Foreign investment in Romania may decrease due to the proposed tax on shifted profits, according to a warning issued by PwC.
Romania's Ministry of Finance and the National Agency for Fiscal Administration are currently influencing changes to the diverted profit tax, setting the country apart from its European counterparts, particularly Poland.
The proposed Romanian rules differ significantly from the Polish model, with fewer exemptions and a lack of mechanisms to exempt situations where affiliated entities with real and material economic activity are taxed on global income in the EU/EEA. Unlike the Polish regulations, which have provisions for exceptions based on economic substance or international norms in the field, the Romanian rules do not adequately address these aspects.
PwC, a leading consultancy firm, has expressed concerns about the proposed rules, stating that they do not take into account economic substance or international norms in the field. The firm also notes that the new tax could be a new obstacle in the path of Romania's fiscal competitiveness, already affected by recent increases in taxation.
The proposed rules also fail to adequately cover the intended purpose of preventing the transfer of profits to lower-tax jurisdictions. This is in contrast to the Polish model, which is designed to cover situations where service providers are established in lower-tax jurisdictions to transfer profits.
Moreover, the Romanian rules propose a general denial of deductibility, disregarding economic substance and international norms in the field. This is unlike the Polish "safe harbor" mechanism, which does not apply if expenses are recorded for the benefit of an EU/EEA-based, taxed on global income, affiliated entity with real and material economic activity.
The report drafted by PwC suggests that the Romanian regulations are less favorable for foreign investments compared to the Polish regulations. This is due to the fact that the Romanian regulations include contracts with local subsidiaries, which are excluded by the Polish regulations, and the Romanian regulations only allow for the deductibility of 3% of expenditures in targeted categories, while the Polish regulations allow for the deductibility of 3% of total expenditures.
The new tax on shifted profit proposed by the Romanian government is affecting the attractiveness of Romania as a destination for foreign investments. PwC has saluted the authorities' plans to terminate the minimum tax on turnover, but the firm remains concerned about the overall impact of the proposed tax changes on Romania's fiscal competitiveness.
In conclusion, the proposed changes to the diverted profit tax in Romania have raised concerns about the country's fiscal competitiveness and its attractiveness as a destination for foreign investments. The differences between the proposed Romanian rules and the Polish model, particularly in terms of exemptions, mechanisms for covering the intended purpose of preventing profit transfer, and deductibility, have been highlighted by PwC in a recent report. The firm urges the authorities to reconsider the proposed rules to ensure they are in line with economic substance and international norms.
