Article also available in / Articol disponibil și în limba: Română (Romanian)
11 situations which may lead to the initiation of a tax audit in Romania
article published on 22 September 2020
Starting with the first half of 2020, a new risk analysis department has been set-up at the level of Romanian Tax Authorities. This new department is already operational and is analysing the taxpayers’ behaviour and based on these analyses may take the decision of initiating a tax audit.
Although the exact criteria applied by the Romanian Tax Authorities in determining the tax risk rating have not been made public, 11 criteria associated to the transfer pricing area have been identified by the experts from ATIPIC Transfer Pricing Solutions.
These criteria could trigger the initiation of a corporate income tax audit by the Romanian Tax Authorities.
The 11 criteria listed here are not the only ones that can lead to the initiation of a tax audit, multiple other criteria could also be included. However, it is essential for a company to be aware of, to prevent or to correct, if the case, the main risk factors that can make it vulnerable in dealing with the Romanian Tax Authorities.
1. Posting accounting losses in the last 5 years
When the value of the transactions carried with affiliated parties have a significant weight in the company’s turnover, or the taxpayer is captive within the group, recurring accounting losses can generate further investigations from the Romanian Tax Authorities.
If such a situation applies for your company, please note that the losses should be extensively and coherently documented as to avoid any potential tax audit and penalties.
2. Applications for reimbursement of VAT
Even if in recent years the reimbursement of VAT was made by the Romanian Tax Authorities when taxpayers requested it, application for reimbursement of VAT triggered in most of the cases a preliminary audit from the Romanian Tax Authorities on the purpose to determine whether a general corporate income tax audit is required.
We noticed that the simple existence of the transfer pricing file may determine the Romanian Tax Authorities, in certain situations, to no longer request during the preliminary audit the initiation of a general corporate income tax audit.
3. Profit margins below the average margins reported by other companies with the same NACE code
One of the main factors which may lead to a potential tax audit is reporting of profit margins that are lower compared to the margins other companies with the same NACE code are reporting.
The existence of an affiliation relationship identified in the Amadeus and / or Orbis databases together with lower than industry average margins will most likely trigger a general corporate tax audit where the transfer pricing file will most likely be audited.
How do you know this situation applies for your company? A similar analysis should be carried out in the Amadeus or Orbis databases – such an analysis can be performed by your transfer pricing consultant.
4. Internal voluntary transfer pricing adjustments not booked properly
Whether we discuss about the adjustments to the initial acquisition prices practiced by the company within related party transactions, or about the year-end adjustments of the profit margins earned by the local entity as to align them to the group policy, these practices must be backed by correct reasoning and well documented within the transfer pricing documentation.
Moreover, the local entity should book the adjustment invoices in the statements of the financial year to which they belong, otherwise the taxpayer might be classified with high tax risk due to the potentially distorted financial results.
Starting September 2020, related party transactions will be reported separately in statement 394 regarding VAT.
The statement 394 will now contain a YES or NO section – stating whether transactions have been carried with related parties, Romanian or foreign, during the target reporting period.The statement 394 will now contain a YES or NO section – stating whether transactions have been carried with related parties, Romanian or foreign, during the target reporting period.
6. Discrepancies between VAT returns
If your company carries out transactions with related entities, both parties must disclose the same value of the acquisitions and supplies of goods in statement 394 regarding VAT, any discrepancy of material value having the potential to lead to the initiation of a tax audit.
7. Restructurings (mergers, spin-offs, dissolutions, business transfers, insolvencies)
Mergers, spin-offs, business transfers or dissolutions often lead to significant variations in the financial-accounting results reported by a company. These variations may draw the attention of the Romanian Tax Authorities, which may decide to initiate a tax audit, in which case it is advisable to have the valuation reports prepared beforehand with an authorized appraiser.
In addition, the initiation of insolvency proceedings may drive the Romanian Tax Authorities in the position of not being able to collect taxes. Therefore, a general corporate income tax audit may be triggered by the time when the request to initiate the insolvency proceedings is submitted. During such an audit, the transfer pricing documentation file will most likely be analyzed by the Romanian Tax Authorities.
8. Administrative management services of significant value, but with no supporting documentation
The situations where administrative services – management, IT, accounting, etc – are received from another group company, may also raise concerns to the Romanian Tax Authorities.
If the services are justified through invoices containing only a limited description and have significant values compared to the company’s turnover, the company risk rating could be affected implicitly through their impact in the financials posted by the Romanian company.
9. Reporting profits in other locations than the place in which the economic activities are carried
The main conclusion drawn from the CbCR reports is the existence of discrepancies between the jurisdiction in which the profits are reported and the jurisdiction in which the economic activities are carried out.
Companies that are part of groups in which higher operating profits were reported in other jurisdictions than the profits reported in Romania can expect to have a general corporate tax audit initiated by the Romanian Tax Authorities.
10. Failure to submit or delays in submission of the tax returns or in payment of taxes and fees
Romanian Tax Authorities closely monitor tax collection and are seeking to find ways to combat tax evasion.
Therefore, to ensure that they collect what they’re owed, the Romanian Tax Authorities resort to initiating general corporate income tax audits in the cases where the submission of tax returns is delayed or even worse, the due taxes are not paid on time.
11. Discrepancies between the amounts reported in the financial statements and the amounts reported in tax returns
If the income and expenses reported in statement 101 regarding corporate income tax, and those reported in statement 20 regarding profit and loss do not concur, the Romanian Tax Authorities can notify the taxpayer and initiate a general corporate income tax audit, during which the transfer pricing documentation can also be analyzed.
It is advisable to analyse the above risk criteria to determine whether any of them are met in your particular situation.
Moreover, in order to prevent potential disputes, as well as to minimize the odds of having a general corporate income tax audit, it is recommended to apply for obtaining an Advance Pricing Agreement (APA) to cover the transactions with significant / material values.
For all the other types of transactions, it’s recommended to prepare the transfer pricing documentation in a timely manner in order to properly support and accurately document all high-risk transactions.