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Cancelled taxes and social security may lead to changes

Angela Rosca 25 Aug 2015

On 20 July 2015 the Romanian Parliament approved & published a law that cancels certain tax & related social security liabilities related to fiscal periods up to 1 July 2015 

The intent of this measure is to remove inequities arising from the practical application of the Fiscal Code and secondary legislation. The law provided for an unclear definition of dependent vs. independent activities undertaken by individuals since 2010 to date and the recent law has eliminated the risk of costly litigation for both taxpayers and tax authorities. Furthermore, the unclear old definition was eliminated and a new set of criteria for an activity to qualify as independent has been introduced in the Fiscal Code as of 10 July 2015.

The so-called “amnesty” concerns mainly self-employed individuals for whom the fiscal authorities have reclassified their activities as if they were under an employment relationship with the company paying their remuneration.

The law cancels the main tax liabilities arising as a result of the reclassification/reassessment of an activity as a dependent one, and validates that no other similar reclassifications are to be made for activities undertaken in periods prior to 1 July 2015.

Inter-alia, the law envisages freelancers (the so-called “PFA”) and liberal professions (the so-called “PFI”, such as pharmacists, doctors, tax consultants, architects, auditors, lawyers, notaries and other liberal professionals), as well as the activity of individuals engaged in intellectual property activities. The recent large-scale fiscal audits that led to these liabilities have investigated whether the individuals carried out an in substance independent activities or whether they were acting rather in a dependent manner, being engaged in a de facto employment relationship. As a result, revenues obtained by the above mentioned individuals had been reclassified as salary income and the paying companies had been urged, retroactively, to pay the difference in social security contributions, as well as related late payment interest and penalties, triggering material amounts and affecting several industries.

The four cumulative criteria for defining a dependent activity, in force until 10 July 2015, have been eliminated and new rules are implemented instead, defining independent activities based on a set of four out of seven such criteria.  The practical assessment of the new set of criteria shall be further regulated by means of a Special Order to be issued by the tax authorities, as to determine the method of computation of taxes and social securities in case of future reclassification of such activities.

According to the legislator, the proposed measures are likely to correct some inequities of the past and remove future interpretation. However, the practical implementation and future practicalities of tax assessments on this matter remain uncertain.

Amendment to the Fiscal Procedure Code

With respect to the Fiscal Procedure Code in force at the moment, the main amendments refer to:

• defining outstanding tax liabilities, a concept frequently used in administrative procedures for which a clear definition did not exist until now
• new provisions brought for debtors undergoing insolvency procedures, for whom it will be possible to compensate the VAT amounts approved for reimbursement with their tax liabilities
• establishment of garnishment for certain, liquid and due amounts that the debtor is entitled to receive from public authorities or institutions, in case of enforcement procedure
• completion of the list of guarantees with the warranty insurance policy issued by an insurance company
• suspension of enforcement, in case of submission of a letter of guarantee / warranty insurance policy
• taxpayer’s right to choose which frozen bank account to keep the garnishment and to lift it for the accounts that exceed the owed tax liabilities; a 3 days term is introduced for the debtor’s banks to pay the frozen amounts in the account specified by the enforcement body

Commencing from 23 July 2015, the requirement of using stamps has been eliminated for documents filed by individuals, private law legal entities and entities without legal personality with public institutions or authorities or other written records issued between the above mentioned persons. However, public law legal entities still have the obligation to stamp the documents they issue.

Taxand's Take

• The recent changes brought to the legislation regarding reclassification of independent activities, together with the so-called “amnesty” law envisaging past transactions until 1 July 2015 have created the need for reconsideration by both multinationals and local companies of, with certain industries being more affected than others, however impacting the whole business environment.
• The recent amendments to the Fiscal Procedure Code are meant to ease the administration procedures of the taxpayers undergoing an enforcement, garnishment or insolvency procedure, from the authority’s point of view.
• Separately, a notable progress, as to lessen the bureaucracy, has been made with the removing of use of stamps in any documents filed with public authorities or between private law entities / individuals.

The changes to legislation discussed in this article will affect corporations by requiring them to consider their current employment and collaboration with self-employed individuals; by easing the administration of taxpayers undergoing insolvency and by lessening the bureaucracy associated with filed legal documents.

Article tags

International Tax | Romania