Foreign investment could potentially be deterred by Romania's proposed tax on reallocated profits, according to PwC's warning.
The Romanian government's new tax on shifted profit has been met with criticism from PwC, who argue that the proposed rules do not align with economic substance or international norms, unlike the Polish model.
According to PwC's analysis, the Romanian rules propose a general denial of deductibility without considering the economic substance or international norms in the field. This is a stark contrast to the Polish "safe harbor" mechanism, which is designed to cover situations where service providers are created in jurisdictions with lower tax rates to transfer profits.
One key difference between the two models is that the Polish "safe harbor" mechanism does not apply if the affiliated entity does not carry out real and material economic activity. In Romania, however, the proposed rules do not capture such situations, instead opting for a general denial of deductibility.
Another point of contention is the treatment of foreign affiliated contractors. Unlike the Polish regulations, the proposed Romanian rules do not make exceptions for such contractors that meet certain criteria. This could potentially impact the attractiveness of Romania as a destination for foreign investments.
The Polish regulations, which serve as a source of inspiration for the new tax in Romania, are intended to cover situations where service providers are based in jurisdictions with lower tax rates, to transfer profits. However, they do not contain equally restrictive provisions as the proposed Romanian rules.
The authorities criticised by PwC for the proposals regarding the implementation of the deferred revenue tax in Romania are the Romanian Ministry of Finance and the National Agency for Fiscal Administration (ANAF).
In a positive development, the authorities in Romania are considering terminating the minimum tax on turnover, a move that PwC has saluted. This could potentially improve Romania's fiscal competitiveness.
However, the new tax and its restrictions could potentially affect Romania's fiscal competitiveness negatively. PwC, in a report, has noted that a new obstacle is emerging in Romania's fiscal competitiveness due to the new tax.
Under the Romanian regulations, contracts with local subsidiaries are included, but excluded by the Polish regulations. Additionally, in Romania, only 3% of expenditures in targeted categories are deductible, compared to 3% of total expenditures in Poland.
As the debate continues, it remains to be seen how the Romanian government will respond to the criticisms and concerns raised by PwC and others. The outcome could have significant implications for Romania's economic future and its attractiveness as a destination for foreign investments.
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