Articles

NEW FISCAL RULES FOR 2005

22 December 2004 (Invest Romania)

Amongst other wishes and expectations accompanying the start of every new year, 2005 brings us the hope for a better year, triggered by the application since January 1st 2005 of newly amended fiscal provisions. Although, in the light of recent parliamentary and presidential elections, additional changes of the taxation system may be predicted under certain circumstances, we will succinctly refer in this context only to existing improvements, such as introduced by the Government Ordinance no. 83/2004, Law no. 494/2004, Government Urgency Ordinance no. 123/2004, and also by the Government Decision no. 1840/2004 concerning the amendment of the methodological norms for the implementation of the Fiscal Code.

Thus, as regards the profit tax, for the commercial companies, the beginning of the new year 2005 shall mean the decrease of the tax from 25% to 19%. The cut may be viewed as part of the general trend to reduce the tax on companies in Eastern and Central Europe, intended not only to stimulate the attraction of new investors from states with higher fiscal burdens, but also to improve internal collection of budgetary revenues.

The diminished quota of profit tax shall not apply to profit gained by sales-transfers of real estates and participations, subject to a special 10%-quota, applicable whether or not the profit had been achieved after December 31st 2003.

In free trade zones, investors who have injected over $ 1 million before July 1st 2002 shall benefit of the tax profit exemption only until December 31st 2006. Moreover, in case of investors whose shareholding is changed, the incentives previously granted shall become inapplicable.

As concerns the goods subject to excise duty, besides the cut of excises applied to beer, sparkling wines and coffee, it shall be increased the excise for cigarettes, following the implementation of the acquis communautaire. Increased excise duties should apply also to automotives under leasing agreements. As effect of the Norms for the application of the Fiscal Code, the taxation base in this respect shall be the whole (accounting) value, instead of the residual value, but new clarifications on this issue are expected from the Romanian Ministry of Public Finances.

However, fiscal policy changes refer also to transactions with inactive taxpayers, the new enactment stipulating that the president of the National Agency for Fiscal Administration may issue orders to define certain taxpayers as inactive. As a consequence thereof, the fiscal authorities shall be entitled to ignore for taxation purposes transactions concluded between inactive taxpayers. As well, the authorities concerned may ignore the transactions concluded by other taxpayers with inactive taxpayers and may regard as nondeductible all expenses originated on the basis of documents issued by inactive taxpayers.

Fiscal encouragement of the company capitalization, resolutely required by the business entities, is somehow supported as well by the new enactments. By the amended legal provisions it has been decided that taxpayers’ expenses covering interest rates shall be fully deductible in case that the debt to equity ratio is less or equal to three (with the debt to equity ratio being defined as ratio between borrowed capital with reimbursement period over one year and own capital).

Following severe criticism of excessive taxation applicable to natural persons’ revenues and concrete proposals relating to the implementation of sole taxation quota, the authorities have decided to use the compromise solution to cut the taxation thresholds and brackets. Thus, starting with January 1st 2005 shall be applicable only 3 thresholds (instead of 5), though having comparable values to the former thresholds, respectively: 14% for yearly revenues of maximum ROL 32.400.000 (approx. EURO 800), 26% for the revenues exceeding this amount and 38% for revenues over ROL 174.000.000 (approx. EURO 4.350).

In the light of the foregoing, it may be concluded that such legislative changes entail a certain reduction of the fiscal burden, which should originate positive consequences for taxpayers. However, new amendments should be expected during the next period, in consideration of Romania’s accession to EU and its inherent need to harmonize the Romanian fiscal system with European requirements.