The tax amnesty, dissimulated in the form of a financial restructuring

The Finance Ministry is preparing the tax amnesty for all companies in Romania, for all debts owed to the state budget until December 31st, 2018. The amnesty is dissimulated into a project where the ministry claims it is a financial restructuring which stipulates the erasing of up to half of the debts accrued or the gradual down payment, under certain circumstances.

Eugen Teodorovici, finance minister, said last Tuesday, at a debate on the business sector: "It is not a fiscal amnesty, let it be very clear, it is a financial restructuring. We are going to create a legislative framework which isn't going to put pressure on economic agents. We are dealing with money which the government wasn't going to recoup, because of the precarious financial situation of most of these companies and firms".

Teodorovici said that, when deciding this measure, "the starting point was the problems that 31 state companies and 200 public institutions and agencies are faced with, and the decision was made that the financial restructuring would apply equally to over 2300 private companies and 30 mixed-capital companies.

According to the draft emergency ordinance, in order to reduce arrears, two solutions have been taken into consideration, which propose the introduction of tax breaks depending the amount of overdue taxes owed on December 31st, 2018.

The first provides the restructuring of budget liabilities outstanding on December 31st 2018 for debtors that owe more than 1 million lei and is based on a restructuring plan, the rescheduled payment and tax oversight throughout the period of the tax break.

The measure is intended to create an alternative mechanism to the rescheduling payment, already established through the Law no. 207/2015 concerning the Tax Procedure Code, respectively a mechanism for the restructuring of tax liabilities in place on December 31st, 2018.

Through the financial restructuring, what is being sought is to revitalize the taxpayers who have accrued debts to the state budget throughout the year and have been incapable of paying them and to prevent their being declared insolvent .

For those who owe more than one million lei, there will be a 6-month window during which time the taxpayers which find themselves in such a situation will make a decision, towards restructuring their debts to the state budget, which also involves a restructuring of the company.

The possibility of accessing this form of restructuring the debts by all the taxpayers, private or state-owned, which have large debts and are facing financial difficulties generated by structural dysfunctions, and owe more than one million lei by notifying their competent fiscal entity concerning the intention to restructure and the call upon an independent expert in order to draw up a restructuring plan similar to insolvency reorganization plans.

• 7-year payment rescheduling

The restructuring of debts to the state budget can be set up through one or more measures:

a) the scheduled payment of the debts to the state budget;

b) the conversion of the debts to the state budget into shares, under the terms stipulated in the Fiscal Procedure Code;

c) the erasing of the debts to the state budget, through the giving in payment of some the debtor's assets, according to the procedure stipulated in the Fiscal Procedure Code;

d)the canceling of some budget liabilities to the tune of 30%, 40% or 50%, as the case may be, out of their total.

The draft also stipulates the establishment of conditions concerning the payment of overdue debts to the state budget, as follows:

a) in the first year of the tax break, the debtor must pay the debts to the state budget coming due in 2019;

b) in the second year of the debt facility, the debtor needs to pay at least 10% of the amount of the debts owed to the state budget which are the subject of the tax break;

c) from the third year and until the completion of the tax break, the debtor needs to pay off the rest of the debts to the state budget, in proportion with the years for which the tax break has been granted;

d) the scheduled payment of the budget liabilities within the maximum of 7 years and the payment of current debts for 2019.

The second measure concerns the erasing of debts in the case of amounts below 1 million lei, or of higher amounts which are not eligible for restructuring (which are already in rescheduling, reorganization, insolvency), if the main debts to the state budget are paid by November 30, 2019.

For those with debts below 1 million lei, the interests and penalties pertaining to the principal can be erased under the following terms:

- the principal amounts overdue by December 31st 2018 are paid by November 30, 2019;

- the erasing of the interest and penalties for the debts due between January 1st , 2019 and November 30, 2019;

- the filing of all the financial statements prior to the submission of the request for the erasing of the debts;

- the submission, by November 30, 2019, of the request for the erasing of the penalties and interest.

• Lump sum tax for 1.2 million companies

If the aforementioned measures produce the expected results, namely the collection of overdue amounts to the state budget, Eugen Teodorovici said that the financial restructuring could be extended to the public debts owed by companies to the budgets of the public local administrations. The Ministry of Public Finances said: "On a local level, such a restructuring framework also needs the financial involvement of the state, for the revenues to the state budget not to drop below for the duration of the application of the aforementioned measures".

According to data presented by the Ministry, at the end of 2018, over 336,000 companies owed the state over 98 billion lei.

The restructuring mechanism proposed through the draft law would be applicable to over 2800 companies (31 state owned companies, 30 private-public capital companies, 2633 privately owned companies and 200 institutions and public agencies), which have in total over 255,000 employees.

Aside from this mechanism, the Ministry of Finance is also considering reintroducing a lump sum tax for most of the companies in Romania. Eugen Teodorovici said: "In Romania there are over 1.2 million taxpayers in the public and private sector, of which just 45000 bring in 98% of the total revenues collected by the state budget. That means that a large part of the financial and staff resources of the ANAF are allocated illogically. If 1.2 million companies bring in less than 2% of the budget revenues, then a lump sum tax can be a solution. It will be an amount that is established transparently, and the ANAF will no longer audit those companies. We want to increase the degree of tax collection. A fixed amount and the taxation of everything the company earns is the solution for the 1.2 million companies. The other 45000 companies will benefit from the transparent presentation of the audit, will know when they're scheduled to be audited and the topics of the audit, and will have time to fix their issues. Thus, the 45000 companies will have an increased staff of the ANAF in charge of them and things will be easier. This is how things work in Spain and in other countries in Europe".

• The business sector, in favor of the amnesty in the form of financial restructuring

The financial restructuring is in line with the requests of the business sector, but its representatives have decided that the planned measures should not apply to companies that have benefited from the 2015 tax amnesty.

Silvia Vlăsceanu, head of the Federation of the Associations of Utility Companies in the Energy Sector, said: "The measure is a good one, but the reasons why those companies have ended up in financial trouble are the legislative instability and the lack of predictability. These causes are destroying the business sector, and the fact that over 3000 companies have ended up in such a situation is further evidence of what we have been saying for years. The companies that have been granted a tax amnesty in 2015 should not qualify for the new amnesty, if they have not complied with the restructuring plan set then. The application of the financial restructuring and for those companies, would twist the measure, because they will not comply with the measures package and will wait for a new amnesty or another program".

Minister Eugen Teodorovici said that he agreed to the proposal and that he would take into consideration if the majority of the representatives of the business sector backs the same thing.

Cristian Erbaşu, head of Construcţii Erbaşu, vice president of the Federation of the Professional Associations of Construction Companies in Romania, said that the financial restructuring is a good measure because some of the companies in the sector have accrued debts to the state budget due to the services rendered to various local public authorities, services which have not been paid, due to the shortages seen by the territorial-administrative or the public institutions.

Corneliu Pascu, the chairman of Iridex Group who also said that companies that do not operate in good faith should be eliminated from the market. "The economic activity of companies acting in bad faith is parasitic. There are companies where the state isn't doing anything even though it knows that they are not paying their debts to the state budget. Some of the companies end up in difficult situations due to the fact that the state authorities do not pay the their bills issued by private companies on time. Ending up in difficult situations needs to be avoided, and a solution would be to pass off the law on holding companies".

Dragoş Anastasiu, the chairman of the Romanian German Chamber of Commerce and Industry (AHK România), said that even though the business sector supports the upcoming measures, they still represent new exceptions introduced by the state. "In the fiscal area, there should be as few exceptions as possible. Romania is a country with many exceptions, which create chaos and for a while, the state should leave the business sector be left alone by the authorities".

The representatives of the business sector also said that companies which have a high risk ratio should be subjected to spontaneous audits and removed from the market.

Recently, European parliamentarian Theodor Stolojan told BURSA the following concerning tax amnesty: "In general, in other countries tax amnesty measures have been taken in relation with attracting the capitals created in the countries in question and then parked in tax havens. In these circumstances, the authorities in those countries tell the companies: «if you want to repatriate that capital, then you will not be subjected to legal sanctions and you will only get taxed to what you bring in». Usually proposals are made for a lower tax than the regular profit tax or capital gains in the countries in question. This is how it has been done in the USA, in France, and some repatriate, others don't. In that regard, an amnesty for the equity transferred outside Romania, which have been removed in various ways to tax havens, wouldn't be a novelty, because it has been practiced in other countries as well. But in Romania, as far as I've understood, there is a desire for a tax amnesty for what exists in the country. Here I don't think that the fiscal amnesty is a good solution, because it would be a «punishment» for those who have paid their taxes fairly, instead of those who haven't paid their taxes being found and sanctioned".

Economic analyst Aurelian Dochia recently told us that the tax break is clearly a discrimination, and those who have dutifully paid their taxes are being placed at a disadvantage.

Theodor Stolojan said that the application of a tax break could also be a case of violation of the rule of state aids, and respectively a topic of debates in the European Union.

Bogdan Chiriţoiu, the president of the Competition Council, told BURSA that the implementation of the fiscal amnesty could raise competition issues in the business sector.