In the summer of 2013, the Organisation for Economic Co-operation and Development (OECD) released an action plan called „Base Erosion and Tax Shifting (BEPS)„, which aimed to reduce the tendency of multinational corporations to shift profits to low-tax jurisdictions. The plan outlined the legislative changes to be introduced in three directions: international direct taxation consistency, tax realignment (considering the economic substance) and transparency – meaning legal clarity and predictability. BEPS measures contained in the report will change the way business is to be conducted, moving forward on a global scale, as well as the business environment and tax related corporate best practices in Romania.
At the beginning of 2014, OECD issued a new document entitled „Transfer Pricing – Country by Country Reporting„, as outlined in paragraph 13 of the BEPS Action Plan. In this document, it is set forth that transfer pricing files must contain a report on income, profits and taxes paid by each entity in the countries between which there have been transactions among related parties and also any payments for services, interests and royalties between associated companies.
So information on the revenues obtained in a certain country by an intra-group transaction carried out by a resident company in another jurisdiction and the way they were taxed, will be transparent to the tax authorities of the two respective countries. This means that a country can adjust the taxes on the revenues received from a resident if the initially paid amount it is not deemed correct.
The business environment responded to this initiative by sending OECD more than 1,300 pages of comments regarding the proposed changes to transfer pricing file and reporting system.
Furthermore, in order to increase transparency at an international level, the OECD issued in February 2014 a document entitled „Reporting and Due Diligence Standard” with the purpose of implementing an automated system for the information exchange between tax authorities.
The strong trend of tax declassification with a direct impact on financial institutions is also maintained through FATCA (Foreign Account Tax Compliance Act), which targets income obtained by non-residents of one country that have investments in various financial institutions but are not taxed in their country of residence. Hopefully, this system will be implemented by 2017.
External pressure with respect to banking secrecy has increased since June 2011 when Switzerland began negotiations with Germany and UK on assets and capital gains taxation. Currently, Switzerland has begun to adopt the White Money Strategy for the prevention of money laundering while increasing transparency on income obtained by non-resident clients of Swiss banks, and monitoring tax obligations fulfillment in their country of residence.
Another document signed in London on March 17th, 2014, between the UK and Germany, entitled „A Protocol to the Double Taxation Convention„, which addressed the use of double taxation treaties to obtain undue benefits. Freely translated, the document puts forward the amendment of the double taxation treaties by the introduction of a clause limiting the benefits. The treaty does not apply to those recipients of income that are not the beneficial owners thereof and only benefit of the double taxation treaty in their international transactions. It seems that Germany already considered limiting the deductibility of expenses paid to companies that do not have economic substance or economic activity and also the deductibility of expenses if the same are not taxed as income in another State.
The aforementioned measures shall apply on a global scale, but the EU initiated similar actions at a regional level, as well. European Directives with respect to parent companies and subsidiaries shall be changed by introducing anti-abuse rules for artificial transactions. On January 1st, 2015, an EU Directive (which has already been transposed into Romanian legislation) entered into force setting forth the information exchange regarding certain categories of income such as income from employment, remuneration granted to directors, pensions, income from immovable property acquired by individuals since 2014. Thus, information about these categories of income will be automatically transmitted to the tax authorities irrespective of the EU State where the same are obtained.
To this end, a new obligation was introduced for the income payers that now, have to file a statement reflecting the income paid to each beneficiary that is resident in another member State of the European Union until the last day of February, for the previous year. In addition, taxpayers that are residents in other EU Member States and obtain income from real estate located in Romania are required to submit a Statement on income until May 25th of the current year, for the previous year.
All the foregoing measures are still open for public debate, many of them not being perceived well within the business environment because they introduce rules which are difficult to be enforced. It is clear, however, that the way taxation rules work globally will fundamentally change in the near future if at least some of these measures are to be adopted.
It is time to start preparing for these changes in international tax environment and appraise the impact it may have not only for local companies but also for Romania’s budget revenues.