SPECIAL TAX INSERT SUMMARIZES RECENT CHANGES, SEE PAGES 13-20 NEWS
LINKS
FOCUS
Ronald Binkofski has been appointed new general manager of Microsoft Romania, replacing Calin Tatomir See page 4
As consumers feel the pinch, IT&C
Romania is keeping its energy op-
retailers are hoping new launches
tions open with an interest in two
will boost their Q4 sales figures
competing gas pipeline projects
See pages 8-9
See page 12
BUSINESS REVIEW
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ROMANIA’S PREMIERE BUSINESS WEEKLY
OCTOBER 25 - 31, 2010 / VOLUME 14, NUMBER 39
BRAND AND DELIVER Some traditional brands from the communist era and even before have survived the onslaught of the free market to take their place on today’s supermarket shelves and high streets. Business Review takes a look at what lies behind their staying power LAURENTIU OBAE
see pages 10-11
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BUSINESS REVIEW / October 25 - 31, 2010
BUSINESS REVIEW
EVENTS
October 28
é Business Review organizes the
Energy – Focus on Power event at Howard Johnson Grand Plaza Hotel.
November 4
é Business Review organizes the
Russian Business Forum at Ramada Plaza Bucharest.
November 10
é Business Review organizes the
Fiscal Litigation event at Ramada Plaza Hotel.
November 17
é Business Review organizes the
Risk Management event.
3
NEWS
Calin Tatomir leaves Microsoft Romania, Ronald Binkofski appointed new GM COURTESY OF MICROSOFT ROMANIA
Ronald Binkofski, new GM of Microsoft Romania
Calin Tatomir has stepped down from the position of general manager at Microsoft Romania, which he has held for the past two years, according to a press release from the company. He has been replaced by Pole Ronald Binkofski. “It is essential to continue the implementation of the company’s business plans in the priority directions established at the beginning of this fiscal year and remain flexible regarding the evolution of the local market,” said the new Microsoft GM. Tatomir cited his achievements at
4
Microsoft Romania as having steered the company back to growth, placed the focus on cloud computing and made Microsoft the most popular employer in Romania. “Two years ago when I took over the position of general manager of Microsoft Romania I believed it was the most sought after position in the IT industry in Romania. Today, I have the same feeling, strengthened by the extraordinary experience that I had as leader of this organization. I am proud of what the team has achieved over these past two years and I am optimistic regarding the impact that Microsoft will continue to have on the industry and on society,” said Tatomir. Before joining Microsoft Romania in October 2008, Tatomir was founder of CCT Consultants, which he sold to avoid a potential conflict of interest between this company and Microsoft. “I have noticed a very vivid team spirit in Microsoft Romania and I am convinced that through Ronald’s appointment we will add value to this
foundation for the accelerated development of the organization and of the Microsoft business in Romania,” said Don Grantham, president of Microsoft Central and Eastern Europe.
CV Ronald Binkofski é Binkofski started his activity in
Romania as the new branch GM after having worked for Microsoft in Poland as developer & platform evangelism lead and, more recently, as marketing, business and operations lead over the past five years. Before joining Microsoft, he was CEE area manager at Software AG. é Binkofski has German and Polish citizenship. He graduated from the Faculty of Applied Mathematics of Jagiellonian University and specialized in mathematics at the Johann Wolfgang Goethe University in Frankfurt.
VAT on food essentials could fall to 5 percent after PDL’s ‘accidental’ vote The Romanian Chamber of Deputies unanimously passed last week bills lowering VAT on basic food items to 5 percent from 24 percent and exempting pensions lower than RON 2,000 from income tax. Although the two bills had previously been rejected by the Senate, the lower house has the final say. If President Traian Basescu approves them, which he might not, they will become valid after being published in the Official Monitor of Romania. The bills could also be thrown out if the government issues an emergency ordinance to prevent them entering into law.The bills lack government support, with MPs from the ruling Democratic Liberal Party (PDL) saying last week that they had voted in favor by accident and would take measures to correct this “technical error”. The two measures could cost the Romanian state around EUR 1 billion a year.Among those who voted for the bills are the finance minister, Gheorghe Ialomitianu, minister of labor Ioan Botis and minister of regional development and tourism Elena Udrea. Simona Bazavan
BUSINESS REVIEW / October 25 - 31, 2010
3Q Martin Schuldt
NEWS
Asirom to open ten new branches and hire more insurance agents by year-end Asirom, part of Vienna Insurance Group, will expand its network in Bucharest by 10 new branches and approximately 100 agents by the end of 2010. The initiative is part of a pilot project that will be implemented across the entire country. Currently, Asirom has 250 insurance agents in Bucharest. “With this project, we wish to ex-
pand Asirom in the most populated residential and business districts of Bucharest, while later we will replicate the model in the entire country. We also wish to enhance our sales team with experienced people on the insurance market, who should take the company to its future development level,” said general manager Boris Schneider.
Asirom has 4.5 million clients in Romania. Since 2007, it has been part of Vienna Insurance Group. In Romania, the profit of the companies that are members of Vienna Insurance Group was EUR 14.3 million for the first half of 2010, which represents an 18.7 percent increase compared with the previous year. Otilia Haraga
Cargill Romania GM How much has Cargill invested in Romania so far? Since we first came to Romania, Cargill has invested USD 100 million and another USD 25 million to upgrade some investments. We are active on the local market in 17 locations and a big part of our half a million tons of grains goes to export. We sell corn produced in Romania in Spain, Greece and the Middle East, while oil seeds are best sold in Western European countries. We depend on the success of the Romanian farmer which is why the growing black market on this sector is severely affecting our business here. How is the black market in crops affecting your local operations? It affects us at the beginning of the chain, when companies come to the farm and buy crops without papers. Whatever goes into the black market taxpaying companies will not be able to get into their flow. This affects the acquisition price because we are not that competitive, and companies active on the black market can simply pay more. It’s difficult to say how much it influences our acquisition price as in the end farmers can play with 24 percent VAT and 16 percent income tax. At the extreme we are talking about a 40 percent tax impact. What is the status of financing in the agricultural sector in Romania? We started this business two years ago on a small scale but the demand was increasing. Currently, we have approved financing of some USD 10 million. This money goes to about 3,000 farmers in the form of chemical and fertilizers. This is something we are also willing to increase because we see the need in the agricultural sector for liquidity as loans to farmers are very restricted. This money comes back to us either in cash or crops, which is obviously our aim. BUSINESS REVIEW / October 25 - 31, 2010
5
NEWS
Metrorex to seek contractors for Rahova-Colentina line design
LAURENTIU OBAE
The new line should be finished in eight years
Bucharest’s subway system will be extended through the creation of a new Rahova-Colentina line, due to be finished in around seven or eight years, Metrorex has announced
through an official press release. The subway company will start the procedure to find a service provider specialized in urban underground public transport to render architectural and engineering services. The new subway line (Magistrala 7 – M7) will pass through Alexandriei, Rahova, Piata Unirii, Mosilor, Colentina and Voluntari, providing access from the southwest, north-east and central parts of Bucharest to the Rahova and Colentina neighborhoods. The line will run for 21 km through 31 stations, plus a depot. The documentation and technoeconomical details of the investment will be made public in 12 months, according to the Metrorex press issue. Corina Dumitrescu
TotalSoft posts EUR 16.8 mln turnover in Q3, has new acquisitions under way TotalSoft, part of Global Finance group, posted a turnover of EUR 16,764,700 at the end of the third quarter, a 15 percent growth compared with the same period of last year. Some 74 percent of the company’s revenues come from the Romanian market while the remaining 26 percent derived from the TotalSoft foreign offices. The company’s best-selling solution was Charisma ERP, a system that generated sales of over EUR 12.5 million. This year TotalSoft intends to expand aggressively on foreign markets and has already opened branches in four countries – Bulgaria, Greece, Serbia and Qatar – following investments of EUR 200,000-300,000 per office. The company estimates it will achieve breakeven in a year from the launch of these offices. “We are a company that is expanding but we are not perceived as an international company right now. Our aim is to become an international company,” said Liviu Dan Dragan (in picture), GM of TotalSoft. TotalSoft has also been involved in projects carried out in three other 6
countries, Austria, Dubai and Saudi Arabia. TotalSoft is currently in the process of acquiring a total or at least major share package in two companies, one in Turkey, which will be finished by the end of this year, and one in Poland, which will be completed by Q2, 2011. “Realistically speaking, we would expect that all acquisitions will involve an investment of EUR 30-50 million,” said Dragan. Over the next three-five years, TotalSoft is looking at opening new offices in Western Europe, more precisely in Germany and Great Britain. Company representatives said they estimate TotalSoft will end 2010 with a turnover of EUR 22.5 million, which would represent a 15 percent growth on the previous year. They also named a figure for the expected turnover that the company will post in 2011, which is EUR 25 million. TotalSoft is part of private investment fund Global Finance, which administers funds of EUR 850 million. Otilia Haraga BUSINESS REVIEW / October 25 - 31, 2010
WHO’S NEWS / CALENDAR
EVENTS, BUSINESS AND POLITICAL AGENDA OCTOBER 25 é The Embassy of the Republic of Azerbaijan in Romania and the Romania-Azer-
baijan Youth and Culture Association organize the Towards Enhancement of European Energy Supply: Azerbaijan in Focus conference at Crystal Palace Ballrooms. By invitation only.
OCTOBER 26 é 11:00 – Salans organizes the "Tax Incentives for Business in Central and East-
ern Europe" free online seminar which will be hosted by Salans experts from Romania, Poland, the Czech Republic and Hungary. Register now for free and reserve one hour at www.salans.com/webcast. é CoSoSys organizes a business breakfast on the topic of new IT developments
and the launch of new products. By invitation only.
OCTOBER 27 é 9:30 – The Association of Electric Energy Suppliers in Romania (AFEER) and
CMS Cameron McKenna organize the Green – The Future of Energy seminar at JW Marriott Bucharest Grand Hotel. By invitation only. é 19:00 – The Dinu Patriciu Foundation organizes the Education Awards Gala at
the Parliament Palace. By invitation only.
OCTOBER 29 é 16:00 – West Eye Hospital Group opens the first private ophthalmologic hospi-
tal in Bucharest, West Eye Hospital Bucharest on 137-139 Vitan Road. By invitation only.
BUSINESS REVIEW / October 25 - 31, 2010
WHO’S BOGDAN DRAGOI has been appointed chairman of the Property Fund’s body of nominees. Dragoi is Romania’s Ministry of Finance secretary of state coordinating the treasury department. He was selected by members of the body of nominees during a closed session of the group ahead of its first official meeting with Franklin Templeton on 14 October. Dragoi will be tasked with leading the body of nominees and ensuring it acts effectively. The appointment is an honorary one, with no additional remuneration attached. MARA STOENESCU is the new client service director of ad agency Frank. She has amassed over nine years’ experience in media and advertising, having run ATL and BTL campaigns for Coca-Cola, Timisoareana, Stejar, Axe and Western Union. She started her career with
NEWS Lowe & Partners and moved on to become account director for Next Advertising. Before joining Frank, Stoenescu worked as marketing director at Realitatea TV. She is a graduate of the Trade faculty at the Academy of Economic Studies. SIMONA MARGINEAN has joined Hammond, Bogaru & Associates. She has been a senior lawyer since 2005, specializing in tax, commercial, regulatory and corporate work. Marginean has advised a major local advertising corporation on its business development in Romania including advising on communications law and licensing requirements. She had worked for a number of law firms as an active collaborator before establishing her own business in 2006. Marginean actively advises in areas of tax and insurance matters.
Business Review welcomes information for Who’s News from readers. Submissions may be edited for length and clarity. Feel free to contact us at editorial@business-review.ro
7
LINKS
ITC players go for new launches on price-dominated market With one foot in the fourth
the laptop segment,” says Condruz. The business and lifestyle segments were affected during this period while the best sold laptops were the standard 15 inch models that cost between EUR 450 and EUR 600. “The optic unit and a 15 inch screen are must-have elements. In second place come a better processor, expanded memory or an expanded hard disk. In third place there are less quantifiable elements such as the brand, warranty and design,” he says.
quarter, traditionally a fruitful season, IT&C producers and retailers are making new launches to boost their chances of achieving higher sales.
ENTRY-LEVEL AND SMART PHONES POLARIZE CONSUMERS’ PREFERENCES
Business Review surveys the latest products thrown out STOCKEXCHANGE
onto the market in the mobile phone and computer categories, their ‘must have’
Key moves: players on the market have had to contend with an increasingly price conscious public
functionalities and what has
“By the end of the product lifecycle (around four months), we expect sales of about 100 units from this high-end category. Overall, by the end of the year we expect to double our market share to 4 percent, compared to the 2 percent we had last year,” says Ishikawa. The most popular Sony products this year have been the multimedia models from the VAIO EA and VAIO EB series on the mainstream segment. “Also, this year we have registered a small increase in our business segment which amounts to 20 percent in terms of value in the local VAIO business. The most popular model was the high-end Z series and for the next quarter we expect a good reach with our new S series,” says Ishikawa. In a consumer profile carried out by Sony, it was revealed that most customers in Romania are the “connector” type, who can be summed up as: “keep me connected so I’m always in touch,” and are also experience seekers. Another prevalent type of buyer is the “status seeker” whose motto is “keep me ahead of the game and help me make the right decision”. In this respect Romanians value looks and design more than users in neighbor countries do. The third important type is the “innovation enthusiast”, users who seek the latest technology and performance. “Romanians’ tastes evolve roughly in the same way as those of people in Western Europe, only with a certain time gap,” Lucian Condruz, sales manager of
changed in consumer behavior. Otilia Haraga The overall PC market will grow by 34 percent this year, across all sectors, according to IT research company IDC. The notebook market, which represents more than 50 percent of the overall volume, will reach approximately 350,000 units. “The growth comes on the basis of companies’ need to upgrade their systems,” Taiju Ishikawa, branch manager of Sony Romania, tells Business Review. He adds that a very visible trend in recent years has been the non-stop growth of notebooks and netbooks, while the number of stationary devices such as desktops purchased has dropped significantly. “Last year was the first time when the notebook market surpassed the desktop market and the latter is still dropping slightly year by year,” says Ishikawa. Capitalizing on this trend, Sony has just brought out a new VAIO range in Romania, consisting of business laptops (S and Z). The most powerful VAIO laptop that Sony has launched was the new Z Series. Weighing under 1.5 kg, it is a high-end model which retails at RON 15,000. 8
Toshiba Romania, tells Business Review. “The netbook is still being purchased as a cheaper laptop and not as a second laptop. Although we are making the transition from desktop to laptop pretty rapidly, we are still lagging behind Western European countries. The basic laptop is the standard 15 inch one with an integrated optic unit. Features such as ultra-portability, autonomy or design still come last in the acquisition decision process,” he adds. This past summer Toshiba put three models out on the Romanian market, celebrating 25 years since the invention of the laptop. The first was a Dual Screen Tablet of 7 inches called Libretto W100, the second was the AC100, a smartbook with an Android operating system, and the third a portable business laptop. the Portege R700. Now Toshiba is preparing to launch a 10 inch tablet with Android-Folio 100 operating system. “We are expecting this category of products to surpass in the future the segment of netbooks and even replace it entirely in three-five years. We are expecting sales of several thousand units in the first six months from the launch,” says Condruz. In Toshiba Romania’s sales mix, laptops sales represent about 60 percent, 30 percent are desktops and 10 percent netbooks. “In a recession, the consumer tends, no matter the industry, to give up certain specifications or brand quality for the price. The same has happened in
Pundits in mobile phone retail agree that the market continues to remain very price-sensitive. They say handsets in the entry-level range are the best sold to all types of buyers. A slightly dissenting voice is that of Roh Pan Ock, president of LG Electronics Romania. While acknowledging the power of a low price, he says that consumers are increasingly opting for advanced technologies integrating functions that offer access to internet services, applications and social media. “Beside advanced technologies, Romanian consumers have started to look for multimedia functions and incorporated business devices, all in one handset. We have noticed they want a handset which incorporates functions that one normally does not find in a regular mobile phone. Romanian users are attracted to and increasingly appreciate smartphones,” he says. Last week LG launched the LG Optimus 7 with Windows Phone 7 operating system, which has entered the Vodafone portfolio and will be available from EUR 129 (VAT included). “Over the next period, we will focus on the segment of smartphone handsets as there are already expectations concerning this segment among consumers,” says Pan Ock. However, it is still the special offers which drive the demand for smart phones forward. “Lately, we have noticed a significant growth in demand for smart phones, which was due to special offers that we have also put out there for clients,” Dobrescu Petre, product division manager of Orange Romania, tells Business Review. He says that among entry-level phones, Nokia and Samsung are the most successful. In the mid-range, customers would rather buy Nokia, LG and Sony Ericsson handsets while those scouring for a high-end handset will BUSINESS REVIEW / October 25 - 31, 2010
LINKS
COURTESY OF SONY
COURTESY OF TOSHIBA
Lucian Condruz, sales manager Toshiba Romania
Taiju Ishikawa, branch manager of Sony Romania
look at Apple, BlackBerry, HTC and Samsung.
tem) and Sony Ericsson Xperia X8 (with Android operating system). Orange has announced that it will soon bring to Romania the Samsung Galaxy Tab, HTC Desire HD, Nokia N8, BlackBerry Curve 3G 9300 and HTC 7 Mozart. “These phones have had great success in other countries and sales have been good, which makes us believe that in Romania the situation will be the same. Of these handsets, Samsung Galaxy Tab is eagerly awaited by Romanian customers and we believe it will have great success,” says Dobrescu.
ORANGE LAUNCHES IPHONE 4 IN ITS STORES
Orange has recently launched the iPhone 4, and is closely followed by Vodafone which has also announced it will have the handset in its portfolio in a few months. The phone can also be bought via several online ITC retailers such as eMag.ro, Pcfun.ro and marketonline.ro. Other models that have recently arrived in Orange stores are Samsung Omnia 735 (with Windows operating sys-
BUSINESS REVIEW / October 25 - 31, 2010
Cosmote, the third largest telecom operator on the local market, and telecom retailer Germanos will soon be launching the Motorola EX115 Dual SIM device, which will be available at RON 399 without a contract and at RON 1 with contract. The operator will also bring the Motorola EX128 dual SIM device for a price of RON 499 lei without contract and at RON 1 with contract. There will also be a new HTC in the offer, the HTC HD with Touchscreen and Android 2.2 operating system. Touchscreen, high-res camera, WiFi, internal memory, memory slot card, mp3 player and Bluetooth connectivity are still the top functionalities preferred by users. “However, the decision to buy a mobile phone is influenced by the value of the handset subsidy,” Alexandru Munteanu, sales operation manager at Cosmote Romania, tells Business Review. At entry level, the best sold models are the Nokia 1616, Nokia 1800 and Nokia 2330. In the best-sold mid-level range come the Samsung S5230, Nokia 6303 and LG KP502. Last but not least, at the high end the most attractive models are the Samsung i9000 Galaxy S, HTC Desire and Nokia E72.
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LINKS
Romanian brands survive capitalist transition through reinvention Communism gave Romanians little in the way of consumer choice. With the arrival of capitalism and the extension of product ranges, one might have expected many of the old brands to just disappear, victims of their more colorful Western counterparts. Yet today, many of these brands LAURENTIU OBAE
offer a survival story. BR takes a behind-the-scenes look at their local and sometimes international success. Corina Dumitrescu Romania was one of the few countries in the Eastern Bloc to have the opportunity of constructing its very own national and affordable vehicle, similar to Germany’s car of the people, the Volkswagen. Carmaker Dacia was founded in 1966 near Pitesti. The Dacia 1100 was the first model released by the Romanian auto manufacturer in 1968, under a Renault 8 license. The carmaker was state-owned until 1999, when it was privatized and became part of Renault Group. And that is the key moment when Dacia’s fortunes changed. From 2000, regular communication campaigns were rolled out, turning 10
Brand and deliver: some of Romania’s traditional products are holding their own among newcomers
Dacia into more of an international brand than a local name. Models of latter years, such as the Solenza, Logan, Sandero and Duster, have notched up impressive sales not only within Romania’s borders, but outside – figures that the communist regime could only have dreamed of presenting through propagandistic, self-aggrandizing messages. In the first semester of 2010, Dacia sold over 181,000 vehicles, according to official information from the group, an increase of 18.2 percent compared to 2009. In Western Europe, over 123,000 automobiles were sold in the first semester of 2010. Sorin Psatta, integrated communication director at the local branch of Graffiti BBDO, the agency that has been managing the Dacia account since 2000, attributes the local brand’s success to its association
with Renault. “Old Dacia 1300 models are in fact Renault 112 vehicles. Romanians have never had the tradition or the expertise to construct vehicles, unlike the French producer, therefore the experience and warranty that Renault Group brings is more than welcome and represents a ‘reason why’, as advertisers put it, which is very important in the decision to purchase a vehicle produced in Mioveni.” Image-wise, in Romania it may seem Dacia has been constantly struggling to escape the inheritance of its forebears’ reputation as barely functional communist vehicles. However, in the last ten years, the brand has focused on functionality, comfort and affordability, with no emphasis on nationality. Interestingly, associations with communism are not at all controversial in Western countries when it comes to the
Dacia. In the German spot “Revolution”, for example, some of the world’s most infamous communist leaders, along with other keynote personalities in recent history, are gathered together in the same location presenting Dacia as the invention for the people that they had all been looking for. In Romania, however, no such associations are made. The younger audience, less and less connected with communism, is now a very important target for the brand. A new campaign will start for the Dacia Sandero on October 25, with a very important online component, promoting a model that has a smartphone incorporated, “in order to serve the urban audience’s needs”, Graffiti BBDO officials explain. Rom Tricolor was the first Romanian chocolate bar, created in 1964 by the Excelent company, which under capitalism became Kandia Excelent and was later taken over by Kraft. Unlike in the case of Dacia, which chose not to make associations with its history through its communication campaigns, Rom has constantly used ironic messages related to its Romanian past and identity. Rom has focused its communication strategy on consistency. The chocolate’s packaging, logo and taste have not changed significantly over the years. In 2005, Rom Tricolor took its communication to the next level. McCann Erickson Romania, started a campaign under the slogan “Rough sensations since 1964”, in which communist realities like propaganda and censorship were presented ironically, as a bittersweet ingredient that one might associate with the chocolate bar and acknowledge as part of his or her past and identity. More recently, however, Rom took its controversial tactics even further. In a time of economic, social and political turmoil, Romanians seem to no longer take pride in their nationality and it is no secret that emigrating has been on the majority’s lips these days. According to sources quoted by McCann ErickBUSINESS REVIEW / October 25 - 31, 2010
LINKS son, 80 percent of young Romanians want to leave the country and only 12 percent regard themselves as patriots. Romanians seem to have a special relationship with foreigners and practice some form of “reactive patriotism”. Therefore, at the start of October, the Rom chocolate bar was released in new packaging, bearing the American flag, as well as a new slogan, “The taste of coolness”. Luckily, the teasing stage of this new campaign only lasted for a week, and soon resulted in Rom’s return to its Romanian roots, as requested by the public through the reactive patriotism mentioned above. The brand is now focused on proud Romanian messages, with allusions to the national anthem and local sayings and a return to the “rough Romanian sensations” slogan. Rom’s temporary American rebranding saw Facebook groups, online petitions and short films from young consumers calling for a return to the old Rom. Some 12,000 people joined forces against the brand’s new image and in just one hour and in one store, the American Rom sold 200 chocolate bars, data from McCann Erickson shows. Some iconic Romanian brands predate communism, with one example being CEC Bank. The CEC brand’s story began almost 150 years ago, when it was founded by Prince Alexandru Ioan Cuza. A milestone in the bank’s history came in 1948, when CEC renounced its status of the central bank of Romania and again became the only savings bank and credit institution. In 1996, CEC began its modernization process and became a bank-stock company, having the Romanian state as its sole shareholder. In 2008, however, at the decision of the bank’s new CEO, RaduGratian Ghetea, a rebranding process was started, both through internal and external communication. CEC had to change the perception inherited from communism as the people’s only option to stash their cash to a full-service modern bank. Although CEC had become functional as a bank earlier, only in 2008 did the message become clear, especially through the addition of the word bank in CEC’s official title. A new logo was created for the bank’s 1,404 agencies across Romania. A yellow-and-green oak leaf, a BUSINESS REVIEW / October 25 - 31, 2010
symbol of tradition and resistance, replaced the former sign that showed a moneybox into which a coin was being inserted. Several advertising spots were created by Papaya advertising agency, highlighting the brand’s proud and nostalgic association with tradition, as well as its rebirth from the ashes. So far, CEC’s rebranding process has resulted in an increase in the bank’s market share from 4 percent in 2008 to 6 percent in 2010 and several national and international awards for the branding process created with the aid of Brandient agency. Tarom, the Romanian Air Transport company, a brand that has existed on the Romanian market for 56 years, but with roots that go even further back into history, is another example of a local company seeking a more coherent brand message. This year marks the company’s first image campaign in its history, started after research showing the brand’s current perception in Romania. Romanians associate the name with “a traditional and trustworthy airline”, “convenient flight times”, as well as “a familiar brand”. Although the research reveals that Tarom has values that make Romanians proud, it is still perceived as an old-fashioned brand. Though the budget for the company’s image campaign is small to medium, reaching around 0.3 percent of the total turnover, hopes are that it will have a strong impact, whose results will be measured at the end of the campaign in December, in order to decide a long and medium-term communication strategy, says Ruxandra Brutaru, Tarom’s GM. The new campaign was developed with the aid of Ogilvy advertising agency and through its most recent TV spot focuses on the message that “In order to be someone, you have to get somewhere”. In its new communication campaign, Tarom also highlights its membership of the Sky Team alliance, a brand of international resonance, the secondlargest airline alliance in the world. The journeys of these brands seem to suggest that the secret of success lies in reinvention to reflect the transition from communism to consumerism. Joining the names above are Farmec cosmetics, Dero detergents and Arctic refrigerators and others, all with the stories of adapting to the brave new business world. 11
FOCUS
Competing pipeline projects are a gas, gas, gas for Romania cubic meters of natural gas annually. The project is seen as a rival to the planned Nabucco pipeline, in which Romania has already committed to participate. Both projects are due for completion sometime in 2015. Nabucco is aimed at diversifying the sources of imports. It is scheduled to deliver approximately 31 billion cubic meters of gas annually from the Caspian Sea to Central Europe via Turkey and Romania, bypassing Russia. Romania’s participation in these projects will modify the present situation, with ramifications on the internal gas market too.
Seen so far as just wishful thinking, gas interconnection with other regional countries has become a reality: last week Romania and Hungary inaugurated the AradSzeged gas pipeline. And the authorities’ big plans do not stop there. Romanian intends to connect
Romania’s natural gas reserves and consumption
with Bulgaria, Serbia and Moldova, and although they are seen as COURTESY OF GAZPROM
competitors, it also wants to be a part of both the Nabucco and South Stream gas pipeline projects. Romania is keeping its options open with an interest in two competing gas pipeline projects
Dana Verdes
12
will substantially increase the security of supply,” said Zsolt Hernadi, MOL’s chairman and CEO. The pipeline that currently sends gas from Hungary to Romania can be made bi-directional with additional investments on the Romanian side that would further increase the significance of this interconnection pipeline. Romania also plays an important role in the transit of gas from Russia to Bulgaria and Turkey, and can play an enhanced role after the Nabucco pipeline is finished and the import of LNG is done through Constanta. In addition, the country has recently signed a memorandum with Azerbaijan and Georgia concerning the construction of the AGRI gas pipeline. In order to enhance gas transit to neighboring countries, Romania plans to interconnect with nearby states Serbia and Moldova, according to the Romanian Competition Council. Meanwhile, further gas interconnector projects encouraged by the EU in the region include the Romania-Bulgaria pipeline project, planned to run under the Danube River from Giurgiu (the Romanian bank) to Ruse (Bulgarian bank. The interconnector will be built by Transgaz and Bulgargaz under an existing agreement, with completion intended by the end of 2011. In light of the geopolitical gas proj-
ects, including those for storage in depleted reservoirs or LNG tanks, the importance of the regional strategic position of Romania and its massive gas storage capacity are key factors. Moreover, the national gas grid infrastructure is well developed. Romania imports gas from only one source, the Russian Federation. Policy in connection with gas exports across the EU is based on a large system of pipelines, of which only one passes through Romania, with a connection station in Isaccea. The Russian gas giant Gazprom has a major gas transport project in southern Europe: South Stream. Just last week, Gazprom officials and the Romanian authorities signed a memorandum of intent over the possibility that the South Stream pipeline may transit Romania. “Following today’s discussions (with Romanian officials), we’ve signed a memorandum of intent for a technical and economic analysis of a South Stream pipeline going through Romanian territory,” said Alexei Miller, Gazprom’s chief. The firm has already completed feasibility studies for all the countries included in the project and is now drawing up the technical-economic study for the entire South Stream project, Miller added. The pipeline will be 900 km long and is estimated to transport 63 billion
SOURCE: COMPETITION COUNCIL STUDY, OCTOBER 2010
The Arad-Szeged pipeline, recently inaugurated at Csanadpalota Metering Station in Hungary, clears the way for gas supply diversification in the region, long desired by European countries and a start for gas supply separation from “Mother Russia”. Hungarian gas transporter FGSZ Foldgazszallito and Romanian gas firm Transgaz jointly built the pipeline to allow natural gas transmission between the two countries, which boosts competition within the region. Implementation of the 47-km long Hungarian section of the 109-km long pipeline with a 3 billion m3 capacity required a EUR 33.3 million investment from the Hungarian gas company. The European Union supported the implementation of the project with EUR 17 million. ”The MOL Group believes that an integrated gas market can be established in the CEE region through regional cooperation. The standard infrastructurebased platform can facilitate the purchase of gas from new sources within the region. The Arad-Szeged interconnection gas pipeline boosts market competition that will present several advantages to both traders and consumers. Relying on future transmission projects, like the Nabucco pipeline, such crossborder solutions interconnecting regions
Romania’s natural gas reserves are estimated by Cedigaz 17 at about 630 billion cubic meters (Bcm). The country’s production used to cover more than 70 percent of total gas consumption. Due to the internal reserves, the gas provided nearly 35 percent of total energy consumption. As the local deposits continued to be exploited, local production has dropped from 35 Bcm in 1988 to only 11 Bcm billion in 2009. The decrease has led Romania to lean more heavily on imports from Russia. On average, from 2003-2008 Romania imported 30 percent of its gas needs from Russia. This is in contrast to the early 1990s when the country was importing only 18 percent of its consumption needs. Since the late 1980s, consumption has dropped from values of around 40 Bcm to about 13 Bcm in the recession year 2009. The explanation lies in the structural changes that have occurred in the economy over the past 20 years as the share of heavy industry has reduced in favor of the services sector. In order to cope with such variations, Romania has developed gas storage capacities in depleted reservoirs. Today, the country can rely increasingly on deposits designed to cope with winter consumption, which registers a maximum deposit extraction of 26 Mcm/day.
BUSINESS REVIEW / October 25 - 31, 2010
TAX INSERT
LAURENTIU OBAE
Taxing times as recession wreaks Romanian havoc When it comes to the local fiscal environment and its attractiveness, it all boils down to two fundamentals which perhaps all legal and tax experts agree that Romania lacks: fiscal stability and predictability. With this Tax Insert BR takes a look
just that, driving both potential investors and local companies towards other, more attractive markets in the Balkan region. Also, tax specialists say that tax evasion is growing during this period of turmoil instead of decreasing because the barriers put in front of honest taxpayers are too oppressive. Foreign investors complain that tax evasion has reached new limits in agriculture especially for wheat and oil beans. Currently, leaders of the top companies active on the local market in the agriculture sector are lobbying Brussels for the right to introduce the reversed VAT mechanism. Using this fiscal instrument the authorities could ensure greater control over those selling and buying grain and could take out the middle-man from the equation. Companies in this sector are awaiting a final answer from the European Commission by the end of the year. The competition between regional countries in luring investors has only been intensified by the recession and without a coherent fiscal strategy for the medium- and long-run Romania is losing ground and credibility. The country could benefit from introducing a holding law, experts say, as Central and Eastern European groups of companies could be interested in locating holdings here. Investors are calling for holding regulations that involve a unique associate and not taking capital in-
Recent legislative developments é New rules on the treatment of
income from professional activities é Tax incentives for research and development costs é Changes to the norms to the fiscal code covering individual and corporate tax é Changes to the norms to the fiscal code covering VAT and excises é Changes to the norms related to the procedure for issuing a certificate for the deferment of payment of VAT on the import of goods come. Specialists say that Romania has reached a stage at which there are many areas of fiscal flaws which cannot be patched up. Advisors to Prime Minister Emil Boc announced recently at the Tax and Law event organized by Business Review that currently there is a lot of pressure from the DemocratLiberal Party (PDL) to reduce the flat tax to 10-12 percent. It remains to be seen what 2011 will bring by way of fiscal measures to restart the Romanian economy, as the current government faces an uncertain future, this week having to survive a vote of no confidence.
at some of the latest legislative developments as they have been reflected in recent public discussions such as the Tax&Law event organized by this magazine on October 14.
BUSINESS REVIEW / October 25 - 31, 2010
nesspeople complain that managing a business in Romania is done in spite of the government’s fiscal measures rather than with its support. This situation is often cited with reference to high taxes and abusive fiscal inspections, with many taxpaying companies complaining that they are paying the bill for the authorities’ inability to efficiently collect money and fight tax evasion.Although Romania is in no position to undermine its credibility as an investor-friendly economy, the government’s fiscal bumbling does
LAURENTIU OBAE
From the controversial minimum tax to the VAT increase and the even more controversial inclusion on the Registry of Intra-Community Operators, 2010 has brought a lot of changes to the local fiscal scene. And not always those needed in times of recession, whether by local firms or potential investors, tax pundits argue. When it comes to the way in which the authorities have reacted to the challenges brought about by the economic crisis, the same experts say too little was done and too late. This has made many local busi-
Experts attending the October 14 BR Tax & Law event say Romania’s unpredictable tax regime loads the dice against investors. Read more on the changes and their consequences in the comments included in the following pages. 13
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Working with freelancers TAX&LAW By Raluca Bontas Senior Tax Manager Deloitte Tax SRL
A quick look at years 2009 and 2010 confirms that, until the crisis hit Romania, the level of amendments to the tax legislation was rather manageable. A big wave of tax changes has occurred however in the past two years, increasing not only the tax burden but also uncertainty amongst taxpayers in respect to their obligations towards the state budget. One of this year’s tax quakes was caused by the introduction of the “dependent activity” definition and related criteria for reclassification. An element of novelty, which was a must-have in our tax legislation but which, unfortunately, was implemented a bit too hastily and a bit more too aggressively. Our tax system focuses on the type of income obtained, on one hand allowing for a preferential regime in case of certain types of income and on the other, heavily taxing labour. In this context, taxpayers used on a large scale, sometimes abusively, various types of collaboration structures with their employees with a view to diminish the labour costs. This practice was of course detrimental from a tax collection standpoint, and the authorities reacted, one may say in an unbalanced manner. The definition under discussion is more of an enumeration of certain criteria which generally characterize an employment relationship; however it is sufficient that one criterion is fulfilled for the authorities to reclassify a certain activity as having a dependent character. To mention only a few of these criteria: - the income beneficiary is subordinated to the income pay14
er, respecting the labour conditions imposed by the latter such as the place of work or the work schedule; - the income beneficiary uses exclusively the material basis of the income payer such as the working environment or the necessary tools, bringing only his or her physical or intellectual capacity, without investing any capital of his or her own; - the income payer covers transportation costs for the beneficiary. The last version of the criteria under discussion, issued through Government Emergency Ordinance no. 82/2010 is slightly improved as compared to the first attempt when the definition was initially introduced (i.e., through Emergency Ordinance no. 58/2010) and which included the most controversial condition for reclassifying activities: “any other element reflecting the dependent nature of the activity”. To this end, it should be acknowledged that even where an authentic independent activity is performed, some of the mentioned criteria still might be fulfilled and thus the application of the said definition becomes arbitrary in the hands of the authorities. It is an often practice that for example services agreements have clauses regarding the manner in which a certain service is delivered or its place of delivery, or the fact that the service is delivered within a certain schedule. Whereas the conditions are not cumulative, the issues associated with the hiring of freelancers are thus substantial and quite unclear. The consequence of the deemed employment relationship is that tax and social security contributions are to be paid by the deemed employer as if the freelancer had an actual employment relationship with the deemed employer. However, the same should be applicable to individuals who use their own limited company, because the
new rules come to define the “activity”. The Methodological Norms issued for the application of the Fiscal Code specifically stipulate that such activity may be reconsidered if the legal form under which it is performed does not reflect its economic content. In this context, there are at least two challenges faced now by the taxpayers: - how do genuinely self-employed people, in business on their own account, mitigate the deemed employment risks surrounding their activities? - how do you undertake proper tax and social charges compliance, admitting you are in a deemed employment situation? For the first question, it should be mentioned that there are certain categories of freelancers who are exempt from such potential reconsideration of their activities. I refer here to those individuals who perform professional regulated activities (lawyers, accountants, architects, pharmacists, etc) and those who assign copyrights, provided that the applicable legislation on copyrights is observed. As regards the rest of the freelancers authorized to conduct independent activities, it is recommended that at least some elements are taken into account, both for the current and future collaborations, with a view to mitigate potential deemed employment risk: - review contract terminology to eliminate terms or phrases such as “employee” or “work” or others which are generally characteristic to employment agreements - examine the length of the contracts so as to evidence more the “project-type” of delivery and not a general framework for ongoing activities - make sure you have proper statements of activities performed to support their actual delivery - consider ways of proving
that the freelancer is allowed to exercise professional discretion in rendering his or her services. In terms of those taxpayers who acknowledge that their relationship with the freelancers has a dependent character and wish to undertake the proper compliance (computing, withholding, paying and declaring the social charges due), this would be rather difficult to achieve without formalizing the relationship into an employment agreement. This mainly concerns agreeing on the taxable base and dealing with the potential double payment of social charges since the freelancer still has his or her own obligations under the relevant legislation to pay health insurance and pension contribution. Until a proper alignment of these provisions with those of the Pension Law no. 19/2000 and of the Health System Reformation Law no. 95/2006, it is recommended that the actual facts and circumstances are presented to the authorities and a formal opinion is requested. The above concerns only a part of the consequences brought in by the new rules. The discussions around this matter involve also the use of civil conventions, of partnerships or of other forms of collaboration. Due to the effects that these changes may have both at the level of the freelancers but mostly at the level of those who engage freelancers, proper analysis should be made in due time, so as to reduce the accumulation of contingent tax liabilities.
Deloitte Tax S.R.L. 4-8 Nicolae Titulescu Road, East Entrance, 3rd Floor, Sector 1, 011141, Bucharest, Romania Tel: + 40 21 207 54 04 Fax: +40 21 222 16 60 www.deloitte.com/ro BUSINESS REVIEW / October 25 - 31, 2010
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From tax strike to the strike of the tax inspectors: why we need a structural reform of the tax administration TAX&LAW By Gabriel Sincu Partner, Head of Tax & Outsourcing - Mazars
During a meeting I had this summer with other tax consultants, to discuss the never-ending story of the changes in the Romanian tax code, somebody came with the idea of a tax strike: “why not asking all our clients to stop paying their taxes for a few months and throw the government in a major crisis? Only then, the government will be able to feel a similar sensation to those caused us when implementing a tax change without any basic upfront preparation!” Of course, such a radical proposal generated smiles around the room, as every tax professional attending that meeting was aware that this is a dramatic scenario and no reasonable decision maker will put his business in danger by implementing such a suicidal action. We all know that this concept is not accepted by any of the Romanian applicable laws and moreover, such a behavior can be ultimately seen as tax evasion by the tax authorities. Consequently, if one or more taxpayers try to take such an action, the tax authorities have all the enforcement procedures available to make BUSINESS REVIEW / October 25 - 31, 2010
him / them pay the outstanding amounts of taxes due: freezing the bank accounts, seizing tangible assets and selling them and finally, if the debt is not recovered, closing the business. Now, a few months after that discussion, we realized that the risk of a strike in the tax field does not come to government from the taxpayers but from its own employees, i.e. the employees of the Ministry of Finance: people refused to do their work, started a spontaneous strike and claimed their salary benefits (the so called “incentives”) which were eliminated as part of the budget deficit reduction plan. Such an unexpected action raises two huge question marks: (i) Are the government and the taxpayers two antagonistic institutions having opposite interests? Considering the above presented case, I would rather say that this is not the case. The taxpayers acted as a real partner of the government during these difficult periods, paying the taxes in due time and not even dreaming at such a tough decision as tax strike. We noticed that the cash collection improved during the last period and this is not due only to the increase of VAT but also to the fact that the voluntary compliance of the taxpayers increased.
Maybe this case will make the government in general and the Ministry of Finance in particular, start considering the taxpayers and the business environment as business partners and start a real dialogue when it comes to the changes in the tax legislation. This will make all our lives better. (ii) How healthy is the Romanian tax administration at this moment and what can be done to change this abnormal state of facts? All the details presented in the newspapers during the last days shown us the illness of the tax administration: people paid with embarrassingly low salaries, all their existence relying on this corrupt system of incentives. Incentives meaning amounts paid as bonuses to the salary, directly from the additional taxes cashed from the taxpayers, but without any basic rewarding system; the only way of distribution is the willingness of the head of department. In my view, under these circumstances, there are no chances for the tax administration system to improve unless a structural reform is implemented. What are the main points of such a tax reform in my opinion? ● Implementation of an integrated IT system: each taxpayer has to be identified based on tax registration
number (in case of legal entities) or personal identification code (in case of individuals) for all his tax duties. ● Centralization of administration and control for all taxes and social contributions in only one institution. This will avoid the multiplication of the processes and doubling the work. ● As a consequence of the above two measures, a significant number of people shall be released from the system. Indeed, this is a sad measure but a real reform of the system is not possible without it. This way, the low performers are eliminated, improving the quality of the work and at the same time, for those remaining in the system, the remuneration scheme can be significantly improved. Of course, implementing such a tough reform is not an easy exercise as it may require political will, disputes with trade unions and last but not the least, dealing with change management. However, it is my opinion that without such reform we will continue to complain for another 20 years.
MAZARS Romania Str. Economu Cezarescu, nr. 31B RO-060754, Bucharest, Romania Office: +4 031 229 26 00 Fax: +4 031 229 26 01 www.mazars.ro 15
TAX
Transfer pricing – latest legislative and practical developments TAX&LAW
multinational company for the benefit of various subsidiaries. The report tackles By Adrian Luca debatable aspects such as the Director evidence that a service has Transfer Pricing Services been provided, invoicing, back-up documentation, shareholder costs, allocation Legislative developments keys and mark-ups levels. 2010 marks a milestone as regards the legislative and Moving to the local level, practical developments in the the most important legislative area of transfer pricing both at the international and local development in 2010 is the clarification brought to the levels. Fiscal Code stating that doOn July 2010, the OECD mestic related party transacpublished the revised Transfer tions fall within the scope of Pricing Guidelines for Multi- transfer pricing audits. national Enterprises and Tax To date, the tax audit pracAuthorities. The revised tice shows that the tax authorguidelines will have a signifiities have focused on crosscant impact on the application border related party transacand investigation of transfer tions. Following the change to prices in various jurisdictions, the Fiscal Code, we expect the including Romania, as the dotax authorities to start carrymestic transfer pricing legislation is in line with the ing out transfer pricing audits OECD guidelines and the Ro- on domestic related party manian tax authorities have to transactions as well and to reconsider the guidelines when quest the transfer pricing docinvestigating transfer prices. umentation file for both doIn a nutshell, the most signifi- mestic and cross border transcant changes refer to (i) re- actions. moval of the distinction beAs the Romanian transfer tween traditional methods and pricing legislation does not profit-based methods; (ii) impose a minimum threshold guidelines on how to perform in terms of monetary value of a comparability analysis; (iii) intra-group transactions that guidelines on the application of profit split method and the need to be documented, the performance of working capi- added clarification will imtal adjustments; (iv) inclusion pose a significant administraof a new chapter dealing with tive and cost burden especialtransfer pricing aspects of ly for small and medium taxpayers dealing with Romanbusiness restructuring. ian related parties. Another legislative develPractical developments opment at the international transfer pricing audits level with a potential future Transfer pricing is currentimpact at the local level is the draft report issued by the Eu- ly positioned as the hottest ropean Union Joint Transfer topic on the tax agenda of fiPricing Forum on intra-group nancial directors and a main services. This report deals audit risk area for multinawith the tax and transfer pric- tional companies operating in ing aspects of the low value Romania. added intra-group services This is also revealed by a centrally performed by a 16
need for financial resources will continue to impose an indirect pressure on the tax authorities to collect more money for the state budget. The number and complexity of the tax audits has already increased (and this will surely continue from now on) and the investigation of transfer prices seems to become stanUnfortunately, the investi- dard practice during these augation of the transfer prices dits. used has proved to be, in most Therefore, the transfer cases, a lengthy and complex process that led to the suspen- pricing risk is not a theoretical sion and prolongment of tax one anymore as it has become audits as well as to numerous real and immediate. Not and complex information re- preparing for a tax audit and quests from the tax authori- for an investigation of your transfer prices is a poor strateties. gy that may result in signifiPractice also showed dif- cant tax liabilities. Performferent approaches in investi- ing a transfer pricing risk asgating transfer prices from sessment of your related-party one audit tax team/fiscal ad- transactions (both domestic ministration to another. In and cross-border) in advance some cases, we witnessed: (a) becomes imperative and aggressive approaches which would allow the identification involved a manual check of of the main risk areas. The the companies included in the next steps should be the benchmarking studies, (b) in- preparation of the transfer depth analysis of the cost base pricing documentation file for the provision of intra- supporting your tax position group services, (iii) additional for the tax years open to an tests performed with the pur- audit, followed by the alignpose of analysing the prof- ment of your transfer pricing itability of the main competi- policies to your business tors of the audited company, model. (iv) analysis of the losses inŠ Transfer Pricing Services 2010 curred and detailed informa– A ll rights reserved tion requests on the reasons which generated the losses. transfer pricing audit survey that we are currently carrying out. In response to this survey, approximately 80 percent of the respondents declared that transfer prices were subject to investigation by the tax authorities during the general tax audit or during VAT reimbursement procedures.
The different approaches of the various audit tax teams can be explained by the following two reasons: (i) currently there is no internal guide/methodology that can be followed by the tax inspectors during the investigation of the transfer prices, (ii) most tax inspectors lack expertise in the transfer pricing area. The current economic conditions and the continuous
5 Corvinilor Street, Ground Floor 060772, Bucharest Mobile: +4 0742 159 142 adrian.luca@transferpricing.ro
www.transferpricing.ro BUSINESS REVIEW / October 25 - 31, 2010
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Tax incentives for research and development costs TAX&LAW By Florin Gherghel Head of Tax Department, Noerr Finance & Tax
Prof. Univ. Dr. Eng. Gheorghe I. Gheorghe1 declared in a 2009 press release from the Bucharest Chamber of Commerce and Industry that “All developed countries have increased their research budgets by 50 percent even up to 100 percent in some cases, as it is well known that the application of the research results may be a solution for coming out of the crisis.” At the same time, Article 1 of Ordinance no. 57/20022 reveals that “scientific research and technological development […] are the main activities creating and generating economic and social progress.” Reasoning with those mentioned above, the Romanian tax authorities, along with specialized organizations, want to encourage the involvement of the private companies in research and development and based on Article 191 of Fiscal code grant them the following tax incentives: a)Supplementary deduction of 20 percent of the eligible expenses f o r re-
search and development activities at the moment of calculation
of the taxable profits; b)Application of the accelerated depreciation method in case of machinery and equipment used for research and development activities. Unfortunately, the “encouragement” of the Romanian tax authorities stopped at this stage, because although the mentioned provisions entered into force at the beginning of 2009, the methodological norms that make their application possible were released only after the middle of 2010 by Order of Ministry of Public Finances no. 2086 and of Ministry of Education, Research, Youth and Sports no. 4504 published in the Official Gazette no. 573 as of 12 August 2010. The norms reveal that the tax incentives are granted only for research and development activities leading to results which can be capitalized upon by the taxpayers, for their own benefit, with a view to increase their revenues. It is specifically mentioned that the term “capitalized” refers to the process by which the outcome of the competitive research is used, according to the requirements of the industrial or commercial activity, in the social, economic and cultural life. At the same time, the norms give a clear definition of the research and development activity, in accordance with the specific EU and internal legislation, i.e. Ordinance no. 57/2002, Regulation no. 800/20083. As regards the supplementary deduction of 20 percent, the norms provide for a list of eligible expenses, such as: - Depreciation of tangible assets, produced or newly acquired and used for research and development activities; - Salaries of the personnel directly involved in the research
and development activities; Maintenance and repairing expenses performed by third parties and related to tangible assets, produced or newly acquired and used for research and development activities; Depreciation of intangible assets, newly acquired and used for research and development activities; Operating expenses, including expenses for raw materials, inventory, consumables, etc. incurred for research and development activities; Overhead costs which can be, directly (e.g. rent of the premises where the research and development activities are performed) or based on an allocation key (e.g. administrative costs), allocated to the research results. Furthermore, the norms state that only the costs that are booked in the accounting of the taxpayer based on justifying documents, as provided by the specific accounting legislation, and which are incurred with a view to realize revenues, are eligible. The supplementary deduction is calculated quarterly or annually, as the case may be and must be evidenced in the annual profits tax return submitted by the taxpayer. As regards the second tax incentive, i.e. accelerated depreciation method in case of machinery and equipment used for research and development activities, the norms guide us to specific types of machinery and equipment detailed in the Catalogue regarding the classification and normal period of operation of tangible assets. The accelerated depreciation method gives the taxpayers the possibility to deduct 50 percent of the acquisitions costs of the newly acquired tangible assets in the first
year of operation. In addition, the norms present a list of activities that are not eligible for the purposes of these tax incentives of which we mention: - Research in the field of social science (including economic science, business management and behaviour science); - Tests and analysis for quality and quantity control; - Operational research, such as management studies or efficiency that are not performed totally/exclusively for research and development activities; - Market research, tests and market development, sales or consumption promotion; - Commercial and financial analysis for market research, commercial production or distribution of a material, product, machinery, process, system or service that is new or improved. Given the clarifications brought by the norms and the continuous development change of all fields of activity that make the research and development mandatory to maintain the competitiveness, we consider that the more and more companies will invest in research and development activities and therefore will benefit from the tax incentives detailed in the present article.
Str. General Constantin Budisteanu nr. 28 C, sector 1 010775 Bucharest / Romania T +40 21 312 58 88 F +40 21 312 58 89 florin.gherghel@noerr.com
Prof. Univ. Dr. Eng. Gheorghe I. Gheorghe is the general director of The National Institute of Research and Development in Mechatronics and Measurement Technique and the leader of the working group “Research, Development, Innovation” within Bucharest Chamber of Commerce and Industry. *2 Government Ordinance no. 57/2002 regarding scientific research and technologic development, with the following modifications and completions, published in Official Gazette no. 643 as of 30 A ugust 2002. *3 Commission Regulation (EC) No 800/2008 of 6 A ugust 2008 declaring certain categories of aid compatible with the common market in application of A rticles 87 and 88 of the Treaty (General block exemption Regulation). *1
BUSINESS REVIEW / October 25 - 31, 2010
17
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Bowed heads during tax audits TAX&LAW By Delia Dragomir Salans, Managing Counsel
Recent headlines highlighting the protests of tax inspectors against the elimination of their incentives bring to mind the kinds of tax audits that often led to certain incentives for the tax agents. Although taxpayers everywhere – Romania included, especially given the tax authority’s presumption of fraud – stop sleeping well when they receive the dreaded letter announcing a tax audit, they hardly ever seek qualified advice in due time. Such behaviour appears to be the rule in Romania, and a good explanation for it may be the mentality reflected by the old Romanian saying: “a bowed head is never cut by the sword”. Hostility towards tax compliance is as old as taxation itself. Historical records show that in 60 A.D. Boadecia, Queen of East Anglia, led a revolt that could be attributed to corrupt tax administration by the Romans; in Great Britain, the 100 Years War (1337-1453) between England and France was reactivated in 1369 – among other causes – by the rebellion of the nobles of Aquitaine against the oppressive “fiscal” policies of Edward, The Black Prince. And not to pick on Great Britain, but that country’s oppressive tax policies towards its North American colonies provided the spark for rebellion that became the American Revolution. And the USA was only a few years 18
old when President George Washington had to put down the Whiskey Rebellion of the early 1790s, caused by an unpopular excise tax on whiskey. In contrast to such “belligerent” attitudes, Romanian taxpayers seem convinced that confronting the often abusive and unprofessional tax agents’ behaviour will only result in retaliation and, probably, higher tax bills. Although widely held in Romania, this view is false – recent experience leads to the conclusion that the less the taxpayers fight the system, the higher are the additional taxes to be paid and the more abusive in their audits the tax agents tend to be. Claiming that Romania has bad or insufficient legislation and implementing norms has become one of the favourite topics (and seen as a mere cliché), not only by politicians and legal professionals but also the media. But few if any seem to make the link that quite often it is the lack of competence in making use of and/or applying the existing legislation that renders the norms inefficient. This happens most often with tax audits: although the fiscal procedure lays down
specific principles with which the tax agents should comply (e.g., informing the taxpayer about his rights or the obligation to assess a situation as a whole in order to correctly determine the taxes – though unhappily defined in the applicable norm), their non-compliance is hardly ever challenged and the taxpayer inevitably tries to “solve the matter amicably”. Thus, the Romanian taxpayer hopes that “paying something” and “being nice to the tax auditor” will get him through the tax audit with the least damage possible. This is equally true for large companies as it is for individuals, and it is rare for the personnel representing a company during a tax audit (usually the CFO or someone from the finance department) to ask for advice during the audit. As a consequence, the taxpayer – ignorant of his rights – speaks directly to the tax auditor, thinking that by answering the agent’s questions immediately, the auditor will be kinder and the audit will be finished more quickly and with fewer problems. Not only that, but, once the audit is final, the taxpayer meekly consents in writing to the agent’s findings. This is usually a fatal mistake and almost
always results in a larger tax bill. Such behaviour is not only the result of everyone knowing everything in Romania, but also the habit of everyone trying to solve his or her problems independently, without professional advice. Widespread mistrust of Romanian courts’ tax rulings contributes to a sense of helplessness and compounds the problem. Hence, the vicious circle is closed: the less one makes use of his procedural fiscal rights the less effective they shall become, and the less effective the fiscal procedural norms are rendered the more abusive the tax auditors shall be. Having said all that, one cannot – for obvious reasons in a country where tax legislation is changed every other day and there politicians seem to pass bills by mistake – always make a solid argument for challenging the tax agents and their findings. But until such attitude becomes the rule and until taxpayers start to exercise their rights, the abusive attitudes of the tax agents (on strike these days to claim their incentives…) shall continue, and those who bow before the tax authority’s sword may get to keep their heads, but will continue to hand over more of their treasure than the law requires.
General C Budisteanu 28-C 010775 Bucharest Romania Tel: +40 21 312 4950 Fax: +40 21 312 4951 www.salans.com BUSINESS REVIEW / October 25 - 31, 2010
TAX The implementation by the Romanian tax authorities of tax provisions regarding holding companies
TAX&LAW By Daniela Lungu, ACCA Tax Senior Manager
Under the current fiscal environment the Romanian or the foreign investors do not seem to be encouraged to set up groups of companies in Romania. One may say that a corporate tax rate of 16 percent is aimed at encouraging the investors to select Romania as “country of choice” for their investments. Unfortunately, the frequent changes introduced in the Romanian fiscal law generate a lack of predictability and stability as far as the investors are concerned. So, in order to attract and stimulate the investments, it would be important for Romania not only to have a predictable fiscal environment, but also to implement a legislation concerning holding companies. Currently the businesses carried out by investors in Romania are generally organized as subsidiaries of foreign companies, while the holding companies are located in other jurisdictions. Some of the investors are even considering to relocate their Romanian businesses in other jurisdictions with a more favourable fiscal climate. What measures could the Romanian tax authorities take in order to maintain the current level of investments and attract new ones, and also to encourage the incorporation of holding companies in Romania? We briefly describe below some of the provisions which we believe would have a positive impact on the development of businesses in Romania. Capital gains realized by Romanian companies Currently, if a Romanian company sells the shares that it holds in another company to a third party, the capital gains are taxed at 16 percent irrespective of the shareholding percentage or of the duration of holding the shares. By comparison, if a foreign company sells the shares it holds in Romanian companies to a third party, the capital gains derived by the foreign company are not taxed in Romania (except in some cases), by virtue of the tax treaties entered into by Romania. Also, in some countries the sellers may even enjoy from exemption from tax on the capital gains earned upon the sale. This means that the Romanian tax authorities do not collect taxes pursuant to the sale by non-Romanian companies of shares in Romanian companies (except in some cases). So, if Romania introduced a similar exemption for Romanian companies which sell their shares in other companies, this would most likely result in an increase in the BUSINESS REVIEW / October 25 - 31, 2010
volume of investments made in Romania, without having a significant adverse impact on the collection of taxes. Distribution of dividends by Romanian companies The distribution of dividends from one Romanian company to another Romanian company currently leads to a tax leakage of 16 percent for the group, as the subsidiary is required to withhold a 16 percent tax from the dividends paid to its shareholder. This 16 percent tax rate was introduced in the Fiscal code on 1 July 2010 and replaced the previously applicable tax rate of 10 percent on the dividends paid by a Romanian company towards its Romanian shareholders. Of course, such a change has an adverse impact on the companies’ cash flow. Please note that, by virtue of the EU parent-subsidiary directive applicable in Romania starting 1 January 2007, this 16 percent tax rate applies in cases where the shareholder owns less that 10 percent of the shares in the subsidiary or where the shares are held for less than two years. By comparison, dividends paid by Romanian companies to their shareholders located in other jurisdictions may subject to tax rate lower than 16 percent or may even exempt be from tax on dividends by virtue of the tax treaties entered into by Romania (for setting up holding companies, the investors usually select a jurisdiction which offers a favourable tax treatment of the dividends distributed by the Romanian subsidiaries). Having this in mind, we believe that the elimination of the 16 percent tax on the dividends paid by one Romanian company to another Romanian company would encourage the set up of holding companies in Romania, while not having a significant adverse impact on the state budget. The investors would also be encouraged to develop their businesses in Romania if they were to have the possibility to distribute their profits by way of dividends during the year, not only at year end (as is currently the case under the Romanian law). The main consequence of distributing dividends during the year would be that the cash flow position of the shareholders of the Romanian companies would be enhanced. At the same time, such distribution of dividends would not have an adverse impact on the tax collection process, since such dividends would be subject to the tax regime applicable for dividends distributed at year-end. Financing the business of Romanian companies Financing the business of Romanian companies by way of loans granted by their shareholders currently generates a tax leakage of 16 percent on the interest charged on such loans, as the Romanian lender would need to pay corporate tax on the interest revenue. In order to opti-
mize the tax position at group level, Romanian companies usually contract loans from group companies located outside of Romania. The loans are generally routed via jurisdictions which offer a favourable tax treatment of the interest paid by the Romanian subsidiaries, by virtue of the provisions included in the tax treaties to which Romania is a party. Such a tax planning exercise usually leads to zero taxes on interest being paid to the Romanian budget. It is therefore clear that, if the 16 percent corporate tax on interested charged between group companies were to be eliminated (subject let’s say to the fulfilment of certain shareholding conditions by both the buyer and the seller), the adverse impact on the state budget would not be significant, while the investments would be encouraged to further develop. Corporate tax matters Another measure stimulating the investments would be to introduce the concept of groups of companies for corporate tax purposes, which would allow companies within the same group to offset the tax losses recorded by one company against the taxable profit earned by another company (currently, such settlement is not allowed). Such a provision would improve the cash flow position of the group as a whole, as the investors would no longer find themselves in the position of paying tax out of one company and waiting for the tax losses of another company to be recovered in the normal course of business. On a related note, due to the fact that the Romanian group companies cannot consolidate their corporate tax position, they intend to restructure their businesses by way of mergers or spin-offs. Such operations are generally considered to be neutral from a corporate tax perspective, meaning that the merger or the spin-off do not generate corporate tax liabilities for the companies involved in the reorganization. However, the tax losses accumulated by the company that ceases to exist as a result of a merger or spin-off cannot be carried forward to be offset by the surviving company against its post-reorganization profits; in other words, the pre-reorganization tax losses are “lost”. Let’s also take the example of a nonRomanian company that carries out several projects in Romania, and such projects generate several permanent establishments. Currently, this company is required to register each project for corporate tax purposes with the local tax authorities and is also required to file separate corporate tax returns for each of the projects. Similar to the scenario described in the paragraph above, the company is not allowed to offset the losses generated by one project against the profits generated by the other projects and hence it incurs cash outflows. More-
over, this provision is discriminatory for the foreign company since the tax law offers to the Romanian companies the right to consolidate the tax results of projects registered with various local tax authorities. VAT In the area of VAT, the currently applicable legislation allows large Romanian companies within a group to file a consolidated VAT return (the so-called “VAT groups”), meaning that it is possible for the payable VAT recorded by one group company to be settled against the receivable VAT recorded by another group company. Also, under the example mentioned earlier where a foreign company carries out several projects in Romania, such company is allowed to file one single VAT return for all its projects (as opposed to the corporate tax returns which need to be filed for each project). These provisions are of benefit to investors as they have a positive impact on the companies’ cash flow position. Unfortunately, the concept of the “VAT group” has only been implemented by few large Romanian companies. It would therefore be important for the Romanian tax authorities to also allow the small and medium companies to organize as “VAT groups”, as this would lead to an optimization of the companies’ cash flow positions and hence to an increase of the funds available for further investments. At the same time, the impact on the state budget would not be significant as the tax authorities would only collect the net amount of VAT (i.e. they would no longer collect from companies the VAT amounts which need to be reimbursed to other companies within the same group). Some of the measures described above are also presented in a draft law elaborated by the Romanian government in 2009. This draft law indicates that the government would have the intention to introduce tax provisions which would be of benefit to groups of companies, and that they are aware of the benefits of introducing such legal provisions (as described above). Unfortunately however this law has not yet been enacted by the Romanian authorities.
Zamfirescu Racoti Predoiu Tax S.R.L. 38 Jean-Louis Calderon Street, Bucharest, sector 2, Romania Tel.: (00 40 21) 311 05 17 (18) Fax.: (00 40 21) 311 05 19 E-mail: office@zrp.ro www.zrp.ro 19
PROPERTY DTZ Echinox and Vitalis Consulting partner for project management services for office fit-out and relocations tion of Avon to its new headquarters in the Eurotower building. The initiative is part of a bigger project, as the two firms have decided to use their resources and experience to deliver integrated project management, cost management and project monitoring services to their clients. The targeted clients for project management and cost management are occupiers and developers, while investors and banks are the target for project monitoring.
EBRD lends EUR 11.5 mln to upgrade transport infrastructure in Sibiu The EBRD is granting a loan of up to EUR 11.5 million to finance the upgrade of the road system in Sibiu, one of the most important cultural centers in the country and a major transport hub in central Romania. The loan, extended to the municipality of Sibiu, will be used to finance the repair of a number of roads in the city, including the replacement of asphalt and pavements and an upgrade of water and sewage pipelines along the streets. The investment is part of the EBRD’s Urban Road Management and
BUSINESS REVIEW / October 25 - 31, 2010
Rehabilitation Framework, aimed at supporting urban road sector reform. The project also includes the construction of a new three-lane bridge in Sibiu with access for vehicles, cyclists and pedestrians. It will replace an existing wooden pedestrian bridge and provide a key connection to the city center for a large residential neighborhood, helping to alleviate traffic in the area. The project will be complemented by grant financing provided by the German Agency for Technical Cooperation.
COURTESY OF TERWA ROMANIA
Real estate advisor DTZ Echinox has signed a partnership with Vitalis Consulting group, which specializes in construction and project management advisory services, to provide project management services for office fit-out and relocations. The agreement stems from a longestablished collaboration between the two companies, on several important projects, such as the relocation of Hewlett Packard to Novo Park (10,000 sqm), PTC/Sema Park and the reloca-
Terwa Romania leases 4,500-sqm warehouse in Brasov’s Olympian Park
The warehouse lease lasts for ten years
Terwa Romania has leased a 4,500sqm warehouse in Olympian Park in Brasov. The firm will move in in January 2011 on a ten-year lease. Terwa produces metallic components for the automotive and construction sectors and has been operational in
Brasov for more than a decade. The company is a tier-two supplier to brands such as Dacia, BMW, Mercedes-Benz, VAG and Strabag, with products being shipped throughout Europe from its base in Brasov. Helios Phoenix is also developing with GE Real Estate the series of Olympian Parks in Timisoara, Cluj, Constanta and Bucharest. The developers will have around 27,000 sqm finished at the Olympian Park Timisoara by November and immediately afterwards start on the site in Cluj, where 10,000 sqm will be available by May 2011. Helios Properties and Phoenix Real Estate formed a joint venture in 2006 to develop and manage industrial warehouse and logistic properties in Romania.
La Caixa approves EUR 10.5 mln loan for luxury residential project in Bucharest Spanish bank La Caixa has approved a EUR 10.5 million loan to the Romanian branch of the construction group GEA International Development. According to a press release from GEA, the money will be used to finance the
first stage of a luxury residential project in the Lacul Tei area of Bucharest. Up until now the project, which will consist of 504 apartments in 18 buildings, has been financed from the developer’s own resources.
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CITY
Bonfire Night and Caledonian Ball raise money for sensory impaired children
Light into Europe NGO is organizing a Guy Fawkes Night Party on November 5. The attendance fee for Bonfire Night is RON 50, which includes food and drink. There will also be a competition between British schools in Bucharest, awarding the one who can make the best Guy Fawkes effigy. The
Andrei Ujica’s Nicolae Ceausescu biopic released next week at Sala Palatului
Cold comfort: Nicolae and Elena Ceausescu
ceived positive reviews since its launch at the Cannes film festival in May. Corina Dumitrescu
Actor Nicolas Cage to be guest of honor at Halloween Charity Ball Oscar-winning actor Nicolas Cage will be the guest of honor at this year’s Halloween Charity Ball, to be held at Palatul Parlamentului on October 30, in support of Ovidiu Rom. Cage is known for his philanthropic activities in support of the economically and socially disadvantaged. After playing an international arms dealer in the film Lord of War, he donated USD 2 million to Amnesty International in 2006 to fund rehabilitation shelters, medical and psychological services for former child soldiers. Ethan Hawke played the Interpol agent assigned to track him down in Lord of War and it was Hawke (last year’s Guest of Honor at 22
the Halloween Ball) who initially invited Cage to this year’s Ball, after learning that Cage would be in Romania at the end of October. Ovidiu Rom’s mission is to get every poor child in kindergarten and school – because children who start school later than their peers never catch up academically. Fiecare Copil in Gradinita is a set of integrated measures that is currently making possible quality early education for 1,200 severely impoverished children in twenty Romanian communities. Ovidiu Rom raises most of its funds through its annual October fundraising event, the Halloween Charity Ball at Palatul Parlamentului.
Rural children are particularly vulnerable to human trafficking
In 2009, 780 people in Romania became victims of human trafficking, 29 percent of whom were children and 54 percent women, the most vulnerable targets, according to information released by NGO Save the Children on October 20, the European Day against Human Trafficking. The real figure may be even higher, said Romulus Nicolae Ungureanu, chief of the National Agency
against Human Trafficking, since the statistic only includes those who gave a statement in such cases. Most people recruited by human traffickers are either victims of sexual exploitation, forced labor or sent to beg. Most of the children come from rural Romania and are vulnerable to these forms of abuse on account of poor education, agreeing to leave Romania in a bid to escape poverty. Traffickers often pose as trustworthy people in the children’s social circle, which they sometimes infiltrate using online social media.The National Agency against Human Trafficking has created the free infoline 0800 800 678 to allow callers to report incidences of the practice. Save the Children has started a petition on its website against human trafficking, aimed to encourage the local government to take legislative measures to defeat the phenomenon. Corina Dumitrescu
Dessert Expo caters to those with a sweet tooth The third Dessert Expo – Sweets, Drinks & More will take place between November 5 and 7, on the first floor of Baneasa Shopping City. All sorts of specialties will be on the three-day event’s menu, including chocolate, cookies, pralines, truffles, marzipan, jams, wines and cakes. Various types of chocolate will be available for tasting, including jasmine, sugar-free, with pepper, antistress, energizing, relaxing, sprinkled with pollen, or filled with spicy cocoa, coffee, burnt sugar or cream. The exhibition will take place from Friday to Sunday from 10.00 to 22.00.
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A montage of some of Nicolae Ceausescu’s best known speeches put together on celluloid by director Andrei Ujica, The Autobiography of Nicolae Ceausescu, will debut in Romania, at Sala Palatului, on October 28. The venue was one of the dictator’s locations of choice for his renowned speeches, praising the country’s past and present accomplishments, as well as detailing future plans. The film is the result of over one thousand hours of footage, and has a running time of three hours. The Autobiography of Nicolae Ceausescu has re-
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LAURENTIU OBAE
With a bang: get ready to see some fireworks
proceeds will go to the organization’s projects aiding sensory impaired children. The celebration will take place at Crowne Plaza Hotel, on Poligrafiei 1, starting at 19.00. Later in the month, the Caledonian Ball and the Highland Dinner take place on November 20 at Intercontinental Hotel, in the Ronda Ballroom, and afterwards at Cercul Militar National. The events will feature live Scottish music performed by the Scottish group Òr Ceilidh Band, as well as traditional Haggis imported from Bannockburn, Scotland. Tickets cost EUR 99 or 430 RON. Light into Europe (www.lightintoeurope.org) is an NGO whose mission is to help Romanian children and young people with seeing and hearing difficulties lead independent lives. Corina Dumitrescu
Save the Children calls for action against human trafficking
Sweet deal: Dessert Expo caters for the sugar loving
Corina Dumitrescu
Norwegian Film Days highlights new cinematic wave at Romanian Cultural Institute The Royal Embassy of Norway is organizing Norwegian Film Days at the Romanian Cultural Institute from October 27-29. The event will include five movies shown free of charge: Upperdog (2009), The Man Who Loved Yngve (Mannen som elsket Yngve ) (2008), Elling (2001), The Greatest Thing (Det største I verden) (2001) and North (2009). It aims to bring to viewers’ attention recent offerings of the new Norwegian cinematic wave, also known as Norwave, which shares with its Romanian equivalent success at international
festivals. Elling, for example, got an Oscar nomination and was then followed by other pictures achieving similar critical acclaim. Preceding the movie projection, on October 27 at 18.00, film critic Andrei Gorzo will lead a seminar on the new trends in Norwegian cinema. The five movies showcased during the festival will have both English and Romanian subtitles. The Romanian Cultural Institute is located on Aleea Alexandru 38, in Bucharest, near Piata Victoriei. Corina Dumitrescu BUSINESS REVIEW / October 25 - 31, 2010