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Dramatic changes in taxation: Multinational companies and groups of companies are the most affected

In June, the government adopted a Memorandum for Plan BEPS (Base Erosion and Profit Shifting) – developed by OECD. The technical term refers to the negative effect of tax avoidance strategies used by multinational companies or groups of companies. The implications will be unprecedented, and some groups may be even forced to redesign their entire chain of holdings.

In other words, through these regulations the authorities intend to tax the profits where the economic activity takes place and creates value.

Also, they will monitor the impact of double not taxation (by setting tax residents without permanent establishment) and enforce rules on controlled foreign companies (a controlled foreign company represents an entity registered and operating in a different jurisdiction or country from that where the owning company is resident).

More specifically, BEPS aims tax planning strategies that exploit legislative loopholes and inadequacies in order to artificially transfer the profits to jurisdictions without taxes or with reduced taxation.

Measures to combat these practices will reform the taxation principles in Romania.

BEPS plan, through the 15 sets of actions, includes recommendations for legislative changes in the following areas:

• Transfer pricing
• Double taxation conventions
• Exchange of information on two levels: by increasing transparency and reporting of information by taxpayers to the tax authorities and between the tax authorities of various countries.

Moreover, the Directive (EU) 1164/2016, adopted in July, sets rules against tax avoidance practices and will affect the activity of multinational groups. The directive aims to prevent profit tax avoidance by diverting profits to subsidiaries / branches located in countries with a lower level of taxation.

This will apply to the taxpayers that are subject to profit tax in one or more Member States, including permanent establishments in the EU of certain entities and tax resident outside the EU and sets rules for: limiting the deductibility of interest, general anti-abuse rules, taxation of the controlled foreign companies and the taxation of hybrid arrangements.

What will be the impact?

Major change will take place in a global approach, including Romania. The international business taxation will face the largest earthquake of the global taxation in the last century. This will occur:

• New definitions of permanent residence
• Very high transparency in transfer pricing and documentation required based on global requirements
• Redefining fiscal impact of intangible assets and their transfer
• Abolishing traditional charging structures based on any hybrid form – be it of entities, debt or asset transactions
• Amending of the treaties of double taxation to create tools that can impose taxes where it is suspected non taxation
• Higher administrative costs
• “Country by Country Reporting” – multinational groups of companies with revenues of over 750 million – will implement these rules in 2017 referring to the data of 2016
• Mandatory sharing of the information on taxpayers – full transparency of the entire organizational group in each tax jurisdiction where the company has business
• Implementing processes that will prevent or solve more rapidly the disputes regarding the application of double taxation treaties
• Redefining harmful tax practices
• Mandatory transparency of aggressive tax planning