Taxation is changing around the world and the information exchange between states is increasingly affecting businesses. The main target is transfer pricing, but not exclusively. Tax and business practices of Romanian companies are forced to keep up with the global trend. Contexpert presents the top changes with the greatest impact. One of them, FATCA legislation is mandatory beginning with July 1, even in Romania
What means FATCA and its implications in Romania
From July 1, FATCA (Foreign Account Tax Compliance Act) will apply to financial institutions in Romania. These will be required to provide information about U.S. resident accounts. Otherwise, they risk a 30% tax on U.S. source income, whether it’s their own or obtained on behalf of the clients.
FATCA approach
Financial institutions should monitor the status of bank customers and business partners to identify revenue sources in the U.S., report them to the NAFA (ultimately to the IRS) and even tax them at source in certain situations.
Even if Romania hasn’t signed yet an agreement to implement FATCA it does not mean that the law is not mandatory. It also has other consequences. The main difficulties refer to the interpretation of the prevalence of double taxation treaties and European directives on FATCA legislation or tax credit / refund of FATCA.
FATCA is just the beginning
In line with FATCA, OECD has recently intensified its activity in the area of tax transparency. OECD aims to achieve a global exchange of information between tax authorities in real time.
Base Erosion and Profit Shifting (BEPS) is a document that targets to inhibit the transfer of profits to favorable jurisdictions. The amendments concern the consistency of direct taxation, internationally realignment charge considering the economic substance and transparency.
Transfer Pricing – Country by Country Reporting is a continuation of BEPS. It requires that transfer pricing cases should include a report on income, profits and taxes paid by each entity in the countries where they made transactions, also any intragroup payments, interests and royalties. The information will be available for tax authorities of both countries. If one country considers the taxes are not correctly paid it can automatically adjust them.
OECD issued a Reporting standard that will apply from 2017. It refers to an automatic exchange of information between tax authorities about non-residents that invest in various financial institutions and were not taxed in their country of residence.
EU follows OECD
EU issued a document concerning the double taxation treaties used to obtain benefits in inappropriate circumstances. In other words, if a beneficiary uses a transit country for a transaction taking advantage of a double taxation treaty, the treaty becomes void.
European Directive on parent companies and subsidiaries enters into force from January 1, 2015. The directive (implemented already in the Romanian Fiscal Code) introduces automatic exchange of information for certain categories of income: labor, remuneration granted to administrators, pension etc.
The NAFA is lining up
Last year, NAFA established the Tax Information Department that makes exchange of information with other countries. Romania joined both the OECD Global Forum on Transparency and Exchange of Tax Information and the FATCA (but not yet signed an agreement). Also last year, NAFA sent 3,371 requests for tax information to other Member States.
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