Once the restrictions are lifted, however, we expect not only tax audits to be resumed, but in fact expanded. Tax officers will knock on companies' doors to check their compliance with the laws, to penalise non-compliant conduct, and – most importantly – to bring money into a convalescent state budget.
Pay attention to current hot topics
We expect tax officers will focus on how companies have applied the specific tax incentives available during the state of emergency period, but also on a series of other specific tax issues generated by the pandemic. Therefore, the main areas of focus might concern:
- provisions that companies will likely set up during this period to cover the risk of failure to collect invoices, and even companies' decisions to waive the cash-in of certain income;
- expenses incurred by companies during this period, such as expenses related to expired inventory and destroyed fixed assets or expenses generated by or in relation to unused fixed assets;
- benefits granted to employees, be it benefits in cash or in kind, provided as support to prevent the spread of the virus or the reimbursement of out-of-pocket expenses incurred by employees during this period (e.g. fuel for driving to the workplace, electricity used for business purposes by employees working from home, etc);
- granting cash, goods or supplying free services as sponsorship, given that certain tax incentives are available to the companies providing the sponsorship.
Risk areas for companies
Companies that apply an incorrect tax treatment during this period will be sanctioned by the tax officers when the tax audits are resumed. Therefore, companies should be extra cautious about how they treat their transactions, to avoid to the extent possible tax assessments for corporate income tax, VAT, income tax and social security contributions.
Moreover, if the tax officers suspect more serious breaches, they might generally report to the criminal investigation bodies. For instance, any expense companies incur during this period without a solid economic basis and thorough supporting documentation might raise a red flag.
Also, companies opting in this period to extend or even change their line of business might face the risk of being charged with tax evasion for concealing a taxable asset or source, if they fail to correctly reflect the change in both corporate and tax documents.
For the criminal investigators to prove the existence of a criminal offence, the actions undertaken by the company's representatives would have to be committed with a view to preventing the company from fulfilling its tax obligations (intent qualified by purpose).
Double trouble for companies with outstanding tax liabilities
During the pandemic, some companies are unable to comply with the legal payment deadlines because their activities have been reduced or suspended. Unfortunately, as the tax burden has not decreased significantly, these payment difficulties can also encompass tax liabilities due.
On the other hand, companies do not yet have protective measures against the risk of entering insolvency. Thus, once the state of emergency ends and the courts resume their activities, there is a risk that the tax authorities will request the opening of the insolvency procedure against companies that cannot pay their outstanding tax liabilities incurred during the state of emergency (especially since these companies have had at their disposal the tempting option of postponing their tax liabilities during the state of emergency).
Moreover, as the Romanian insolvency system favours the budgetary creditor over all other creditors, the state can conduct a tax audit in addition to the insolvency procedure. And it will probably do just that, since after the state of emergency ends the state will be in dire need of cash.
Things are moving at an unprecedented pace these days and companies must react quickly to the myriad of changes impacting the normal course of their business. Decisions taken during these unusual times must be substantiated by a thorough analysis of the tax and legal implications both in the medium and long term. Only in this way can these decisions successfully pass the test of the tax audits that will undoubtedly ensue once the state of emergency ends and life returns to (the new) normal.
This article is part of our coronavirus-focused legal updates – visit our coronavirus info corner to get more info!