***FLASH REPORT***

In a recent Decision issued by the Romanian Court of Accounts, they advised that their priority for 1996 will be to review payments made by Romanian legal entities to nonresidents. Decision No 23 of 19 February 1996, states that "a main objective of the financial control in 1996 will be the way in which (service) payments made abroad by Romanian residents are taxed in Romania". It should be explained that this Decision does not appear to have been made public at this time.

It is our understanding that the two major issues that the Court of Accounts will be concentrating on when they review the accounts of Romanian legal entities during 1996 will be the application of VAT and withholding tax on payments for services.

Further to this Decision, the Court of Accounts has initiated controls on a number of private companies that have made significant hard currency payments abroad without applying VAT and/or withholding tax. The view of the Accounts Court is that management fees as well as any payments to service companies abroad are subject to withholding tax in Romania in the same manner as royalties. They argue that domestic law taxes such payments and that double tax treaties merely reduce the applicable rate of tax.

We understand that many would view this interpretation as not being in line with international understanding of the Double Taxation Agreements and we expect that the view of the Accounts Court will be disputed and challenged in some cases. We would expect that such disputes will prove successful.

As regards VAT in respect of the imported services, the interpretation given by the Accounts Court (and currently by the Ministry of Finance) is that VAT is payable by the Romanian beneficiary of the service at the time of payment to the foreign provider. Such VAT is deductible in the VAT return of the month following the payment, subject to general deduction rules. The application of this "reverse charge" VAT will mainly affect banks and other VAT exempt businesses.

It should be noted that during the controls performed in the past by the Ministry of Finance (local tax authorities etc) these issues have not been raised. We expect that future reviews performed by financial control bodies will follow Court of Accounts guidelines.

Contact information

Further information can be obtained from either Ron Barden or Anca Troaca-Dragoman

Price Waterhouse Romania
Union International Center
11 Campineanu Street
Sector 1, Bucharest
Romania

Tel No.: 40-1-311 24 55
Fax No.: 40-1-312-3334

Disclaimer

The above information is a short summary of recently published information and is not intended to be advice on any particular matter. Price Waterhouse expressly disclaims any liability to any person in respect of anything done in reliance on the contents of this publication.

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