EU Accession Newsletter - January 2006

No. 1 / January 2006

Foreword
The countdown has begun. In less than a year’s time, Romania and Bulgaria are expected to join the 25 existing member countries of the European Union. Romania’s accession is an historic moment in EU enlargement and will have major consequences for all those who have existing trade and other business relations with the EU and Romania. An extensive level of preparation will be needed in the area of tax, where the implications of taking on full EU membership, and in particular the acquis communautaire, are considerable.

At Ernst & Young Romania, we will monitor these changes closely. This is the first of a series of EU Accession Newsletters, which will bring you these developments every month. This inaugural edition is focused on Customs & Trade issues and on aligning VAT legislation to EU law in accession countries. We believe some of the biggest challenges and opportunities arise in these areas. On the last page of this and subsequent newsletters, we will provide contact details of Ernst & Young tax and EU accession professionals who can assist with business issues arising out of entry into the expanded common market.

In subsequent issues, we will consider the impact of accession on domestic tax legislation of the adoption of EU directives and regulations and the jurisprudence, the European Court of Justice, as well as the implications for employers and employees of changes in immigration law and social legislation. We will also review the progress being made by Romania as an accession country in converting and adapting domestic legislation and administrative practices – including significant gaps – to EU norms and practices.

Lastly, EU accession will open up access to a range of grants and incentives for all businesses, whether presently trading in the two accession countries or considering inward investment. As a major global professional services firm operating across Southeast Europe, Ernst & Young is adequately positioned to guide businesses through the plethora of issues, challenges and opportunities that they are likely to encounter.
 

Importance of the Acquis
The EU maintains friendly trading relationships with countries all over the world, including its neighbours in Europe. In the majority of cases, the EU does not seek to legislate on the internal affairs of its trading partners. But when a country seeks membership in the European Union, it must be willing to implement the common rules, standards and policies that make up the body of EU law, a principle known as acquis communautaire, or simply the acquis. Adopting the acquis transforms an accession country to a full-fledged member state.

The acquis relates to every area of EU competence. Under the acquis, the laws of the accession state must conform to the EU’s regulations and directives and its legislators may not adopt new laws that contravene these principles. Equally important, its courts must treat EU case law as binding and its government institutions must apply EU policy and practice. By requiring each new member to accept the community’s legislation and regulations, the acquis creates a level playing field for business and trade – new member states are not at an economic advantage compared with existing ones. Everybody must play by the same rules.

In theory, Romania must adapt its laws, policies and administrative practices by the time of accession. In practice, however, accession countries usually find it impossible to adopt the acquis in all areas by the time of entry. Sometimes the changes required to existing laws and policies are far too radical to be achieved in a short period of time.

Therefore, transitional arrangements may be agreed upon for staggering the full impact of EU membership. In certain cases, accession countries such as Romania and Bulgaria may also request derogation from a particular provision of EU law in order to sustain a different local practice over a longer period.

However, transitional arrangements and derogations must be decided upon ahead of the accession or the entire range of EU law will apply in the accession country from the date of entry.
Progress on Tax Acquis
Romania provisionally closed negotiations on the tax acquis (Chapter 10) in 2003. It was granted a transitional period till December 2009 to apply the minimum excise rates to cigarettes. It was also allowed a derogation to apply special excise arrangements to the distillation of fruit spirit by small fruit growers. Other derogations were granted on VAT exemption for international passenger transport and VAT exemption and registration threshold for small and medium enterprises.

In its October 2005 country report, the EU noted that Romania had made significant progress on aligning its tax legislation to the acquis, but it said further efforts were required to align tax legislation by the date of accession. In the area of VAT, for instance, some progress has been made on legislative alignment towards eliminating certain incompatible VAT exemptions. However, the registration and exemption threshold needs to be brought down to the level set in the Accession Treaty and special schemes need to be introduced.

In the domain of excise duties, Romania was acknowledged to have made progress in adopting the legislative framework by increasing excise on tobacco, alcoholic products and mineral oils as of April 2005 and that excise on certain mineral oils had already reached EU rates.

However, the EU report noted that more efforts were required to complete alignment in this area, i.e. reaching the minimum excise duty rate levels, transposing the provisions related to intra-community movements for all the harmonised product categories, and adopting the Energy Directive.

Furthermore, Romania has to enact legislation introducing the reduced excise duty rate (50%) for small fruit growers for personal consumption, in accordance with the transitional arrangement, and put in place adequate administrative capacity to enforce effectively the quota of distillation at reduced rates for personal consumption, as the enforcement of the relevant legislation will require extensive controls upon a large number of small distilleries.

Progress on Tax Acquis
Romania still needs to complete transposition of the Directives concerning indirect taxes on the raising of capital, parent-subsidiary, interest and royalties and savings. The amendments regarding the Merger Directive have also to be taken into account. In addition, Romania needs to ensure that existing and future legislation complies by accession with the principles of the Code of Conduct for business taxation. Romania also needs to undertake necessary preparations by accession to ensure effective exchange of information under Directive 2003/48/EC. During accession negotiations, a transitional period was granted till 1 January 2011 on the taxation applicable to interest and royalty payments.

Romania has been acknowledged to be meeting its commitments in the field of VAT, excise duties and direct taxation (except for IT aspects) and is expected to be in a position to implement the acquis by accession time as far as legislative alignment is concerned. However, there were serious concerns in the fields of administrative cooperation and mutual assistance, where urgent attention is required to address the slow pace of implementation. More effort is needed on implementation structures, particularly increasing the existing low level of collection of VAT and excise duties.

Customs Integration and Movement of Goods
The main consequences of accession is the free movement of goods criteria based on a Customs Union under which customs duties and quantitative restrictions are prohibited between EU member states and the EU Common Customs Tariff (CCT) determines customs duties with respect to third countries. For traders in Romania, the most noticeable impacts will be:

1. The EU Treaty provisions that establish the EU Customs Union and guarantee the free movement of goods will have immediate and full effect, with the following results:
- Customs duty rates set out in the national customs tariffs will give way to those of the CCT.
For example, the existing graded customs duty rates on television sets will be discontinued on the date of accession in favour of the uniform CCT duty rate of 14%; and

- Goods in free circulation within any member state may be imported into any other member state free of customs duties, commercial policy measures and any other restrictions or charges.

2. Abolition of physical border controls between acceding countries and between the acceding countries and EU member states. Only imports of non-Community goods (for example, direct imports from third countries) will be subject to the rules on customs clearance.

3. Existing national customs legislation will be replaced by the Community Customs Code. Because customs regulations fall within the exclusive competence of the Community and has direct effect, national legislation is not required to give effect to the Community rules. Moreover, national customs administrations will concede power to the European Union to set duty rates and procedures and to conduct trade negotiations with third countries.

Common Customs Tariff
On accession, Romania’s customs duty rates will be replaced by those provided by the CCT. This has budgetary impact for both the government administration and local importers. From an administrative point of view, not only are many duty rates decreasing but the revenue collected, apart from an administration fee, accrues to the European Union rather than to the national budget. Simultaneously, the administration is liable for any failure on duty collection under its management after accession.

For many businesses, the changes in customs duties will also have a significant impact on competitiveness and may require them to look at their supply chains, operations and marketing strategies.

National tariffs tend to have evolved to discriminate in favour of local manufacture and their replacement by the CCT may diminish or eliminate the local tariff protection.
Another important aspect for many companies is that no concessions or relief from the duty rates set out in the CCT may be provided under national law and any such concessions currently in force will come to an end. However, companies may take advantage of EU mechanisms such as the tariff suspension scheme.

For instance, the European Commission may, following consultation with a particular member state, suspend applicable CCT tariff if a company is able to prove its raw materials or capital equipment cannot be sourced from within the EU.

Companies should note that a lead time of approximately 12 months applies from the date of application until these suspensions come into force.
The bulk of customs legislation for the European Union is contained in the Community Customs Code (see below), which includes a range of “economic customs procedures” that companies may use to reduce the impact of CCT duties, and thereby increase profitability and competitiveness.

Free Movement of Goods
Goods produced in the European Union and goods imported and released for free circulation, upon payment of customs duties, are considered “Community Goods” and may not be subjected to import duties or quantitative restrictions when transported to another EU country. Furthermore, the Treaty of Rome prohibits “disguised” duties and restrictions or any measures that are equivalent to quantitative restrictions on imports or exports between member countries.

The only exceptions to the principle of free movement of goods are those justified on grounds of public morality, public policy or public security; the protection of health and life of humans, animals or plants; the protection of national treasures possessing artistic, historic or archaeological value; or the protection of industrial and commercial property. The case law of the European Union, which covers among other things trading and marketing rules, is extensive and tends to place the onus on the member country attempting to maintain a restriction to prove it is fully justified.
 

One important customs aspect of free movement of goods is that, unlike current trade agreements which may provide preferential tariff treatment, there is no requirement in intra-community trade for goods to be considered as “originating” in a member state, merely that they be in free circulation.

Consequently, non-EU goods receive the full benefits of free movement once they have been subjected to import formalities after entry into a member country. According to the European Court of Justice, such goods are “definitively and wholly assimilated to products originating in the member states.” Accession may thus open new opportunities for companies who were previously unable to win manufacturing contracts because the local “added value” was insufficient to qualify for preference under the trade agreements.

Abolition of Intra-community Border Controls
The most visible aspect of accession will be the unrestricted movement of people, cars and trucks across EU countries without having to stop or declare goods to customs. The abolition of border controls between established member countries has generated significant logistical benefits in terms of time and cost of intra-community trade. Businesses in Romania will benefit from shorter lead times and lower administrative costs. This is counterbalanced somewhat by the additional reporting requirements under the VAT rules and the special rules for the movement of goods subject to excise duties.

The removal of physical border controls offers companies the possibility of significant savings. Some of these savings should be used to ensure VAT and excise compliance. These will be the core mechanisms for administrations to rely on for revenue and statistical controls in the expanded market.

Even for import of goods from non-EU countries, the emphasis within the EU has been away from border checks of individual consignments and more on customs audits and using risk analysis.
If what has happened in existing member states is any indication, customs authorities in Romania will work with industry to make the import process faster and concentrate their resources on audit and investigation teams.

Faster clearance will improve logistics performance for businesses. To maximize the benefits and minimize the risk of penalties for non-compliance, companies must ensure they are well prepared and have introduced the necessary systemic changes, personnel training and well-documented policies and procedures according to the opportunity-risk profile of their particular industry and operations.

Community Customs Code
The Community Customs Code sets out the framework within which customs and trade must operate and defines the following:

- Rights and obligations of importers, exporter and other persons;
- Methods for determining the classification, valuation and origin of goods;
- Procedures for goods entering the Community until they are prescribed a “customs approved treatment or use” and for goods leaving the Community;
- “Economic customs procedures,” whereby goods may qualify for relief from duty or altering the date or method by which duty is determined;
- Transit and free zone arrangements; and
- Rules on customs liability, customs debt and repayment/remission of duty.

In addition to the customs code, specific EU Regulations apply on a wide range of issues, for example, to give effect to trade agreements and
preferences, relief from duty (including concessions) and such commercial policy measures as restrictions and anti-dumping measures.

A key issue for companies in Romania to consider is what their requirements will be post-accession and to plan accordingly so that they obtain any required authorisations in advance.

As indicated above, the EU customs framework will largely replace and make redundant the procedural national laws within its scope. However, companies should be aware that there will remain national legislation in such areas as the seizure of “uncustomed” goods, penalties and criminal liabilities.

Afterword
The accession process involves immediate implementation of the body of customs law in terms of the rates of customs duties, the abolition of border controls and the free movement of goods.

The consequences for business in Romania are significant and will require a review of strategy and resources. The best advantage will come by managing the transition and making strategic decisions. This process should begin early so as to achieve the lowest compliance costs and particularly if a company wishes to take advantage of concessional duty relief.

Ernst & Young Romania’s EU Accession team is geared to offer a wide range of accession and compliance related services to companies that want to gain a competitive advantage in the new expanded marketplace.

For further information on issues in this article, please contact members of the EY EU Accession Team listed below.

Ernst & Young Romania has put in place a team of experienced professionals to assist clients in matters related to EU Accession. Please read the CVs of the team members in the following pages.
For more details on our services visit www.ey.com/ro. 

Market offerings in Romania:
Assurance & Advisory Business Services
Taxation Services
Transaction Advisory Services
Business & Technology Risk Services
Global Financial & Accounting Services
Legal Services (through the affiliated law firm)
 

Camelia Horlaci, Country Managing Partner
Head of Global Financial & Accounting Services
Camelia is the leader of the EU Accession Advisory Team and will coordinate all accession advisory-related activities. She has over 18 years of professional experience in the Romanian accounting system and brings unmatched insight into obtaining grants and incentives. Camelia has been an expert on Phare funded projects for various state-owned companies. She has helped company managements in developing forecasts based on actual results, costs system improvement, financial models, profit projections, reviews of inventory, accounting practices, receivables, customer procedure follow-up and collection methods, potential tax risks. She has a degree in Economics from the Academy of Economic Studies, Bucharest, and is a member of the Romanian Association of Chartered and Certified Accountants, Romanian Chamber of Auditors and the Stock Exchange Commission. camelia.horlaci@ro.ey.com


Christos Seferis, Partner
Head of Assurance & Advisory Business Services
Christos is EU 4th Directive, IFRS and Corporate Governance champion of the Accession Advisory Team and brings years of experience working in these and other relevant areas such as financial, internal and IT audit, business risk assessment and operational IT expertise across sectors such as financial services, industrial products, consumer goods manufacturing, retail, wholesale, energy, utilities, technology, telecommunications, media, entertainment, tourism and the public sector. Christos holds a Masters in Computer Science from the University College London, UK, and is a member of the Institute of Chartered Accountants in England & Wales, the Institute of Internal Auditors (UK), the Information Systems Audit & Control Association (USA), the Institute of Certified Auditors Accountants of Greece, the Institute of Certified Public Accountants in Cyprus and the Romanian Chamber of Financial Auditors. christos.seferis@ro.ey.com


Venkatesh Srinivasan, Partner
Head of Taxation Services
Venkatesh is the direct and indirect tax champion of the Accession Advisory Team and has many years of experience in advising clients on streamlining tax functions and optimizing costs in business operations. As head of the Tax Department, he has advised domestic and international clients in the oil and gas, telecommunication, manufacturing, financial services, software and utilities sectors. His over 14 years of experience comprises a large variety of services such as inbound and domestic tax planning, transfer pricing advice, etc. Before joining Ernst & Young in August 2002, Venkatesh worked in the Bombay, London and Bucharest offices of Andersen. He has a degree in commerce from Bombay University and is a member of the Institute of Cost and Works Accounts of India and a member of the Institute of Chartered Accountants of India. venkatesh.srinivasan@ro.ey.com


Oana Petrescu, Partner
Head of Business Risk & Technology Services
Oana is the BASEL II champion of the Accession Advisory Team and has 15 years of business advisory experience for the financial services industry. A founding member of the Romanian Risk Management Association and an active member of the Banking and Financial Instruments Working Group of the European Accountants Federation (FEE), she is a Certified Financial Services Auditor. Oana has been instrumental in a number of significant restructuring and merger projects, including software implementation and full process redesign to align with European best practices. She holds a Ph.D. in Economics from the Academy of Economic Studies, Bucharest, and diplomas from the European Business School London-DEBA Program, Universite des Sciences Sociales in Toulouse-DESS Banque et Finances Europeenes, Wirtschaftuniversitat, Wien and Hungarian Academy of Sciences, Budapest. oana.petrescu@ro.ey.com
 

Angela Rosca, Senior Manager
Taxation Services
Angela has relevant experience in EU taxation matters, with emphasis on the harmonised VAT legislation, having worked in the Andersen Indirect Taxation Group in London the late Nineties. Angela has over 11 years of professional experience and wide knowledge of tax matters of industries such as consumer goods, leasing, manufacturing, energy, telecoms, services, hospitality, trading, infrastructure, etc. She has been a member of assignment teams for tax structuring of investments by different multinational companies, tax planning, tax compliance and tax due diligences projects. Angela holds an MBA degree from the Institute for Business and Public Administration Bucharest and the University of Washington. angela.rosca@ro.ey.com

Radu Tudoran, Senior Manager
Global Financial & Accounting Services
Radu has been a key member of the GFAS team in Ernst & Young Romania and was also involved in the setting up of a GFAS Department in Ernst & Young Bulgaria. He has extensive experience of supervising the accounting, financial and tax compliance of domestic and multinational companies and establishing internal control procedures, devising and implementing management reporting packages, having begun his career with the Arthur Andersen Business Process Outsourcing Division over 11 years ago. Radu also has significant experience in designing management reporting packages and has been setting up and implementing such packages for a wide range of companies. He has a Bachelor in Economics from the Ecological University of Bucharest. radu.tudoran@ro.ey.com

Veronica Luchian, Manager
Business & Technology Risk Services
Veronica has critical experience in accession related projects having worked on a Phare project on compliance assessment of the government and local authorities, affording her a deep understanding of the institutional framework in Romania in relation to the absorption of EU funds, and insight into EU requirements in terms of absorption of structural funds. She has over nine years of professional experience and her key areas of expertise include internal audit, SOX404, evaluating internal controls, improving processes, developing written procedures and manuals, evaluating policies and procedures for companies in various industries. Veronica holds a Bachelor’s degree from the Academy of Economic Studies, Bucharest and is a member of the Institute of Chartered Accountants and Certified Public Accountants in Romania. veronica.luchian@ro.ey.com
 
Oana Munteanu-Jipescu, Manager
Legal Services (through the affiliated law office)
Oana’s legal know-how on accession requirements includes experience on harmonisation of legislation on company law, competition and the stock market. She has eight years of experience and joined PI Partners, the associate law firm of Ernst & Young in Southeast Europe, in 2002. Oana is also a specialist in corporate law, particularly on mergers and acquisitions, and has considerable experience in commercial transactions, tax and banking legislation. She has coordinated various due diligence undertakings and restructuring transactions, and in reviewing, drafting and negotiating credit facilities. Oana has a Bachelor’s degree in law from the University of Bucharest and is a member of the Bucharest Bar Association. oana.munteanu@ro.ey.com

Luana Constantinescu, Attorney-at-law
Legal Services (through the affiliated law office)
Luana has been involved in drafting a regulatory framework for insurance supervision and is involved in multi-institutional initiative on harmonization of legislation. She has over seven years of experience and has been with PI Partners, the associated law firm of Ernst & Young in Southeast Europe, since 2005. Luana’s regular areas of expertise includes corporate and commercial law and mergers and acquisitions and has extensive experience in such sectors as construction and real estate, capital markets, insurance, hospitality and pharmaceuticals. She has also been involved with several World Bank funded projects. Luana holds a Bachelor’s in law from the Romania American University and is a member of Bucharest Bar Association. luana.constantinescu@ro.ey.com