New Romanian tax on tips likely to discourage tipping

Starting from 8 May 2015, taxpayers who receive tips will be required to document all tips received on a distinct fiscal receipt, separate from the receipt provided for goods or services. Tips are defined as any amount of money offered freely by the customer, in addition to the value of the goods or services acquired, as well as any change voluntarily left by the customer. The newly imposed requirements are likely to be viewed as burdensome for both the customers and the goods and services providers, thereby discouraging tips.

In addition, each goods and services provider must create an internal policy addressing whether the income from tips belongs to the company or will be distributed to employees.

Tips kept for the benefit of the company will be subject to 16% profit tax or 3% income tax for microenterprises. The intention of the legislator is that tips distributed to employees will be subject to 16% income tax, only.

Yet, the new law triggers many questions. For example, although tip proceeds distributed to employees should not be treated as consideration for the goods or services provided, the new law does not clarify whether tip proceeds that are retained by the company would be subject to VAT as consideration for the goods or services provided, considering the fact that they are freely given by the customers. Additionally, if tips retained by the company are subject to VAT, it is unclear at which rate VAT will apply to tips.

Due to the significant impact of the new law on a wide range of goods and service industries, we anticipate further clarifications to be issued in the following period.

The new provisions also amend the level of fines and penalties for failure to comply with the legislation on cash registers, thus setting fixed fines instead of using ranges as before. Of note, in the event tax inspectors identify money not justified with supporting documents the sanctions and fines applied depend on the severity of the misconduct. For example, unjustified differences less than RON 300 (approx. EUR 65) but not higher than 3% of the sales revenue recorded through cash registers or special registers will be sanctioned with only a notice. However, higher unjustified differences are subject to fines ranging from RON 3,500 to RON 27,500 (approx. EUR 780 – EUR 6,200) and potentially suspension of business activity for 30 days if the company is subject to a second penalty within a period of 24 months.

The above changes in the law result from the Romanian Government’s adoption of Emergency Ordinance no. 8/2015, amending and supplementing Emergency Ordinance no. 28/1999 regarding legislation on cash registers.

To discuss how these new provisions affect your business, please contact Roxana Popel or Elena Mihailescu.