Ambiguities of the Fiscal Code

Modifications from one day to the next of the Fiscal Code have generated confusion in the business sector, leaving local companies and foreign investors unsure as to how to adjust to the new rules. Many provisions are ambiguous and difficult to decipher even by tax experts, making it necessary to urgently adopt enforcement guidelines that would shed light on the unclarities. The latest modifications extend the scope of application of the 16% flat tax, raise the VAT to 24%, with new taxes and contributions levied on sole traders' revenues and on royalties. Instead of simplifying things, the modifications of the Fiscal Code bring about additional administrative obligations. In addition, the 2011 tax system is shrouded in doubt.

The modifications brought to the Fiscal Code are ambiguous both because they use terms not defined in the Fiscal Code or in any other law for that matter, as well as because of a lack of correlation with a series of other special regulations on social contributions, which makes them difficult to apply, say fiscal consultants.

An example to this effect is the use of the concept of "incomes of a professional nature", for which no definition is provided. This can potentially result in a wider scope of application for the various social contributions, in dissonance with primary legislation which regulates those respective social security systems and at odds with special laws instituting other systems of contributions for certain professional categories, explained Alexandru Reff, coordinating partner of Tax& Legal Deloitte.

"Some of those targeted by the law would as a result be bound to contribute more than once, sometimes without benefiting from any social service that goes with that contribution. Such is the case of lawyers, for instance, who already contribute to a system of their own, and of independent professionals in general, who are asked to insure against unemployment when the lack of a job is the very definition of an independent professional."

As far as taxation of individuals is concerned, although the government's intention to limit the use of sole trading and of royalties is very transparent, there are problems of a practical nature.

When it comes to recategorising incomes resulting from independent activities - such as royalties derived from copyright assignment - as salary incomes, it is not clearly stated who will pay the social contributions corresponding to those incomes and to what extent.

Moreover, the ordinance refers to a phrase that does not exist in the Fiscal Code "incomes of a professional nature, other than salary ones", which provides for the income payer's obligation to retain and calculate the income tax and social contributions (CAS - social security contributions), CASS (social health insurance contributions), and unemployment benefits.

As for the VAT increase to 24%, the first effect is the increase of prices to end consumers.

Daniel Anghel, PwC's indirect tax partner, anticipates banking institutions will stand to suffer a great deal, as will public institutions that are not entitled to VAT deduction for acquisitions (hospitals, educational institutions and nursing homes), so they will have to bear a higher VAT cost.