S O V A     &     P A R T N E R S
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The Romanian business sector and the public administration have wondered about the future of Romania’s tax system and whether or not Law 343/2006 amending and supplementing the Tax Code could be Romania's passport for a switchover to a fiscal system befitting a European Union member state. EU accession will reveal legislative deficiencies and the State shall be held accountable for past mistakes in taxation and law enforcement.
After Romania’s accession to the European Union, virtually everybody will face new issues in taxation. The tax administration bodies, not used to implementing even the Romanian jurisprudence of the Supreme Court of Justice and Cassation or that of the local Court of Appeals, will be bound to take seriously the European jurisprudence. Romanian courts will have to understand and apply EU legislation, and to draw up and submit files to the European Court of
Justice, because this obligation will be incumbent on them, rather than on the applicant requesting the intervention of this European court. Romanian authorities will be bound to observe certain minimum requirements of EU legislation in taxation, such as a VAT of at least 15%, as well as certain restrictions imposed on direct taxes in view of a future "European fiscal serpent”, whose aim will be the establishment of at least minimum tax levels for each tax category. The positive outcome of these measures is that they will protect Romanians against demagogical election campaigns.
Last but not least, local businessmen will have to understand that Romania is now part of a developed tax system, in which they have to give up to childish ideas of off-shore companies, and instead understand and join the civic spirit by contributing proportionally to the public financial effort of the community.
A Challenge for the Courts
Romanian courts will face something novel: the jurisprudence of the European Court of Justice, whose observance is mandatory, in accordance with the Accession Treaty signed by Romania in
April 2005. Moreover, these decisions, an integral part of the EU legislation, are the only official sources for the interpretation of legal texts and for the enforcement of the acquis communitaire . It is important to note that the European Court of Justice has been operational since 1953 and solved its first cases in 1954. In its more than 50 years of existence, the European Court of
Justice has amassed an impressive record of decisions regarding the interpretation of EU law content and its enforcement. All these decisions have been out of reach for Romanian judges until now. For example, in the area of VAT alone (VAT being a clear and unequivocal tax in its substance and application) the European Court of Justice has more than 450 rulings regarding the interpretation of relevant EU legislation and its application in the member states as of the end of 2005. However, VAT has always been regulated by EU Directives, and its mandatory implementation in member states has very much simplified the juridical situation. The same can be said about customs duties and excise duties, which, along with the VAT, are part of the socalled “positive integration”, as they are regulated by EU Directives and other regulations and then simply implemented at the local level.
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“Negative Integration” of Direct Taxes
The situation of direct taxes is completely different from that of indirect taxes, and in this case the jurisprudence efforts of the Romanian courts shall be even greater. The decreeing of regulations in direct taxation on incomes derived by individuals, profit taxes, taxes on dividends, etc. has always been considered by the EU as an attribute of national sovereignty for the member states.
Currently, there are only five EU Directives in direct taxation, failing to reach the heart of the matter and not being able to influence the taxation policy of the member states. Yet, this does not mean that each country is free to do what it sees fit. There is a very clear harmonization method, albeit quite complicated, which consequently poses huge problems for Romania, a country that is entirely unaccustomed to the philosophy of the European Courts of Justice and to the EU law system.
The harmonization of direct taxation, or more precisely, the systemic functioning of direct taxation
Europe-wide, is subject to the so-called “negative integration”, that is, fiscal integration is performed by assessment against the four fundamental freedoms regulated by the Treaty on the
European Union (the free movement of goods, services, people and capital). In addition to these four fundamental freedoms, the doctrine considers that the free movement of payments within the
EU should be added, as it facilitates and supports those four basic freedoms. Thus, all persons
(natural, legal or collective entities without a legal personality) who believe their rights derived from the fundamental freedoms regulated by the Treaty have been violated as a result of a misinterpretation or the wrong implementation of some national tax legislation may address the
European Court of Justice, pursuant to Article 234 of the TEU. The Romanian courts of law are bound to accept the interpretation of the European Court of Justice on national legislation in the context of the four fundamental freedoms regulated by the Treaty.
Effects of European Legislation
Moreover, the Romanian courts of law will be obliged to face even more challenges: the “direct effect” and “indirect effect” of the European legislation, and the claims that Romanian citizens may submit against the Romanian State for refusal or omission of the implementation of EU tax legislation.
The European Court of Justice may also rule on the applicability or validity of national legislation in relation to EU legislation, and decide on the conformance of a given text with the acquis communitaire . The European Court of Justice may obviously not abrogate a national legal text nor can it suggest to its member states replacements for non-conforming legislation, as this is a decision of national authorities. However, once a law has been declared non-conforming with EU legislation or with the implementing principles of EU law or with the fundamental freedoms regulated by the Treaty, any further attempt by the Romanian State to use such legislation for taxation purposes will trigger either a Request for Claims on the part of the affected person, or a direct action by the European Commission against the Romanian State upon request of the person concern, pursuant to Article 226 of the Treaty.
The huge technical problem thus arising, strictly in terms of procedures, is that there will be no decisions of the European Court of Justice to become enforceable (because the European Court does not rule on facts, but on the interpretation of community acts of all ranks and on the conformity of national legislation with the EU legislation), but only decisions of Romanian courts that will include among their considerations the guidance of the European Court of Justice. The decisions of the national courts will be issued by taking into account recommendations of the
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European Court of Justice contained in the latter's decision regarding those aspects pointed out by Romanian judges that are covered by the material competence of the European Court. Or, any continuous refusal by the tax administration offices to take into account the jurisprudence of the courts of law will obviously result in an unwarranted swallowing of court docks and a rise in the requests for interpretation submitted to the European Court of Justice (from our experience, lawyers from our firm have prompted laughter in employees of the central tax administration office when they pointed out the irrevocable jurisprudence of the Supreme Court of Justice and
Cassation in relation to tax legislation that they were applying contrary to the mentioned jurisprudence).
Direct Application of EU Norms
Romania’s tax administration and courts will also feel the direct impact of many EU acts whose application does not require implementation, i.e. basic treaties as well as clear and unequivocal regulations and decisions. The direct effect means that, once Romania is an EU member, the person concerned may use direct reference to the EU act, instead of reference to the corresponding act in the national legislation before Romanian courts of law or tax administration offices. The European Court of Justice established long ago the direct effect in the member states of the EU acts, hence this is no longer a matter of theoretical debates or disputes, but rather a certainty conditional upon some conditions being met. Thus, there are decisions issued in reference cases of the EU jurisprudence, such as Van Gend en Loos v. Nederlandse
Administratie der Belastingen (Case 26//62), pronounced in 1963, establishing the direct effect of clear and equivocal provisions of the basic Treaties; Politi SAS v. Ministero delle Finanze della
Repubblica Italiana (Case 43/71), pronounced in 1973, establishing the direct effect of
Regulations; or Grad v. Finanzamt Traunstein (Case 9/70), pronounced in 1970, establishing the direct effect of EU Decisions.
It is worth highlighting that EU Directives have a direct effect if two conditions are cumulatively met; their wording is clear and unequivocal, and the deadline for the implementation has run out without the member state implementing the EU Directive in the national legislation.
Romania’s Tax Legislation, a Hodge-podge of EU Directives
The overall impression after reading Law 343/2006 is that it is a hodge-podge of EU Directives.
Law 343/2006 has been deemed a necessary legislative amendment and completion to the national legislation in view of Romania’s accession to the EU. And, undoubtedly, Law 343/2006 contains a series of mandatory provisions in the new context following Romania’s accession to the EU on January 1, 2007 (the tax regime of dividends received from other EU member states, the common tax regime applicable to mergers, divisions and share exchanges between companies from EU member states, the VAT to be levied on intra-Community operations, etc.)
However, the amended law also includes a series of provisions pertaining to tax legislation that could have been implemented in the Romania long before the accession time, as they do not relate directly to EU accession. It is just not normal to issue, five months before Romania’s accession to the EU, a 111-page law amending an already existent tax law that has previously been modified in excess, without issuing Application Norms that would first be useful to the tax administration offices. It is extremely worrying that, six weeks prior to Romania’s accession to the
EU, the Application Norms of the Tax Code are not updated yet, that no other norms have been issued in connection with Law 343/2006, nor that the Tax Code renumbered is yet to be published in the Official Gazette of Romania.
Admitting that all these modifications to the legislation were absolutely necessary for Romania in order to perform honorably upon Romania’s accession to the EU, it then results that Romania was
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in a Precambrian era of taxation before the issuing of Law 343/2006. Moreover, this leads to the astounding conclusion that the main factors hampering economic development in Romania are exactly those people that should be primarily concerned with boosting development.
Taxation Matters – the Amusement within the Texts
The implementation of EU Directives in taxation has been conducted by a naïve law-maker who failed to understand entirely the provisions in this field, and worked with translators capable only of slavish, word-by-word translations that did not render the meaning and the logic of the legal texts. It would be useless to mention that word order in English and French is radically different from the word order used in Romanian, so a word-by-word translation will fail to produce a logical, intelligible, sentence in Romanian.
The conclusion is that years will have to pass by after Romania joins the EU before the country has a tax system somehow functional within the European Union, and even more time before enjoying an articulated and stable taxation system both in administrative terms and in terms of the taxpayers’ needs. Moreover, in order to attain a perfect integration, Romania needs an accelerated professional training for the employees of the tax administration offices, stable regulations, as well as profound changes in the mentality and behavior of Romanian tax payers.
Dan Sova,
Managing Partner
SOVA & PARTNERS
Bucharest, Romania
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S O V A     &     P A R T N E R S
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Sova & Partners is a Romanian multidisciplinary business group that comprises our law firm, a bankruptcy and liquidation firm, and an EU funding consultancy group. We cover a broad range of business and legal practices, such as banking and finance, corporate restructuring and bankruptcy, commercial contracts, privatisations, mergers and acquisitions, project finance and energy, real estate, tax, and industrial property. Our partnership was founded in 1997 in
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Our firm has experienced consistent and dynamic growth by keeping in line with the latest business trends and developments in the law. It has built an integrated multidisciplinary, business-oriented culture, aimed at achieving our clients’ objectives through strategic planning and innovative methods of execution. Our determination to delivering results and expanding opportunities serves as our guiding principle, setting apart our law firm from the rest.
Sova & Partners is a leader in the market, ranked among the top five law firms in Romania, both domestic and foreign. We have a strong, experienced, talented and highly educated team of professionals that include several partners, senior associates, associates, and trainees. In addition, we have a legal support team comprised of translators, paralegals, and legal staff that works closely with our attorneys to provide the most comprehensive resources to our clients.
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The starting point at Sova & Partners for legal counsel and all other activities is solid analysis based on careful examination of all legal and economic issues.
Our firm’s aim is to provide excellence of services by developing imaginative solutions to complex problems in order to meet our clients' requirements. We provide such solutions through our team of experienced lawyers and tax advisors who have excelled in their academic and professional careers. We have built an integrated, business-oriented culture, aimed at achieving our clients’ objectives through strategic planning and innovative methods of execution. Our determination to delivering results and expanding opportunities serves as our guiding principle, setting apart our law firm from the rest.
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