International Tax Planning and Transfer Pricing Planning: Romania from a US perspective

Autor:Professor Dr. Rainer Zielke
Cargo del Autor:Professor in business economics at Østfold University College, Halden, Norway
Actualizado a:April 2017
 
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Contenido
  • 1 Abstract tax planning
  • 2 Abstract transfer pricing planning
    • 2.1 Introduction
    • 2.2 The low tax country Romania in the OECD context
    • 2.3 Transfer pricing rules of Romania
      • 2.3.1 Laws and rules
      • 2.3.2 Arm's length principle
      • 2.3.3 Transfer pricing methods
      • 2.3.4 Definition of related companies
      • 2.3.5 Reporting requirements
      • 2.3.6 Documentation requirements
      • 2.3.7 Cost sharing
      • 2.3.8 Interaction between customs valuation and transfer pricing
      • 2.3.9 Dispute resolution
    • 2.4 Calculation of the case studies in international tax planning between Romania and the USA
      • 2.4.1 Design of the tables
      • 2.4.2 The treaty Romania-USA in brief
      • 2.4.3 BEPS Project progress
      • 2.4.4 Romania in brief
      • 2.4.5 The USA in brief
      • 2.4.6 Design of case studies
      • 2.4.7 Case study 1: Dividends from Romania to the US
      • 2.4.8 Case study 2: Interests from Romania to the US
      • 2.4.9 Case study 3: Royalties from Romania to the US
      • 2.4.10 Case study 4: Management and technical service fees from Romania to the US
      • 2.4.11 Case study 5: Capital gains with Romania as asset country to the US as seller country
      • 2.4.12 Case study 6: Dividends from the US to Romania
      • 2.4.13 Case study 7: Interests from the US to Romania
      • 2.4.14 Case study 8: Royalties from the US to Romania
      • 2.4.15 Case study 9: Management and technical service fees from the US to Romania
      • 2.4.16 Case study 10: Capital gains with the US as asset country and Romania as seller country
    • 2.5 Concluding remarks
  • 3 Notes
Abstract tax planning

According to the International Monetary Fund, Romania confirms in 2016 with a gross domestic product (GDP) of US$ 186,514 million the fifteenth-highest GDP of the European Union. In Romania, corporate income tax is levied at a flat rate of 16.00%. Additionally, the Romanian tax system is a classical one: profits are taxed at the company level and distributed profits are taxed again in the hands of both corporate and individual shareholders. Nevertheless, Romania is a low tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in low taxing countries by means of tax planning measures. Romania has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting. According to the OECD, during the past few years, Romania has recovered well from the global financial crisis. However, the country still faces structural problems, including poor competitiveness, that limit economic growth. Against this background, the OECD Competition Assessment Project analyzed legislation in three sectors of the Romanian economy: construction, transport and food processing. Using the OECD Competition Assessment Toolkit to structure the analysis, the OECD identified 227 problematic regulations and made 152 specific recommendations on legal provisions that should be amended or repealed. An OECD report identifies the sources of those benefits and, where possible, provides quantitative estimates. If these recommendations are implemented, there should be benefits to consumers in Romania and to the Romanian economy in all three sectors. This chapter provides a survey on the actual tax law frame conditions in Romania and provides practical support in international tax planning and transfer pricing planning between Romania and the US based on cross border case studies.

Abstract transfer pricing planning

With respect to transfer pricing Romania Republic applies the arm’s length principle and follows the OECD Guidelines, the following transfer pricing methods are applicable: the comparable uncontrolled price method, CUP, the resale price method, the cost plus method, the transactional net margin method, and the profit split method. CUP is the preferred method. A company is regarded as related to another company if it holds at least 25% of the shares or voting rights in the other company. Further, two companies are related if a third company holds at least 25% of the shares or voting rights in each company .There are reporting and documentation requirements. Cost sharing is allowed. There is interaction between customs valuation and transfer pricing. There are regulations on advance pricing agreements.

Introduction

International tax planning and transfer pricing planning between Romania, an upper-middle income country economy, of the European Union, and the US as most important national economy of the world based on cross-border case studies is of central importance. In addition, the USA confirm with a population of 321 million inhabitants in 2016 3rd place of the most populous countries in the world (4.40% of the world population).

According to the International Monetary Fund, [1] Romania confirms in 2016 with a gross domestic product (GDP) of US$ 186,514 million the fifteenth-highest GDP of the European Union. In Romania, corporate income tax is levied at a flat rate of 16.00%. Additionally, the Romanian tax system is a classical one: profits are taxed at the company level and distributed profits are taxed again in the hands of both corporate and individual shareholders. Nevertheless, Romania is a low tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in low taxing countries by means of tax planning measures. Romania has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the OECD, [2] during the past few years, Romania has recovered well from the global financial crisis. However, the country still faces structural problems, including poor competitiveness, that limit economic growth. Against this background, the OECD Competition Assessment Project analyzed legislation in three sectors of the Romanian economy: construction, transport and food processing. Using the OECD Competition Assessment Toolkit to structure the analysis, the OECD identified 227 problematic regulations and made 152 specific recommendations on legal provisions that should be amended or repealed. An OECD report identifies the sources of those benefits and, where possible, provides quantitative estimates. If these recommendations are implemented, there should be benefits to consumers in Romania and to the Romanian economy in all three sectors.

According to Orbitax, [3] (Daily Tax News Digest of 19 September 2016) on 13 July 2016, an order clarifying the research and development expenses eligible for an additional 50% deduction was published in Romania's Official Gazette. The additional deduction applies for the following main expenses when related to R&D: Personnel expenses; Rental expenses; Maintenance and repair expenses; Expenses incurred with third-party providers; and a portion of overhead expenses. In addition, increased depreciation is allowed for assets used in R&D. In order for the additional deduction for qualifying expenses to apply, they must be related to qualifying R&D activities. Qualifying R&D activities include applicative research and/or technological development relevant to the taxpayer’s activity, which must be performed in Romania or in an EU/EEA Member State.

The pivotal question is therefore, how groups of affiliated companies with group companies in Romania and in the US can – before the background of anti-avoidance legislation and other tax law frame conditions – optimize their strategies of international tax planning based on cross-border case studies.

Therefore and first of all the low tax country Romania is to be reviewed in the OECD context (see section 2) – also with respect to the transfer pricing rules of Romania (see section 3), and constructive hereon 10 case studies in international tax planning between Romania and the US are to be calculated (see section 4). Finally the results of this survey are to be compiled in concluding remarks (see section 5), especially with respect to the deduction of strategies in international tax planning between Romania and the US.

This chapter had been written based on the following sources:

  • Orbitax[4], Orbitax Country Analysis Romania and USA, Orbitax Cross-Border Calculation Tools, Orbitax Transfer Pricing Tool,
  • the Romanian Tax Code, [5]
  • the Romanian Tax Reform 2017, [6]
  • the US Internal Revenue Code, [7] and
  • the Double Taxation Convention between Romania and the USA signed 4 December 1973 and effective from 1 January 1974. [8]
The low tax country Romania in the OECD context

International tax planning and transfer pricing planning between the Romania and the US based on cross-border case studies is of central importance. In Romania, corporate income tax is levied at a flat rate of 16.00%. Additionally, the Romanian tax system is a classical one: profits are taxed at the company level and distributed profits are taxed again in the hands of both corporate and individual shareholders. Nevertheless, Romania is a low tax country.

Between OECD Member States, also Romania, that is no OEC Member State, the US, and other countries and also within the OECD there exists – also in 2016 – a considerable tax differential. Here from there results the incentive to international tax planning and to shift the taxable basis into lower taxing OECD Member States and other countries outside the OECD. Primary parameters of the corporate income tax burden of any country are the statutory corporate income tax rates. [9] Furthermore in many OECD Member States there are – in addition to the statutory corporate income tax rates – further corporate income taxes, especially on the level of subordinated regional administration bodies. Consequential and following the concept of Gerd Rose[10] there can be calculated combined tax rates for any country, that applied to one (uniform) taxable basis, result in the tax burden of the related country. The combined corporate income tax rates of countries with several taxes can then be compared with countries that just apply a single corporate income tax rate. In addition, an average rate for the whole OECD can be calculated.

In 2016...

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