Foreign investment in Romania may experience a decline due to a proposed new tax on shifted profits, according to a warning by PwC.
Romania's proposed tax on shifted profits has sparked debate and concerns about the country's attractiveness as a destination for foreign investments. The new tax, which is more restrictive than the similar regulation in Poland, has been criticised for its lack of consideration for economic substance and international norms in the field.
According to a report drafted by PwC, the proposed Romanian rules on deductibility are more restrictive than the Polish model. The Romanian regulations do not seem to address the issue of profit transfers through service providers in lower-tax jurisdictions, a concern highlighted by PwC.
One of the key differences between the Romanian and Polish models lies in the "safe harbor" mechanism. The Polish tax model, which has been a source of inspiration for the Romanian rules, includes a "safe harbor" mechanism that does not apply if expenses benefit an EU/EEA-taxed affiliated entity with real and material economic activity. However, the Romanian regulations do not include this feature.
Another significant difference is the flexibility in the approach to deductibility. The Polish model is more flexible, as it considers the economic activity of affiliated entities. In contrast, the proposed Romanian rules do not take this into account, allowing only 3% of the expenditures in targeted categories to be deductible (versus 3% of total expenditures in Poland).
The lack of flexibility and the absence of a "safe harbor" mechanism in the Romanian rules have raised concerns about the creation of service providers in jurisdictions with lower tax rates, aimed at profit transfers. This is a concern not addressed by the Romanian rules, as stated by PwC.
The new tax has already affected Romania's fiscal competitiveness, with a consultancy firm supporting the authorities' plans to terminate the minimum tax on turnover. However, the specific consultancy firm that criticised the impact of the new tax on Romania's attractiveness for foreign investments and demanded a withdrawal from the minimum turnover tax remains unnamed in the provided search results.
In conclusion, the proposed Romanian tax on shifted profits, with its lack of consideration for economic substance and international norms, has raised concerns about the country's fiscal competitiveness and its attractiveness as a destination for foreign investments. The absence of a "safe harbor" mechanism and the lack of flexibility in the approach to deductibility in the proposed rules have been highlighted as key concerns.
