Foreign Trade Regulations

Last update: March, 2008

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by PricewaterhouseCoopers
 

Intrastat

With Romania’s Accession to the European Union on 1 January 2007, the customs borders with other Member States were removed. Consequently the movement of community goods between Romania and those States is no longer subject to customs control.

Intrastat is a system that, in the absence of customs declarations, monitors based on statistics the movement of community goods between Member States. Intrastat has become a concern for companies due to:

• its novelty;
• the specific cases that may arise during trade between Romanian companies and other EU business partners;
• the penalties that Romanian companies could face if they do not fulfil their obligations.

Inward Processing Regime

The inward processing regime (“IPR”) allows you to benefit from advantageous conditions for customs duties and VAT payments upon import of the raw materials. The IPR regime applies to raw materials temporarily imported into Romania to be processed and subsequently re-exported as finished goods. In this case, the company either does not pay the customs duties (IPR with duty suspension) or recovers them after the export of the finished goods took place (IPR with reimbursement).

If the customs duties applicable to the finished goods are lower than those applicable to the raw materials, the IPR can be closed – if certain requirements are met – by applying the customs duties for the finished goods. The IPR with duty suspension regime is more favourable than the one with reimbursement because it has the advantage of improved cash-flow (i.e. the company does not pay the VAT when applying the IPR with duty suspension). However, the application of the IPR entails that specific requirements, including a number of economic ones, are met.

Rules of Origin

Determination of the origin (preferential or non preferential) of goods is important because it represents the basis for ascertaining:

• The application of a preferential tariff treatment (reduced or zero customs duty rates);
• The application of duties for products covered by the Common Agricultural Policy (CAP);
• The application of anti-dumping duties or certain tariff quotas;
• In some cases, whether the said goods may or may not be imported, or if they are subject to other tariff or non-tariff barriers or trade measures.

Preferential origin determines whether reduced or zero rate duty applies within preferential arrangements enforced in European Union (“EU”). Non-preferential origin confers an “economic nationality” to goods. It is necessary for determining the origin of products subject to certain commercial policy measures or tariff quotas, as well as import restrictions or prohibitions.

Customs Unions / Customs Status

The EU has established customs unions with three countries: Turkey (for all industrial products, except coal and steel), Andorra (for all industrial and agricultural products) and San Marino (for all industrial products, except coal and steel).

Customs union implies zero customs duty rates provided that the customs status upon importation into EU of goods from the other part of the customs union can be proved. Therefore, if you are trading in goods from these countries, you may benefit from the elimination of customs duties if certain conditions are met.

Moreover, if you are trading with Turkey, Andorra or San Marino, in goods originating in third countries, we recommend that you analyse the level of the customs duties applicable upon importation of goods into the EU and compare these with those applicable in countries within customs unions, so as to determine the extent to which it is possible to optimise customs duty costs.

First Sale Principle

Many multinational corporations have established ‘middleman’ type structures to assist their flow of goods. However, many of these companies are largely unaware of strategies that would allow them to utilize or create these ‘middlemen’ structures to reduce customs duties.

Consequently, they often have inefficient tiered sales arrangements and pay higher customs duties than necessary.
Customs duties are generally calculated on an ad valorem basis, that is, as a percentage applied to the customs value of the goods. So, by reducing the customs value, the amount of customs duties payable on import can be reduced. Through effective customs planning, it is possible and recommendable to reduce the customs value of goods.

In general, the customs value is based on the price the EU importer pays its foreign supplier. However, if this supplier is not the manufacturer, duties are paid on the margin applied by this middleman, who purchased the goods from the manufacturer. Under the ‘First Sale’ principle, the middleman’s profit does not have to be dutiable.

Under certain circumstances, EU customs legislation allows customs valuations to be based on an earlier or first transaction value in a chain of transactions. Under this ‘First Sale’ principle, customs duties are assessed upon the ‘manufacturer-to-middleman’ arm’s length sales price (the ‘first’ sale), which is lower than the traditional price paid by the importer (i.e. the ‘middleman to importer’ sales price).

Structures

We can summarise the above in the following structures:

The import duties paid by importers are often based on the transactions between middlemen and EU importers (100 currency units). After implementing a first sale value structure, import duties are due on the value of the first transaction (80 currency units).

If no earlier transactions are available, it is possible to restructure the company and implement an additional transaction. Please note that many multinational corporations already have similar legal structures in place.

Current situation

First sale scenario – for purposes of example, we have considered a situation where the seller company is split into a manufacturing entity and a sales and marketing entity.

In this scenario, the manufacturer sells the products to a sales and marketing entity at an arm’s length price. By applying the first sale principle, the transaction between the manufacturer entity and the sales and marketing entity can be used as a basis for the customs value of the goods imported to the EU. This structure is especially beneficial for companies with substantial sales and marketing costs.

Conditions

Three main conditions need to be met to allow the application of this first sale strategy: 

• The sale price has to be ‘at arm’s length’;
• The previous transaction (the price of which is to be used to determine the customs value) has to determine the export to the EU – this can be proven, for instance, by direct transport from the dispatching company to the EU;
• The importer has to be able to substantiate and document that the chain transactions have economic substance. This solution is predominantly used within multi-national companies and not between third parties (apart from situations where the manufacturer is an independent third party and subsequent parties in the chain are related).

Deliverables

As the implementation of ‘First Sale’ requires a project approach and, preferably, pre-approval from the Customs Authorities, these projects are generally performed in phases:

• Phase I – Feasibility Analysis and Cost Benefit Assessment;
• Phase II – Design and Implementation of the structure; and
• Phase III – Negotiations with Customs

The negotiations with Customs seek to achieve a ruling agreement confirming that the preferred transaction can be used as a basis for determining the customs value upon importation to the EU. Please note that methods of implementation vary between member states, so a valid decision in one state is not binding in another.

Benefit

Multinational corporations using ‘middlemen’ to assist their flow of goods, including those companies where production is separate from marketing and sales activities, as described above, can reduce the amount of import duties paid on importation of goods to the EU (including Romania). The potential EU customs duty savings are equal to the gross profit achieved by the ‘middlemen’ multiplied by the duty rate applicable to the imported merchandise in the EU.

Considerable savings have been achieved in past implementations, especially if the duty rates on the imported goods are high and / or the middleman’s mark-up is significant. If a company is restructured by separating production from the sales and marketing entity, the savings can be even more substantial.

Tariff Classification Services

Since Romania’s accession to the European Union, new concepts and practices have emerged for commercial relationships between economic operators from Romania and those from other Member States.

Customs formalities are no longer performed for community goods commercialised between Member States, but the circulation of such goods is still subject to reporting requirements on intra-community acquisitions / supplies and Intrastat declarations or, in the case of excisable products, through the Accompanying Administrative Document (“AAD”).

Customs formalities continue to be performed for goods exchanged with third countries. Amended customs legislation has been applicable since 1 January 2007 for these goods.

Economic operators are obliged to ensure the accuracy of the information provided in customs declarations, Intrastat declarations and AADs. Tariff classifications can significantly affect, positively or negatively, your company activities.

As a consequence, it is vital that you ensure the accuracy of the tariff classifications you use; furthermore, in case of intra-community supplies/acquisitions, you must ensure that they are compliant with the tariff classifications used by your Community partners. Using incorrect tariff classifications can result in additional costs and significant fines, as well as problems for the company in further performing its activities. Tariff classification plays an important role in determining the customs duties level, in applying the import / export commercial measures (i.e. additional taxes, restrictions, prohibitions) and in determining the excise duty regime applicable to different goods.

Tariff classification remains an important element of commercial activities with other Member States, whether for avoiding the applicable penalties (in the case of Intrastat declarations), obtaining correct tariff classifications, applying correct excise duty treatments, or for determining the customs duty applicable for noncommunity goods.

Summary of Transfer Pricing Developments

In recent years, tax authorities throughout the Central and Eastern European region

• Have become increasingly concerned with transfer pricing issues,
• Have begun aggressively investigating the intercompany pricing policies of multinational companies,
• Would like to ensure that profits are correctly allocated between related parties.

In Romania

• The principle according to which related party transactions must be carried out at market value (arm’s length principle) was first introduced in 1994.
• As of 2004, the Fiscal Code sets out in a systematic manner the definition of related parties, the statement of the arm’s length principle and the methods for setting transfer prices at arm’s length.
• In July 2005, the concept of Advance Pricing Arrangements (APA) was also introduced.
• As of September 2006, formal transfer pricing documentation requirements have been introduced through changes to the Fiscal Procedure Code.
• Norms on the application procedure and the documentation that needs to be prepared by a taxpayer intending to request an APA were issued in June 2007.
• In February 2008, detailed regulations regarding the content of the local transfer pricing documentation file were published.

Companies should pay attention to:

• The increasing interest of the Romanian tax authorities in transfer pricing, which is expected to become one of the main areas of tax investigation.
• The arm’s length of their related party transactions so as to be prepared in case of any transfer pricing disputes with the tax authorities.

Romanian Transfer Pricing Legislation

Currently, Romanian transfer pricing legislation requires that transactions between related parties be carried out at market value.

Two legal entities are related parties if:

• one entity holds directly or indirectly, including the shareholding of related entities, minimum 25% of the number/value of shares or voting rights in the other entity or it effectively controls the other entity, or
• one entity holds directly or indirectly, including the shareholding of related entities, a minimum of 25% of the number/value of shares or voting rights in the two entities.

Inter-company transactions between Romanian legal entities are currently excluded from the scope of transfer pricing investigations. If transfer prices are not set at arm’s length, the Romanian tax authorities have the right to adjust the taxpayers’ revenues and expenses so as to reflect the market value.

When applying the transfer pricing rules, the tax authorities will also consider the OECD Transfer Pricing Guidelines.

Traditional transfer pricing methods (comparable uncontrolled prices, cost plus and resale minus), as well as any other method that is in line with the OECD Transfer Pricing Guidelines (transactional net margin and profit split) may be used for setting transfer prices.

Taxpayers engaged in related-party transactions have to prepare and present the transfer pricing documentation file upon request of the tax authorities during a tax audit. The content of this file is generally in line with the Code of Conduct on transfer pricing documentation in the European Union. The deadline for presenting the transfer pricing documentation file to the tax authorities cannot exceed three calendar months following their written request, with the possibility of a single extension with a period equal to the term initially established.

Failure to present the transfer pricing documentation file may result in fines and estimation of transfer prices by the tax authorities based on generally available information on similar transactions, as the arithmetic mean of prices on three similar transactions. The additional taxable profits resulting from this estimation or any transfer pricing adjustments are subject to the general 16% profit tax rate and related late payment interest of 0.1% per day of delay.