pwc accounting, tax & legal framework* *connectedthinking

Accounting, Tax & Legal Accounting, Tax & Legal Framework*Framework*

*connectedthinking

Accounting, Tax & Legal FrameworkPricewaterhouseCoopersD&B David si Baias

Slide 219 October 2005

Content

1. Legal Framework

Laura Luputi, Associate Lawyer D&B David & Baias

2. Accounting and Profit Tax Framework

Richard Grotendorst, Tax Manager PricewaterhouseCoopers

3. Indirect taxes

Daniel Anghel, Senior Manager PricewaterhouseCoopers

Legal Framework*Legal Framework*

Laura Luputi - Associate Lawyer D&B David & BaiasLaura Luputi - Associate Lawyer D&B David & Baias

*connectedthinking



Contents

Part I – Overview of current legal framework

Part II – Financial leasing versus operating leasing



Part I: Current legal framework

1. Governmental Ordinance no. 51/1997 as subsequently amended and completed by Law 571/2003 (Fiscal Code) and Law 533/2004

Defines leasing

Assets capable of being covered by leasing agreements

Minimum elements of the leasing agreement

Rights and Obligations of the parties: legal and contractual




Liabilities of the parties

Organisation and operation of leasing companies

Leaseback





Intended changes: draft Law amending and supplementing GO no.51/1997 now in the Chamber of Deputies

EU legislation: there are no EU specific regulations on leasing, but there are regulations that impact leasing transactions




2. Banking Law no. 58/1998 as subsequently amended

Lists financial leasing among the activities that can be performed by banks (indirectly for the time being)

Companies engaging in financial leasing qualify as financial institutions, unlike companies conducting operating leasing

Banking Law implements EC Directive no. 12/2000 relating to the taking up and pursuit of the business of credit institutions




3. Registration of leasing transactions

Leasing transactions involving immovable property must be registered with the Land Registry

Leasing transactions involving movable assets are registered in accordance with Law 99/1999, Title VI on collaterals

4. Personal data processing

Leasing operations may involve personal data processing




5. Consumer protection law

(i) Consumer credit legislation (Law no. 289/2004 implementing the EU Directive 102/87 regarding consumer credit as subsequently amended and completed)

(ii) Unfair terms in consumer contracts (Law no. 193/2000 implementing EU Directive 13/1993)




5. Consumer protection law

(iii) GO 85/2004 regarding consumer protection upon execution and during the performance of distance financial services contracts (implementing EU Directives 65/2002, 619/1990, 7/1997, 27/1998)

(iv) Commercial practices and rules regarding advertising




Conclusion:

There are several pieces of legislation making up the current legal framework;

Most of them apply to both financial and operating leasing;

Changes are expected in legislation regarding leasing companies, leasing agreements and leasing transactions




Financial leasing meets at least one of the following conditions:

The risks and rewards incident to ownership are substantially transferred to the lessee from the effective date of the leasing agreement;

The leasing agreement specifically states that title to the leased asset passes to the lessee upon expiry of the lease term;

The lessee uses the asset for more than 75% of the normal life of the asset, including throughout any extension of the leasing agreement;

Operating leasing: leasing not satisfying any of the above conditions.

Part II: Financial leasing versus operating leasing



First criterion: transfer of risks and rewards

Art. 10, letter f) of GO 51/1997: Lessee must assume the risks of loss, destruction or damage of the asset under either financial or operating lease agreements;

Possible legal interpretations:

Financial leasing may involve that Lessee also assumes the asset-related risks, not just the risks of the agreement itself;

Art. 10, letter f) of GO 51/1997 applies only to financial leasing;




Second criterion: transfer of title at the end of the lease term

Does the option to buy the asset exist under any form of leasing?

Does financial leasing mean that Lessee exercises its option as from effective date of the agreement?

Can Lessee under an operating leasing agreement demand Lessor to observe its right of option or is it merely entitled to claim damages in accordance with the Ordinance?




Third criterion: Lease term

A term longer than 75% of the normal useful life of the asset;

Extension of what was originally an operating leasing agreement may lead to re-qualification of the agreement as financial leasing, even if the agreement is extended after the right of option has been exercised;




Conclusions:

There are unclear aspects as regards the difference between financial leasing and operating leasing;

Distinguishing between financial and operating leasing is primarily important in terms of the applicable tax and accounting treatment, and secondly from a legal perspective;


Accounting and TaxAccounting and TaxFramework*Framework*

Richard Grotendorst, Tax Manager PricewaterhouseCoopersRichard Grotendorst, Tax Manager PricewaterhouseCoopers

*connectedthinking



Accounting & Tax Framework

Order no 94/2001 harmonising the Romanian accounting rules with both the EU 4th Directive and the IAS (applicable starting from the financial statements for 2000).

Order no 306/2002 regarding the implementation of the simplified accounting rules harmonised with the EU directives (applicable since 1 January 2003).

IAS 17 – Leases.

Law 571/2003 – the Fiscal Code, amended and supplemented (profit tax and VAT).

Government Decision 44/2004 – the Norms on the application of the Fiscal Code, amended and supplemented.



Definition Lease (IAS 17)

A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period.

Finance lease Operating lease

Leasing companies in Romania generally apply OMF 94 applicability of IAS 17

Definition:



Finance vs. Operating Lease

Finance Lease

A lease is a finance lease if all the risks and rewards incident to ownership are substantially transferred

Operating Lease

A lease is an operating lease if the risks and rewards incident to ownership are not substantially transferred

Substance over Form



Finance Lease or Operating Lease?

(1) Identify the business purpose behind the lease and its economic impact together with the economic issues at the end of the lease term





(2) Determine the lease term (including extensions that are reasonably certain to take place)

Cancellation provisions

Renewal options







Renewal options

(3) Determine the net present value (NPV) of the minimum lease payments (including payments that are reasonably certain to be made)




(4) Conclude on whether or not all the risks and rewards have been substantially transferred from the lessor to the lessee



(3) Determine the net present value (NPV) of the minimum lease payments (including payments that are reasonably certain to be made)


Rights and obligations at end

of lease

Renewal options




(4) Conclude on whether or not all the risks and rewards have been substantially transferred from the lessor to the lessee

Special nature of the

asset

Purchase option

Transfer of ownership at the end

of the lease

Residual value risk



Finance lease indicators

Specific examples or indicators of a finance lease within IAS 17

1. Lessor transfers ownership of the asset to the lessee at the end of the lease term.

2. Lessee has an option to purchase at a price below fair value.

3. Lease term is for a major part of the economic life of the asset (>75%?) even if the title is not transferred.

4. At the inception, the NPV of minimum lease payments amounts to at least substantially all the fair value of the leased asset (e.g. US GAAP – 90%).

5. The assets are ‘specialist’ and only useable by the lessee without major modification.



Other finance lease indicators

Other indicators of a finance lease within IAS 17

1. On cancellation, the lessor’s losses associated with early termination are borne by the lessee.

2. Gains or losses from the fluctuation in the fair value of the residual fall to the lessee.

3. Lessee has the ability to roll over the lease for a second period, at a rent substantially lower than the market rent.



Operating Lease Indicators

IAS 17 identifies the following indicators of an operating lease:

1. If ownership of the asset transfers at the end of the lease for a variable payment equal to its fair value at that moment.

2. If there are contingent rents, as a result of which the lessee does not have substantially all such risks and rewards.



Summary Lease classification

Financial lease Operating lease

Transfer of substantially all risks and rewards of ownership

No transfer of substantially all risks and rewards of ownership

Transfer of ownership at the end of lease term No transfer of ownership at the end of lease term

Option to purchase the asset at a price expected to be exercised

No option to purchase the asset, or option to purchase asset not expected to be exercised

Present value of MLPs equal to substantially all of the FV of the asset

Present value of MLPs differs substantially from the FV of the asset

Leased asset’s nature only suitable for lessee There can be several users of the asset

All indicators need to be considered, applying substance over form



Definition Fiscal Code

Financial lease Art. 7 (7) FC

A lease whereby at least one of the following conditions is met:

The risks and benefits of the ownership of the leased property are transferred to the lessee upon inception of the leasing contract.

The leasing contract expressly provides for the transfer of ownership of the goods subject to leasing to the user upon expiry of the contract.

The leasing term covers at least 75% of the useful life of the leased property (including any extensions of the lease term).

Operating lease Art. 7 (8) FC

Any leasing contract that does not fulfill the conditions to be classified as a financial leasing.



Tax Treatment

Financial lease

The asset is depreciated by the lessee.

The interest expenses are deducted by the lessee.

The building/land taxes are paid by the lessor.

Insurance premiums are paid as agreed between the lessor and the lessee.

Operating lease

The asset is depreciated by the lessor.

The lessee deducts the lease instalments.

The building/land taxes are paid by the lessor.

Insurance premiums paid as agreed between the lessor and the lessee.

Indirect Taxes*Indirect Taxes*

Daniel Anghel, Senior Manager PricewaterhouseCoopersDaniel Anghel, Senior Manager PricewaterhouseCoopers

*connectedthinking



EU Accession – Why indirect taxes… Wide range

Indirect tax & logistics

recognised as the main issue to resolve

direct, immediate effect

long term strategy

But also on aspects such as:

Legal- EU Competition law / intellectual property- product & packaging requirements- health & safety requirements

Human resources- mobility of work forces / HR aspects of relocation- labour laws

IT - especially also as a consequence of the EU VAT requirements

Accounting- new requirements, e.g. indirect tax reporting requirements

Tax / transfer pricing

35%

25%

25%

5%10%

VAT Customs

Excise Duties Corporate Income Tax

Social Security

Impact on particular taxes



Financial Institutions - Scope

… are not only:

Banks

Insurance Co’s

…but also:

Leasing Co’s

Treasury Department

Investment Funds

…etc.



Financial and Operational leasing of movable goods

Current treatment:

Supply of services

Split capital from interest

VAT does not apply to the finance element

Account for VAT at time of instalments

EU Accession

Supply of services

May be deemed as delivery of goods (case by case analysis of the leasing contract)

VAT on finance element

Account for VAT at time of instalments



Intracommunity and cross border leasing

Current treatment

Leasing of:

movable tangible property – where the beneficiary is located

EU Accession

New rules:

movable tangible property except means of transport – where the beneficiary is located

means of transport – where the supplier is located

Treatment varies between EU members

Use & enjoyment for leasing transactions with non-EU parties



Country Supply of services Delivery of goods Austria Leasing – VAT under reverse charge Belgium Operational and financial leasing Purchase and rental contracts Czeck Republic

Operational leasing (the user does not have the option to buy)

Financial leasing (the user has the option to buy)

France Leasing with/without option to buy The selling of vehicles and the transfer of ownership (including the case where that transfer occurs at the moment of the final payment)

Germany Leasing – when the vehicle is part of the lessor’s assets

Leasing – when the vehicle is part of the lessee’s assets

Hungary If the transfer of ownership to the vehicle is optional and occurs as a result of a mutual agreement between the parties

If ownership will be automatically transferred in the future

Italy Financial and operational leasing The Netherlands

Operational leasing Financial leasing contracts and rental – purchase contracts

Spain Leasing with an option to buy at the end of the contract up to the moment the vehicle is actuallybought

Leasing with a mandatory option to buy at the end of the contract. The exertion of the option to buy the vehicle, mentioned in the leasing contract.

Sweden Leasing The purchase of the vehicle as a result of a leasing contract

Supply of services vs. delivery of goods in different EU countries

(*) VAT treatment for IC leasing of means of transport



The delivery at the end of the leasing contract

Current treatment

Delivery of goods

Importation/exportation of goods for cross-border transactions

The Romanian beneficiary is liable to pay for the import duties at residual value

EU Accession

Delivery of goods

Within the Community

Registration of foreign owner

ICA of goods

Domestic supply

From outside the Community – Importation of goods



Current Road…

Imagine a truck transporting goods……

Romania

Hungary



New Road …

Additional costs/Documentation

Logistics

Intrastat

Accounting

Human Resources

Legal

IT Systems

Austria

Transfer Pricing

Romania

Hungary

Additional compliance and reporting



Running leasing contracts

Goods imported with exoneration

Will be put into free circulation in the Community (import duties)

From outside the Community

From the Community Communitary

goods

-domestic leasing-

Before Accession After Accession



Running leasing contracts

Goods under temporary admission with total relief

Will be put into free circulation in the Community (import duties)

From outside the Community

From the Community

Communitary goods (*)

Will be placed under temporary admission with partial relief

-cross-border leasing-

Before Accession After Accession



Financial & Operational real estate leasing

Current treatment

No VAT on interest element

Subject to VAT on standard rate

Simplification measures

EU Accession

Interest will be subject to VAT – (additional cost for companies which do not have deduction right and individuals)

Exempt with option to tax

Simplification measures ?



Reporting and compliance

Current

VAT return

VAT purchase ledger

VAT sales ledger

EU accession

In addition:

Register of non-transfers

Recapitulative statement for intra – Community supplies and acquisitions

A list of capital goods subject to adjustment (e.g. Real estate)



How can we help you to be ready on 1 January 2007 ?

Pre- & Post accessions reviews

EU accession Business Strategy

Planning and implementation

Training

Systems/Compliance Implementation

EU Accession Forum



Your worlds Our people

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pwc accounting, tax & legal framework* *connectedthinking

Documents

current legal framework

pwc legal framework

operating leasing slide

legal framework laura

connectedthinking slide

contractual slide

operating leasing banking

impact leasing transactions