The recent practice in the field has shown that the expenses with intragroup services are currently one of the main topics addressed during tax audits and, at the same time, one of the main topics generating tax controversies.
Having in mind such background, the legislative process for amending Law No. 227/2015 on the Fiscal Code continues with the Draft Law amending Art. 25 para. (4) letter f) of the mentioned law, which was adopted by the Senate and is currently registered at the Chamber of Deputies for debate.
As per the general rules in the field, deductible expenses are those incurred for the purpose of carrying out the economic activity. Additionally, Art. 25 para. (4) of the Fiscal Code provides for a certain category of expenses that are not deductible.
Currently, the expenses for management, consultancy, assistance or other services provided by a person located in a country with which Romania has not concluded a legal instrument for the exchange of information are excluded from deduction and this is applicable only in the case in which the expenses are incurred as a result of transactions qualified as “artificial”.
Artificial transactions are those cross-border transactions or series of cross-border transactions which do not have an economic content and which cannot normally be used in ordinary economic practices, the essential purpose of which is to avoid taxation or to obtain tax advantages which could not otherwise be granted.
Under the proposed amendment, the expenses for management, consultancy, assistance or other similar services provided by a non-resident related entity in Romania, based on transactions qualified as artificial, would represent an offence and would be sanctioned with a fine equal to twice the value of the deducted expense. Thus, the non-deductibility of expenses is extended to services provided by a non-resident related entity and, additionally, the draft law introduces a much more severe sanction for non-compliance with the provisions.
As per the statement of reasons, the proposal for amendment is due to the fact that the text does not provide at present a comprehensive list of such situations, neither the sanction applicable in case of non-compliance by the taxpayer. This approach is strengthen also by the need to amend the national legislation in order to apply the provisions of Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market with the aim of ensuring that taxes are paid where profits and value are generated.
The need for the amendment arose also in consideration of the complexity posed by the application of the transfer pricing rules in the case of such services, unlike the transfer of goods, where market prices are more easily determined by the tax authority through the instruments provided for by the law, and by taking into account the risk of uncontrolled transfer of income to other tax jurisdictions.
By this amendment, it is expected that the use of management fees, hidden/artificial administration expenses for the artificial reduction of the corporate tax amount and its outsourcing be definitively eliminated.
What’s next? It is yet to be seen whether such proposed amendment will be adopted by the Chamber of Deputies. It is essential to remember that in order to become a law, the proposal must go through the entire legislative process.
By Roxana Bujoreanu, Senior Tax Manager, and Elena Nitu, Junior Associate, Musat & Asociatii
