Article also available in / Articol disponibil și în limba: Română (Romanian)
Country by Country Reporting (CbCR) in Romania, notification template and calendar
article published on November 22nd, 2017
The action plan for the prevention of base erosion and profit shifting (”BEPS”) approved in 2013 by the Organization for Economic Cooperation and Development (”OECD”) and by the group of twenty ministers of finance and governors of central banks (”G20”) brought to the attention of the public two important aspects that should be considered when fighting against profit shifting.
The first aspect considered was that tax authorities in countries all over the world did not have the necessary instruments to fight against profit shifting and taxable base erosion and that the implementation of systems and tools that must render tax information transparent should be implemented as concerns companies that are members of multinational groups.
The second aspect considered was that, even if instruments existed, a joint and uniform mechanism would still be necessary to assess risks brought by transfer pricing and other risks pointed out by BEPS as concerns the profit shifting and taxable base erosion.
As concerns instruments for fighting against price shifting and taxable base erosion and systems and tools for rendering information transparent, EU Member States had already implemented Directive 2011/16/UE of the Council providing for the exchange of information upon request in several fields and which, theoretically, would have allowed for the taking of actions in this respect.
However, as (i) the objective of Directive 2011/16/EU was rather a general one and not an objective specifically focused on preventing the profit sharing and taxable base erosion and (ii) the exchange of information was done upon request only, it did not properly operate and, therefore, an update of Directive 2011/16/EU was necessary, by means of Directive 881/2016, which brought concrete specifications as to systems and tools that actually force the information to become transparent and the automatic exchange of a pre-defined set of information in the fiscal field between European countries.
Measures provided by Directive 881/2016 resulted from action 13 from BEPS plan of OECD, taken over by many countries outside the OECD and the EU (for example by Singapore, China, etc.). Thus, we can say that all premises exist, that the exchange of information will be put in practice even at international level, regardless if certain countries are part of the OECD or the EU or not.
Moreover, OECD published a manual to help tax authorities to interpret reports for each country, CbCR (Country by Country Reporting), and, eventually, to help them focus all their resources on a vast verification of companies whose financial-fiscal indicators show a possible profit shifting risk.
Considering the above, we may say that the CbCR topic, included in the BEPS plan, reached the final implementation stage at the level of the EU and OECD Member States and at the level of some of the non-member states, as well.
Effects of transposing the EU Directive 881/2016 about the mandatory automatic exchange of tax information into the Romanian law
As the deadline imposed by the European Union for transposing the EU Directive 881 / 2016 about the mandatory automatic exchange of tax information (i.e. 4 June 2017) approaches, EU Member States transposed all changes brought to this directive into their local laws in an accelerated rhythm.
Without making important changes to the European text, through the Govenrment Emergency Ordinance 42/2017 the Romanian Government offers the premises of a new source of information that may be used during a tax inspection or during risk analysis preliminary to the commencement of tax inspections.
By interpreting the new law, one can conclude that there are many categories of companies in Romania that are part of groups whose consolidated turnover (according to the provisions of Directive 2013/34/EU of the European Parliament and of the Council from 26 June 2013) is above EUR 750 million and that will have the obligation to send a report for each country – CbCR, as follows:
- companies that must file the report for each country – CbCR -as final parent company: the only company in Romania in this situation at this moment is Dedeman SRL;
- companies from groups of Romanian origin, whose final parent companies are in other countries and that, most probably, will appoint surrogate parent companies in Romania to file the report for each country – CbCR: e.g. companies in Tinmar, RCS&RDS și A&D Pharma groups;
- companies that have no other branch in any of the countries in which the law on the reporting for each country – CbCR – is implemented or whose final parent companies / companies appointed to file the report for each country – CbCR – are resident in one of the countries that: (i) are not part of the European Union (i.e. so that the automatic exchange of information be made based upon Directive 881/2016 transposed into local laws). It is important to take into consideration that fact that Romania has not signed the multilateral agreement on the exchange of information yet as concerns the reporting for each country – CbCR and, therefore, will not be able to make an automatic exchange of information with most jurisdictions outside the European Union even if they signed a multilateral agreement, for the example with the United States of America, Turkey, Switzerland, China, Canada, India, Israel, Japan, Russia, Singapore, United Arab Emirates, Kuwait, Lebanon, Panama, British Virgin Islands, etc., (ii) did not sign a bilateral agreement on the automatic exchange of information with Romania; or (iii) did not conclude a double taxation convention with Romania allowing the free and automatic exchange of personal information.
- companies in systemic failure: for example when Romanian authorities do not receive the report for each country – CbCR – from jurisdictions where groups filed this report either due to the suspension of the automatic exchange of information, or due to the fact that only exchanges of information with Governments that are ISO/IEC 27000 certified as concerns the security of information was requested in these countries were reports were filed, or because such jurisdictions simply refuse to file such reports to Romanian authorities;
- other companies appointed by final parent companies as being surrogate parent companies or other appointed reporting entities.
It is also important to know that, even if there are few companies in Romania that have the obligation to file such report for each country – CbCR, each company part of a multinational group of companies with a consolidated turnover above EUR 750 million will:
- have the obligation to inform Romanian tax authorities, as soon as possible, from the date of publication in the Official Gazette of the Order of NAFA President as concerns the approval of the model and content of the form “Report for each country” i.e. 14 November 2017. This notification must be sent both for 2016 financial year and for 2017 financial year. Update: the notification model and filling in instructions were published on 14 November 2017 through the Order of NAFA President no. 3049/2017.
- must send to the final parent company, by 31.12.2017, all information about the tax year starting after 1 January 2016 regarding a series of financial indicators. Even if Romanian law offers an information filling in and presentation model, it is recommended that data be provided according to the model received at group level. Update: the report model for each country (CdCR) and instructions for the filling in thereof were published on 14 November 2017 through the Order of NAFA President no. 3049/2017.
Update: The notification model about the quality of the constitutive entity and the report model for each country (CbCR) in xml format were published on December 11th, 2017 and were subsequently successively updated. They can be accessed below:
R405 – Notification on the quality of the constitutive entity of the multinational group of companies, respectively on the identity and tax residence of the reporting entity of the group of multinational companies
It is interesting to note that the bill of law indirectly provides that a group of companies exceeding the turnover of EUR 750 million, but that does not have branches in several jurisdictions, must not prepare and submit reports for each country – CbCR (this category also includes, for example, Hidroelectrica SA and Romgaz SA, which are state-owned companies).
The text of the Government Emergency Ordinance 42/2017 is quite franc as concerns the purpose of collecting such information, namely the carrying out of risk analysis on transfer pricing or other fiscal aspects.
Those that have undergone tax inspections on the transfer pricing topic must have probably seen by now that some of the adjustments made by tax authorities were often made without considering the key factors, such as functional profile, economic circumstances, business strategy or negative impact of extraordinary events.
Even if the bill of law specifically provides that no transfer pricing adjustments can be made strictly based upon simplistic information presented in these reports for each country – CbCR, we are expecting a major intensification of the aggressiveness of tax authorities as concerns branches of multinational groups that record losses or fluctuating results in Romania. All such inspection or risk analysis actions will be carried out having as background the extensive use of information in the reports for each country – CbCR.
Moreover, it is expected, in the context of more and more obvious needs to supplement budgetary resources, that Romanian tax authorities take advantage from their option to apply fines between lei 30,000 and lei 100,000 for not filing or delayed filing of reports for each country – CbCR (based upon art. 336, paragraph 1, letters u and v and respectively art. 336, paragraph 2, letters l and m from Law no. 207/2015 on the Tax procedure code) and fines between lei 500 and lei 1,000 for small taxpayers and respectively between lei 1,000 and lei 5,000 for medium and large taxpayers for not filing or delayed filing as concerns the reporting entity (based upon art. 336, paragraph 1, letters a or b and art. 336, paragraph 2, letter d from Law no. 207/2015 on Tax procedure code).
To make the issue international, after the outbreak of scandals in Panama Papers, LuxLeaks and Paradise Papers, the passing to the next level of tax transparency is more and more obvious, namely obliging multinational groups to publish such reports for each country – CbCR. The first step in this respect was already made on 12 June 2017 when the European Parliament approved the proposal that reports for each country – CbCR – be accessible to the public.
As part of this scenario, once with the exposure, the public pressure of different communities on multinational groups will importantly rise. If until now the spectre of risks was dominated by the financial risk, from now on it might be accompanied by the reputational risk, whose effects are hardly quantifiable.
It is already becoming obvious that during the next period many measures will be implemented in an accelerated manner, leading to total fiscal transparency and in the close future we foresee a significant decrease of the current reporting threshold by the consolidated turnover of EUR 750 million.
Romania, as EU member and potential OECD member, will most certainly be in the first line of the political war declared against moving profits and base erosion.
Questions to which everybody expect answers are (i) if all such measures will eventually lead to hardening the competition between multinational and local groups, (ii) if the latter will be advantaged and last (iii) if all such measures will result into major disputes between Governments of countries with low tax rates and those of countries with high tax rates.