The impact of the new minimum turnover tax from a transfer pricing perspective

Minimum turnover tax

Law 296/2023 mandates that taxpayers, who have reported an adjusted turnover exceeding €50 million in the previous year, are obligated to pay corporate income tax above a minimum threshold called the minimum turnover tax (MTR), where:

MTR = 1% * (TR^[1] - SR^[2] - I^[3] - A^[4] )

The tax rate applied on the adjusted turnover stands at 1% for commercial companies, and 2% for credit institutions from 2024 to 2025, and reverts to 1% starting in 2026. Additionally, companies involved in oil and gas activities are subject to a rate of 0.5%.

If the corporate income tax, calculated before deducting certain categories of tax credits, is less than the MTR, or if the taxpayer registers tax losses, it will pay tax at the level of MTR.

Impact on the Romanian companies

In Romania, there are approximately 1,000 active companies with a turnover of more than €50 million, which must analyse the effects of new legislation. Most of them are part of multinational and national groups.

The calculation of the profit and MTR for companies that are part of groups is influenced by transfer pricing rules, which require that transactions between affiliated companies be performed by observing the arm’s length principle.

Application of the transfer pricing rules

Transfer pricing rules will continue to apply, which means companies subject to the MTR will have to document the market level of prices applied in transactions with affiliated companies.

The introduction of the new legislation leaves companies liable to pay corporate tax at the minimum level of the MTR and this has complex implications for transfer pricing analysis.

Particular attention should be paid to the impact of transfer pricing rules on the elements of the MTR formula. Taxpayers should ensure that those elements of Total Revenues (TR) and Subtracting Revenues (SR) reported from transactions with affiliated companies are established at the market level. Otherwise, there is a risk the authorities may adjust that income, leading to a potential recalculation of the MTR and additional tax liabilities.

Also, the values of assets acquired from affiliated companies, which enter into the calculation of the value of assets in progress (I) or depreciation (D) in the MTR formula, must follow the same principle.

Based on preliminary estimations, the impact of a transfer pricing adjustment made by NAFA on the income of companies with low-profit margins will most likely lead to a higher tax paid under the MTR, compared to the previous situation when adjustments were included in the recalculation of the profit taxed with the 16% rate.

That means that price adjustments made by NAFA during tax inspections may have a greater impact on companies subject to the MTR than in the past.

Credit institutions

Credit institutions will owe both corporate income tax and additional turnover tax.

The determination of income derived from transactions with affiliated companies, especially those related to interest income, in accordance with transfer pricing rules, remains of particular importance within the framework of the new legislation, just as it is for commercial enterprises.

Loss-making companies

Companies that were part of loss-making groups were targeted by transfer pricing tax inspections. Although the OECD Transfer Pricing Guidelines set out several situations in which justified operational losses can be incurred, such arguments were rejected in most cases by the inspection teams, who made price adjustments to put the companies in a profit position.

The new legislation forces loss-making companies to pay MTR. The situation is complex for those companies where the loss can be justified by the functional profile (e.g. if the local entity takes commercial risks) or for reasons related to the unfavourable economic context in the market.

Conclusion

MTR does not eliminate the risks that arise in the event of a transfer pricing inspection, on the contrary, the adjustment risk may, in certain circumstances, lead to the payment of higher corporate income tax compared to the previous methodology.

Romanian companies in the scope of MTR that carry out transactions with related parties must comply with the transfer pricing rules and local regulations, and the main document for analysis is the transfer pricing report, which must be prepared and updated on an annual basis.

[1] Total revenues.

[2] Revenues to be subtracted, i.e. non-taxable revenue, revenue relating to costs of stocks of products, costs of services in progress.

[3] Value of assets in progress arising from the acquisition/ production of assets recorded in accounting records starting from fiscal year 2024.

[4] Depreciation at historical cost of assets acquired/produces since the fiscal year 2024, less than those contained in the I indicator.