The notorious tax on special constructions, better known as the utility pole tax, keeps on creating major difficulties for the business owners even almost one year after it became effective. Along the significant impact over the companies’ budgets, as they now own annually to the state 1.5% of their constructions’ value, there are still numerous disputes regarding the way the regulations for various cases should be translated. One of the provisions, which not even the detailed rules –which were published only two days before the first payment date, on 23 May- made fully understandable, aims at the tenants that performed building, upgrading, consolidation, modification or expanding works upon the rented properties. The paragraph is applicable among others to the rented offices and stores that were refurbished or renovated in various ways, including by installing shelves.

Ambiguous scenarios

The cases where the tenants have to pay the tax are specified in the Fiscal Code, the Fiscal Code’s detailed rules (HG 421/2014) and the detailed rules regarding notifying works to the landlord (HG 670/2012). The major problem is, according to the fiscal consultants and accountants, that interpretation of these provisions is not the same all over the country. The fiscal authorities explain and implement them in different ways. Which expose the companies to serious risks, as they are in danger to find out at some point they own both the tax and the penalties. What does the law provide?

According to the Fiscal Code, the special constructions tax is calculated for those buildings that are not subject to local property tax. Therefore the exonerated buildings, including those obtained by renovation and upgrading works, can be subject to utility pole tax. At this point the government’s decision 670/2012 enters the scene, imposing a threshold for such investments. When this level is exceeded, the tenants should inform the landlord, so that he can announce the authorities regarding the increased value of the building and consequently pay an increased property tax. There are two possible cases.

The first one implies the landlord was announced by the tenant the upgrading or expanding works overran 25% of building’s value and at his turn he had informed the authorities. As result, the landlord paid the increased property tax. In the second case, the tenants didn’t inform the landlord about the investments they made, as their value was lower than 25% of building’s value. “If the amount of works done is under the 25% threshold, the tenant doesn’t have to inform the landlord about them. Hence the landlord doesn’t know about them and doesn’t notify the authorities regarding them, so he doesn’t pay an increased property tax. According to the National Agency for Fiscal Administration (ANAF), even if this contradicts the Fiscal Code and the detailed rules, in such cases the tenant should pay a 1.5% on the value of the investments he made”, Eugenia Ion, a tax consultant working for Contexpert, explained.

Lost in translation

A different scenario is when the tenant, even if he should have informed the landlord regarding making investments over the 25% threshold, didn’t do it. In this case, the landlord wasn’t able to pay the increased property tax as he didn’t know about the transformations suffered by his building. Consequently, the tenant should pay the 1.5% utility pole tax.

Meanwhile, a different situation, often overlooked by tenants, could occur. In order to evaluate the risk of paying the utility pole tax, they should calculate the total and not the separate value of the construction works they performed in one year.

The above mentioned scenarios are still a disputed subject between the Ministry of Finances, ANAF and the local fiscal authorities on one hand and accountants and companies on the other.

Correlating the provisions of the three laws is a confusing challenge not only for the business community, but also for the fiscal authorities. Unfortunately, such disputes usually harm the tax payers. There is a risk that different interpretation will lead to increased payment obligations, especially as result of a tax investigation. These would include not only the utility pole tax, but also the penalties. “The 25% threshold of the building’s value was established in 2012. Before that, the tenant had to announce the landlord regarding any construction works, no matter what their value was. In this case, the fiscal authorities’ position might create the worst problems. Theoretically, tenants that didn’t inform their landlords regarding the value of the performed investments should not be responsible for the special construction tax. Each case will necessitate a separate analysis, as there is a risk for abusive interpretations”, Eugenia Ion said.

Undervalued impact

The utility pole tax started heated debates since the beginning. First at all, the companies complained about the level of the tax, which they considered to be very high, especially as it was applicable to all assets previously exempted. The business community’s dissatisfaction was ignored, despite the alarming estimates it produced. The Foreign Investors Council pointed out that planned investments will be annulled on the long term and that there is a serious risk of bankruptcies and therefore of layoffs.

Since July, when the companies started to reveal their balance sheets for the first half of the year, it was easily noticeable the utility pole tax took a bite out of their sales and profits and decelerated the investment projects. OMV Petrom and Nuclearelectrica are two good examples. Both companies blamed on the tax the deteriorating results.

After the first payment date, which was on 25 May, the companies paid as special construction tax about 1.5 billion RON. The amount is triple compared to the Ministry of Finances’ estimates. At its turn, the Fiscal Council had indicated the government undervalues the impact of the tax over the business environment and made a prognosis according to which the total annual payments will arrive to 1.5 billion RON.

The tax was criticized not only because of its level, but also because it is to be paid every year. This way, the value of the investments with a very long lifespan, for example 60 years, will be paid once again to the state through this tax.

The utility pole tax also led to debates due to the unclear provisions. The detailed rules were published only two days before the first payment date, even if the Fiscal Code had been modified six months before. Even after the detailed rules were published, numerous questions remained unsolved. The fiscal inspectors are left to interpret the blurry paragraphs and there is nothing new about this method.

The companies and the tax consultants often complained about the unclear laws. There were frequent cases when the central fiscal authorities had to issue clarification or interpretation notes to their local branches. And such problems are officially recognized. For example, the draft regarding the penalties to be paid for not declaring certain revenues clearly stipulates the penalties are not enforceable if they are the result of the tax payers’ interpretation of some obvious unclear fiscal regulations. Several government representatives stated, since the beginning of this year, the utility pole tax should be changed in 2015. For the moment, the Ministry of Finances doesn’t have any initiative regarding this issue.

 

ANAF’s explanations regarding the tax to be paid in case of rented buildings

 

  1.  A tenant that performed rebuilding, upgrading, consolidation, modification or expanding works to a rented space before the Government decision 670/2012 has become effective doesn’t have to pay the special construction tax as it had to inform the landlord about these works, irrespective of their value, and the landlord had to pay property tax for the above mentioned investments.
  2.  A company that was notified by its tenants for rebuilding, upgrading, consolidation, modification or expanding works that took place in 2011, with a cumulated value of less than 25% of building’s value, doesn’t have to pay the special construction tax as it had to notify the fiscal authorities to increase the property tax for that building.
  3.  A company that was notified by its tenants for rebuilding, upgrading, consolidation, modification or expanding works that took place in 2013, with a cumulated value of less than 25% of building’s value, didn’t have to change the level of property tax. The tenants owe special construction tax on the value of the above mentioned works.

 

SPECIAL CONSTRUCTIONS AIMED BY THE UTILITY POLE TAX

Hydro, thermo and nuclear power plants;

Transformers, connecting stations;

Runways and platforms;

Oil, gas and salt wells;

Loading and unloading ramps;

Chimneys and cooling towers;

Ponds, pools;

Water locks, lifts;

Dams, fishing drains;

Railroad infrastructure, road infrastructure – alleys, streets, highways, freeways with all necessary accessories (sidewalks, traffic signs etc.);

Telecommunications infrastructure (cables, poles, towers, antennas etc.);

Electricity transport construction;

Artificial lakes and irrigation systems.

 

1.5%
is the special construction tax applicable to the assets’ value

 

1.5

billion RON is the amount the state budget collected in June from the utility pole tax

 

We are currently performing several estimates in order to improve the special construction tax starting with 2015

Ioana Petrescu, the Minister of Finances

 

I stated since the beginning that I don’t find necessary the utility pole tax to be applicable in the agriculture sector, even if it’s only aiming at the companies. We continued the discussions with the Minister of Finances and we were informed this tax will be abandoned

Daniel Constantin, Minister of Agriculture