New abusive practices by tax authorities are causing ripples in the business of taxpayers in the construction industry. Costas, Negru & Asociatii has once again set out to strengthen an “iron defence” for taxpayers who are once again faced with abuses by tax authorities as a result of legislative loopholes.
The tax authorities, under Article 121 of the Tax Code, issue compliance notices to taxpayers for the analysis and correction of tax returns, based on risk analyses identified by the tax authorities. This time, the tax authorities are targeting taxpayers who have applied for construction tax relief.
In fact, as of 1 January 2019, certain tax incentives or incentives for the construction sector have been granted in Romania (for the period 1 January 2019 – 31 December 2028). These incentives involve:
– an exemption from income tax [according to art. 60, item 5 Tax Code];
– a reduction in the amount of compulsory social security contributions, in the sense that for natural persons who earn income from wages and similar income from wages under individual employment contracts concluded with employers who carry out activities in the construction sector and who meet the conditions laid down in Article 60(5) of the Tax Code, the social security contribution rate of 25% is reduced by 3.75% to 21.25% [under Article 1381 of the Tax Code].
It should be noted that the benefit of the tax facilities on the income tax (- 10%) and social security contribution (- 3.75%) components is a benefit for individuals.
The conditions laid down by the Emergency Ordinance No 114/2018 for the application of these facilities provided as a condition that the turnover obtained by an economic operator in the construction sector must represent at least 80% of the total turnover. However, there were no rules for the application of this proportion of turnover actually achieved from construction activity.
Clearly, this is where the abusive conduct of the tax authorities begins, which never ceases to amaze us: if they can find a loophole to impose additional tax obligations as a result of legislative chaos, they will surely continue to make victims.
We point out that the main order implementing tax facilities in construction was Order No. 239 of 24 July 2019 issued by the President of the National Strategy and Forecasting Commission by means of which the mechanism for calculating the turnover provided for in Article 60, paragraph 5 of the Tax Code was regulated.
In its content, it was provided that in terms of calculating the turnover actually achieved from the construction activity from the total turnover in case the company has foreign branches, only the activity actually carried out on the territory of Romania at the level of the company will be taken into account.
This normative act has never been published in the Official Gazette, as a result of which there is a ruling by the Court of Appeal of Cluj, whereby the court of law found the nullity of this order in terms of the method of calculating turnover, which remains final after the dismissal of the appeal by the High Court of Cassation and Justice.
The court held that the Order is an administrative, normative act for which the obligation laid down in Article 11(1)(a) of the Regulation is imposed. (2) of Law No 24/2000 to be published in the Official Gazette, Part I, an obligation which in the present case has not been fulfilled.
Further, the tax authorities clearly do not stop there.
When they realised what had happened by invoking the nullity of Order No. 239/24.07.2019, they found another loophole to make victims of abuse: they invoked the applicability of Order No. 1942 which approved the model, content and method of submission and completion of the Declaration on the obligations to pay social contributions, income tax and the nominal record of insured persons, but this order was published in the Official Gazette No. 426 of 19 May 2020.
Although at a first glance things would be simple, we point out that from the perspective of explaining the mechanism for calculating turnover this Order contains only a reference to a Note in Annex no. 6, chap. 2, Subchapter I, Section 5, which reminds us that for the determination of the 80% share of the turnover actually achieved from the construction activity, the entities will take into account only the activity carried out on the territory of Romania, the revenues achieved from the construction activity through foreign branches will be taken into account only for the calculation of the total turnover achieved from the entire activity.
Further, on the other hand, they invoke during tax audits Order No 2814/1536/1806/2020 which contains a reference to a Note in Annex 6 chap. 2 Subchapter IV, Section I according to which “The Order of the President of the National Strategy and Forecasting Commission issued for the application of Article 60, paragraph 5 of the Tax Code for determining the 80% share of turnover from construction activity, entities shall take into account only the income from the activity carried out on the territory of Romania.
We show that we are in a situation of abuse by the tax authorities.
We make this statement because as regards the illegality of these Orders, it was correctly assessed by the Court of Appeal of Cluj that these orders (secondary rules) substantially modify the primary rule that transposes the will of the legislator, substantially adding a condition to those indicated in the Tax Code and establishes a distinct treatment for companies that also perform construction activities outside the territory of Romania that perform such activities on the territory of Romania, and such differentiation and condition is not regulated by the primary rule found in the Tax Code.
Thus, it was concluded ab initio that Article 6 of the Annex to Order No 239/2019 is a secondary legal rule that is unclear, leads to arbitrary interpretations and violates the tax principle of certainty of taxation.
Consistently, the two orders – Order No 1942 and Order No 2814/1536/1806/2020, although they have been repealed, are notes in the contents of joint ministerial orders that violate the competence attributed to the President of the National Strategy and Forecasting Commission and contain practically masked the position used by the tax authorities in Order No 239/24.07.2019 null.
Thus, we find ourselves in a situation in which these Ministerial Notices invoked by the tax authorities in a situation of legislative shortcoming violate the principle of legality, ignoring the rules of legislative technique and practically violating the principle of legal certainty. Thus, through inferior normative acts, a condition is inadmissibly added in addition to those stipulated in the primary legislation – the Tax Code.
What is actually sought is to ensure a continuous succession of provisions found in the annulled Order No 239/2019.
In view of these aspects, the Court of Appeal of Cluj ruled that, given the reasons that led to the annulment of Order No 239/2019, set out above, this act being deemed never to have existed, the removal of all the harmful effects requires, including the abolition of the subsequent acts – the two ministerial orders invoked by the tax authorities, which contain an identical regulation from the perspective of the mechanism for calculating turnover, and consequently ordered the annulment of these acts.
This article was prepared, for the Blog of Costaș, Negru & Asociații, by Ms. Larisa Mărginean (Arad Bar Association).
Costaș, Negru & Asociații is a lawyers’ civil partnership with offices in Cluj-Napoca, Bucharest and Arad, providing legal assistance, representation and consultancy in a number of practice areas with a team composed of 17 lawyers and consultants. Details regarding legal services and the members of the team can be found on the website https://www.costas-negru.ro. All rights for the materials published on the company’s website and on social media belong to Costaș, Negru & Asociații, their reproduction being allowed only for information purposes and with the correct and complete disclosure of the source.