cancelled ex officio and those that did not carry out any intra-community operations in the year following the year of registration.

Special provisions

Taxpayers whose registration for VAT purposes has been cancelled ex officio by the Romanian tax authorities but carry on business activities thereafter, are not allowed to deduct input VAT for purchases during such period but are liable to pay output VAT.

Beneficiaries who purchase goods / services from taxpayers whose VAT registration was cancelled ex officio by the Romanian tax authorities are not allowed to deduct input VAT on such purchases (except for those made under the forced execution procedure).

Simplification measures

Clarifications were introduced for supply of waste, scrap, residues and secondary raw materials resulting from their processing for which the simplification measures regarding payment of VAT are applicable.

Excise duties

Deadline for excise duty payment

Under the new provisions, starting 1 April 2012, the deadline for payment of excise duty for registered consignees is the working day following the day when the excise duty becomes exigible.

Provisions on excise duty for coffee

Appendix No. 2 was introduced to establish the level of excise duty for 2012 for green coffee, roasted coffee, including coffee with substitutes and soluble coffee, at the same level as for 2011.

Provisions on excise duty for diesel

Excise duty for diesel fuel will be EUR 374.00/ton, or EUR 316.03/1,000 litres (previous level: EUR 358.00/ton, or EUR 302.51/1,000 litres).

Building tax

Taxable value of buildings belonging to credit institutions that apply IFRS accounting regulations and choose as subsequent evaluation method the cost model, is the value resulting from the revaluation report issued by an authorized evaluator and filed with the competent authorities.

Social contributions

Title IX2 of the Fiscal Code – “Mandatory social contributions” – has been restructured and divided in three chapters as follows:

Chapter I: “Mandatory social contributions for individual earning salary income, income assimilated to salary, income from pension, as well as persons under state protection or custody”

The following income categories are subject to mandatory social contributions:

Managerial wages based on a management contract as per the law;

Amounts received by members of censor committee or audit committee, as well as amounts received for participation in other committees, commissions or similar bodies;

Amounts representing employees’ participation to company’s profits;

Amounts representing participation to company’s profits for managers with a management contract;

Various health insurance benefits or temporary disability benefits following an accident at work, which are borne either by the employer, the Unique National Fund for Health Insurance or by the National Insurance Fund for Labour Accidents and Professional Diseases;

Compensation paid by the employer under the collective bargaining agreement or the individual labor contract.

Exceptions:

Travel and accommodation expenses, as well as delegation / secondment allowances to the extent of 2.5 times such compensation paid to public sector employees, and also the amount exceeding this limit are not subject to social contributions if the employer pays profits tax or income tax;

The Article exempting social contributions on certain benefits in kind granted to employees has been amended. Consequently, such benefits are now subject to social security contributions.

Chapter II: “Mandatory social contributions for persons receiving income from independent activities, agricultural activities, and associations without legal personality”

Among others, the following categories of taxpayers are contributors to:

(i) public pension system, and

(ii) public health insurance system,

based on the Fiscal Code and not based on the special legislation:

Individuals authorized to carry out freelance activities;

Individuals receiving income from liberal professions;

Individuals receiving income from intellectual property rights, for which income tax is determined based on single entry accounting;

Individuals receiving income from activities mentioned in Art. 52 para 1 of the Fiscal Code for which income tax is withheld at source, as well as from associations without legal personality, etc.

Regarding pension contributions, the former minimum and maximum calculation ceilings provided for individuals registered as freelancers (“PFA”) and individuals receiving income from liberal professions remain unchanged.

The chapter also includes special provisions for the computation, filing and payment of social contributions by each of the contributor categories mentioned above.

Chapter III: “Health insurance contributions for individuals receiving other types of income, as well as individuals without any income”

The criteria for charging health fund contributions on other types of income, as well as the procedure for reporting and payment, have been provided.

Provisions of Chapters II and III are applicable as of 1 July 2012.

Amendments of other normative acts

As of 1 July 2012, Article III of EGO 58/2010 regarding the social security contributions due for income from professional activities will be repealed;

As of 1 July 2012, the administration of mandatory social contributions due from individuals covered by Chapters II and III above will be transferred to the National Agency for Fiscal Administration;

As of 1 July 2012, social security contributions due from individuals covered by Chapters II and III above will be paid to the State Treasury of the tax administrations to which the respective taxpayers belong.

By Venkatesh Srinivasan, Partner – Head of Tax and Legal, Ernst & Young Romania

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