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A number of 44 multinationals active in Romania will be affected by the future provisions of a 15% minimum corporate income tax rate at global level (Romania has a 16% income tax rate), established following an agreement reached within the Organization for Economic Co-operation and Development (OECD), according to data sent by the Ministry of Finance at the request of Economedia. What this agreement means for Romania, what the next steps are, what our country needs to change in its legislation and when this tax will be implemented are some of the questions the Ministry of Finance offered answered to.
- Background: More than 130 countries agreed in July on a tax reform for multinationals to impose a minimum global corporate tax of “at least 15%”, the Organization for Economic Co-operation and Development (OECD) announced at the time. The OECD’s decision, rejected by Ireland and Hungary – EU countries with very low taxation – followed frustration among major economies, mainly the US, France and Germany, with multinationals’ avoidance of taxation in the countries where they generate revenues. In Romania, there have been ongoing discussions about a possible change to the regime for companies like Google and Facebook, but no decision has been taken. A study published in May by the EU Tax Observatory showed that the European Union would gain around €50 billion in additional revenue from taxing multinationals with a 15% minimum tax on company profits globally.
Marcel Ciolacu, the President of the Social Democratic Party (PSD), asked Prime Minister Florin Cîțu in July to explain the economic effects of the agreement signed by 130 countries, including Romania, on the taxation of multinational companies.
Economedia asked the Finance Ministry a series of questions about the implications of the agreement for Romania. Here are the authorities’ answers.
- What does the signing of the OECD Joint Declaration mean for Romania in detail?
Ministry of Finance: At the Organization for Economic Co-operation and Development (OECD) Inclusive Framework meeting from 30 June to 1 July 2021, Romania, together with 130 other countries, reached a consensus on the main elements of Pillar 1 and Pillar 2 tax reform at international level.
Romania supports the implementation of measures to combat base erosion and profit shifting (BEPS), as similar objectives are also reflected in Romania’s fiscal-budgetary strategy.
Multinational companies that will fall under Pillar 1 are those with a global turnover of more than €20 billion and profitability (Profit before tax/Total revenue) of more than 10%. If the implementation of Pillar 1 under the above conditions is successful, it is envisaged that the turnover threshold will be lowered to €10 billion. To this end, an evaluation of the implementation of Pillar 1 will be carried out within 7 years of the entry into force of the agreement, to be completed within a period of one year.
Pillar 1 focuses on the tax concept of significant economic presence (“nexus”) and profit allocation rules allowing the taxation of income earned by companies in jurisdictions where they do not have a physical presence but carry out economic activities, provided that the multinational enterprise earns more than €1 million in that jurisdiction. For jurisdictions where GDP is less than €40 billion, the income limit has been set at €250,000.
For multinationals falling within Pillar 1 parameters, 20%-30% of residual profits will be reallocated to jurisdictions where clients/consumers are located, using an allocation key based on the amount of income.
Through this mechanism, the international tax system adapts to new global business models, where the allocation of taxing rights can no longer be based on physical presence.
The main agreed elements of Pillar 2 are the level of the global minimum effective tax rate which will be at least 15% and the mechanism of exclusions from the tax base.
The tax base will be reduced by the carve-out mechanism taking into account the profitability of activities with economic substance. The carve-out will apply to the income level and will represent at least 7.5% of the book value of the tangible fixed assets and payroll component in the first 5 years of transition.
Also under the provisions of the Agreement, the GloBE Pillar 2 rules are proposed to be applied by groups of multinational companies with a turnover of more than €750 million, but Member States may choose to apply these rules also to multinational companies that do not meet this threshold.
2. What are the next procedural steps after signing this declaration and what are the deadlines, if any?
Romania will continue to monitor the OECD’s work, as the Agreement foresees the elaboration of a detailed implementation plan and the exploration of outstanding issues by October 2021. Therefore, a final decision on the technical and policy elements of Pillar 1 and Pillar 2 will be taken by October 2021, when the exclusion of newly established multinational companies from the global minimum tax will also be considered. Pillar 1 will also involve the development of a multilateral convention between participating jurisdictions from 2022 and applicable from 2023.
After final approval at OECD level, the implementation of these provisions will be done in a unified way at EU level by means of a legal act, with an estimated deadline of 2023.
3. Is Romania obliged to implement the provisions of this plan? Is it a “binding agreement” or a “non-binding agreement”?
As a rule, regulations developed by the OECD are at recommendation level. There are also regulations that represent a mandatory minimum standard to be implemented. After final approval of the document by the OECD, it will be analyzed at Member State level and implemented uniformly at EU level by means of a legal act, i.e. a Directive/Directive of the Council of the European Union.
4. What exactly does Romania need to change in its legislation to bring it into line with the agreed provisions?
Taking into account that the OECD document will include rules to combat tax planning, these will be implemented in the Tax Code in Title II Corporate Income Tax, Chapter III – Rules against tax avoidance practices that directly affect the functioning of the internal market, as implemented in national legislation, e.g. the rules on controlled foreign companies transposing OECD Action 3 (Designing Effective Controlled Foreign Company Rules, 2015 Final Report).
Further changes to the Romanian legislation will be considered after the work at OECD level is finalized. At EU level, as mentioned above, applicable legislation will be developed by EU Member States.
5. How soon will Romania have to change its legislation to bring it into line with the agreed provisions?
Based on the information available to date, implementation is expected to take place in 2023.
6. How many companies do you estimate will be affected by the provisions of this agreement and how much of Romania’s GDP do they represent?
7. Which are the multinational companies concerned that are known not to pay their taxes in Romania?
8. Do you estimate that the new minimum corporate tax will have a financial impact on the state budget? What would it be? Will it be positive or negative, given that the current tax rate is 16% and the proposed tax is “minimum 15%”?
With regard to questions 6 to 8, we would like to inform you of the following:
The reform of the international tax system resulting from the digitalization of the economy is a priority for the entire international community, which is committed to reaching a globally agreed solution.
Setting a global standard on minimum effective taxation could have a major impact in the future on the accepted limits of tax competition and on how less developed countries will be able to use tax rates to attract foreign investment.
According to the data we have (Data communicated by the National Centre for Financial Information), in 2019 there were 44 economic agents registered that reported a turnover of more than 750 million euros.
Regarding the non-payment of taxes in Romania by multinational companies, we inform you that we do not have data on this issue.
Translated by Service For Life S.R.L.