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Will people who obtain income from independent professions be taxed as employees?

Recent law amendments regarding Independent Natural Persons (PFA) and independent professions, more accordingly the write off of tax duties and the new criteria for reclassifying these activities as dependent did not come into force yet, being discussed in the Parliament. On the other hand, the government already repealed the article which stated that independent professions and copyrights cannot be reclassified.

In the new context, the intention of the law makers to change the taxation of independent activities to be similar with that of salaries takes shape. Keep in mind that the taxation difference is considerable. The effective taxation is now 26% for independent professions and 75% for salaries.

Bearing in mind the fact that all the statements, proposals and decisions recently made raised interest and a lot of questions, Contexpert made an analysis of the present legislative framework, of the modifications put forward and of the possible situations which can arise.

Independent professions that can be reclassified are carried out by:

• Authorized Natural Persons (PFA) in various domains;
• Freelancers (pharmacists, doctors, architects, chartered accountants, tax consultants, valuation officers, judicial executors, lawyers etc.);
• Natural persons who obtain income from copyrights.

How did we end up here?

Reclassifying independent activities as dependent, with the payment of subsequent tax duties associated with salaries, was introduced in the legislation in July 2010, through Governmental Emergency Ordinance 58/2010. Since then, the Tax Code stated, at art. 7, that “any activity can be reclassified as dependent if it meets at least one of the following criteria:

• The income beneficiary is subordinated to the income payer, or to the management members of the income payer and respects the working conditions imposed by the latter, such as: their attributions and manner in which these are carried out, the place of activity, working hours;
• When carrying out the activity, the income beneficiary uses exclusively the income payer’s material base, meaning spaces with adequate facilities, special working equipment, protection equipment, working tools and others alike and contributes with physical performance or intellectual capacity, not with their own capital.
• For the activity to be performed, the income payer pays for travelling expenses of the income beneficiary, such as detachment or delegation allowance inside the country or abroad, as well as other expenses of this type.
• The income payer pays for the income beneficiary the vacation allowance and for the temporary invalidity allowance.

In the case one independent activity is reclassified as dependent, the compulsory income tax and social contributions, established according to the law, will be re-calculated and sent, being jointly owned  by the income payer and beneficiary. In this case, the rules for determining income tax for salary for the non-principal job are applied.”

Once the application norms were modified, through Government Decision 791/2010, an exception from reclassifying incomes, regarding independent activities and copyrights was introduced, starting August 2010.

This exception was added to the Tax Code, which is not allowed, as the secondary law is given in order to explain and apply the primary law.

These two provisions, from the Tax Code and the norms, coexisted until one week ago, when the government passed a new set of norms that repeal the exception, as we stated above. The decision regarding the norms was not yet published in the Official Gazette.

Different approaches and disputes in the courts of law.

Consequently, the existence of the two provisions, for almost five years, led to different approaches, both from the tax payers and from the tax authorities. The difference in approach became visible, leading to disputes, only towards the end of the year 2014.

The conflict was generated by NTAA’s inspections (National Tax Administration Agency), which led to the reclassification of the income of several persons. The NTAA inspectors reclassified the income based on art. 7 and art. 11 of the Tax Code, ignoring the exception from the application norms. In the matter of tax law, art. 11 states a general rule according to which, when setting taxes, the economic content of a transaction prevails against the judicial form of the contract between the two parties.

Because the government noticed that the dispute with the persons whose activities were reclassified is lost in court, it decided to eliminate the exception from the norm and also to repeal the main tax duties and accessories which were established for all these activities.

The decision was transposed in a bill, which is now debated in the Parliament. For it to come into force, it has to be voted by the Parliament, promulgated by the president and published in the Official Gazette. It is very unlikely that all these conditions will be fulfilled by the 1^st of June 2015, the date up to which the “amnesty” is mentioned.

What is next?

After having all the debt written off, the government wants to modify the Tax Code, in order to have clarity in implementation. In the project for the modification of the Tax Code, which was sent to the parliament, the definition of independent activities is modified, but in our opinion, the possibility of abuses, from both the taxpayers and the tax authorities, still remains. The new definition of independent activities which appears now in the project made public is: “any activity carried out by a natural person in order to obtain income, which fulfils most of the following criteria:

• The natural person has the liberty to choose how to conduct their activity, where they do it and also the working hours;
• The activity can be performed for one or more clients;
• The risks of the activity are assumed by the tax payer;
• The activity can be conducted by mainly using the client’s assets, their intellectual capacity and/or physical performance, depending on the nature of the activity;
• The activity is performed directly or by using personnel employed according to the law.”

Not even this definition is clear enough, in order to eliminate abuses made by the tax authorities or by the companies, but still, this is a step forward. However, the Ministry of Finance has already put forward in the Parliament a new proposal of analyzing independent activities, which encompasses other criteria for reclassification, which were not yet made public.

The IRS model and the tax treatment similar to salaries

The criteria that the ministry considered are taken from the questionnaire used by the IRS from the USA, for determining a worker’s status in view of taxation.

The questionnaire is very complex, it has 57 questions regarding both the company’s activity and that of the natural persons. For example, information regarding the following issues is required:

The reason the services were contracted, instructions received from the company, the way duties are designated, the way duties are carried out, the place where the activity is carried out, working hours, equipment, materials, facilities used when carrying out the activity, the type of payments and benefits borne by the company (insurance, commission, fixed amounts etc.), the payment method used by the client (for the company/worker), financial risks, the materials assumed by the natural person, the way new clients are contracted and the way references for new clients are given etc.

Yet, the Ministry of Finance does not rule out applying a tax treatment for independent activities similar to that of salaries.

In conclusion, we must keep in mind the fact that the only modification, so far, is the repeal of the exception from reclassifying independent activities and copyrights. The other modifications are only propositions, at this moment. The final text will be known only after it will be published in the Official Gazette (given the very frequent changes, including in the project for amending the Tax Code). Yet, the tendency is toward increased taxation and a more aggressive reclassification of the income from these activities.