In a previous article we have analysed the dilemmas resulting from the thematic tax audit campaign aimed at auditing the tax treatment of purchased gift vouchers, in terms of income tax and social security charges. A very sought after extra-salary employee benefit, companies bought and offered gift vouchers amounting to over RON 1 billion (approx. EUR 200 million) in 2018 alone and we can only assume that these figures have only risen since then.
The surprise of the tax payers was not generated by the initiation of the actual tax audit, but rather by the inspectors’ approach, who speculated a legislative ambiguity in the tax treatment applicable to vouchers granted by taxpayers to their business partners’ employees, with the view of boosting their own sales.
Considering the uncertainty of the tax treatment of gift vouchers, as of 1 January 2021 the Romanian Fiscal Code suffered several amendments in the view of bringing clarity to this matter.
Unfortunately, it appears that these changes were not sufficiently clear and, therefore, new dramatic changes related the gift vouchers were introduced as of December 2021. Basically, the tax authority decided that the possibility of granting gift vouchers to other persons than the employer’s own employees increases the risk of generating disguised employment relationships and, thus, has eliminated the possibility of granting gift vouchers to any other person than the company’s own employees and for any other purposes than the social one.
In our analysis below, we have summarised the reasons that determined this drastic decision, as well as the rules applicable as of 2022.
The history of the gift voucher’s tax treatment
For at least 5 years, the local tax legislation had the following general rules, which led to the whole uncertainty regarding the gift vouchers tax treatment:
- Firstly, it generally stated that benefits in kind or in cash are considered to be any kind of benefits received by the employee from third parties or as a result of the provisions of the individual employment contract or a contractual relationship between the parties, as the case may be. As such, benefits in kind or in cash had to be taxed with salary tax and social security charges (health insurance contribution, pension contribution, and employer’s contributions), under the same rules as those applicable to salary income. The reporting obligation would also fall with the individual’s employer and not with the third party granting such benefits;
- Secondly, the local tax legislation stated that gift vouchers granted to individuals separate from salary should fall under the category of “income from other sources”, thus being subject to income tax and health insurance contribution only (provided certain conditions are met). Therefore, a more favourable tax treatment was in place for these types of income due to fewer social security charges being owed. The provider of the gift vouchers (payer of income) would have to compute and pay solely the income tax, while the individual would owe and report the health insurance tax (if applicable).
The above mentioned tax rules were not clear enough and left much room for interpretation. Gift vouchers granted by companies to the employees of their business partners could be treated as either falling under the salary income category (since the individual would not receive such gift voucher, should he/she not be an employee of the business partner) or under income from other sources category (since the gift vouchers were granted separate from salary, with no individual employment agreement existing between grantor and recipient of the gift voucher).
Hence, framing gift vouchers as salary related income would entitle tax authorities to collect more taxes to the state budget (via additional social security charges). This triggered the massive thematic tax audit campaign in the second half of 2019, which is still ongoing. During this campaign, in most tax audits, tax inspectors still consider that the gift vouchers granted by third parties to their business partner’s employees should be seen as benefits-in-kind and taxed with salary tax and entire spectrum of social charges, while the reporting obligation should be not on the third party, but on its business partner (the actual employer).
However, in practice, the business partner might not even know that its employees received gift vouchers from other companies, a situation that lead to a lot of instances in which the gift vouchers were not taxed by the business partner/actual employer as salary tax, but rather as income from other sources, with the third party paying solely the applicable income tax. Even the scenarios of gift vouchers granted directly to the company’s employees were subject to scrutiny, since, under these bonus schemes, different tax treatments apply, depending on whether the gift vouchers are offered for certain public holidays and under limited amounts.
Consequently, the tax audits almost always result in additional tax obligations being established for the individual’s employer, with additional delay interests and penalties.
The tax authority’s first attempt to solving the uncertainty
Given the public outcry generated by these thematic tax audits that keep on pouring, the Romanian Government amended the tax legislation as of 1 January 2021 in order to clarify the relevant tax treatment.
Law no. 296/2020 stated that all gift vouchers granted by a company to individuals who are not their employees, on a nominal value, for marketing campaigns, market research, promotion on existing or new markets, for protocol, for advertising and publicity, other than the ones qualifying as benefits-in-kind or the ones being non-taxable, are included in the category of income from other sources and, therefore, only subject to the 10% income tax (to be withheld by the income payer) and health insurance contribution (if the case, to be reported by the individual).
As paperwork, the nominal record must include, at least, information on the name, surname, personal ID code/tax ID number of the beneficiary and the value of the vouchers granted to each beneficiary, on a monthly basis.
Unfortunately, this legislative amendment was still not sufficiently clear, leaving room for interpretations, since it excluded gift vouchers that are treated as benefits-in-kind.
The tax authority’s drastic decision to solving the issue
As anticipated in our previous article, the safest and easiest solution would have been for the Ministry of Public Finance (the legislator) and the tax authorities (the auditor and enforcer of the tax rules) to reach a common ground and issue clear tax guidelines on how gift vouchers should be taxed.
Nevertheless, this strategy was not pursued and the Ministry of Public Finance decided that the best way of solving the gift vouchers issue was to eliminate the option of granting gift vouchers to third parties (other than the employees) altogether.
Hence, by means of the Government Emergency Ordinance no. 130/2021, which entered into force as of 18 December 2021, the following main measures were adopted in relation to gift vouchers:
- Granting of gift vouchers to other categories than the company’s own employees is forbidden and the employer must grant them only for social purposes. Previously to this amendment, the law allowed companies to grant gift vouchers to other category of persons than the company’s own employees, for marketing campaigns, market studies, promotion on existing or new markets, for protocol, for advertising and publicity.
- All gift vouchers must be granted electronically and, therefore, gift vouchers in paper format are no longer permissible.
- The threshold for gifts, including gift vouchers, given starting with January 2022 to employees and their children for Easter, Christmas and similar holidays, to ladies for March 8 and to employees for the benefit of their minor children in respect of June 1 anniversary, is increased from RON 150 to RON 300. All gifts, including gift vouchers, that fall under these categories and threshold are deemed as non-taxable for income tax and social security charges;
- On the other hand, any other gift vouchers granted starting with January 2022 that do not fall under the categories and threshold mentioned above will be taxed with income tax and social security charges. Prior to this change, the gift vouchers granted for other occasions than the ones mentioned above were exempt from social security charges.
Considering these measures, it is safe to say that the tax authorities have taken the “easy way out”, by avoiding to provide a clear tax treatment for the gift voucher granted to other persons than the company’s employees and by severely limiting the use of these vouchers.
This solution does indeed clarify the gift voucher tax treatment, but on the other hand affects the business model of the companies that granted them for marketing campaigns, market studies, promotion on existing or new markets, for protocol, for advertising and publicity, by limiting their visibility on the market.
By Razvan Graure, Tax Partner, Musat & Asociatii