Applied Skills

TX – ROM
Taxation
– Romania
(TX – ROM)
Tuesday 4 June 2019

TX ROM ACCA

Time allowed: 3 hours 15 minutes

This question paper is divided into two sections:

Section A – A
 LL 15 questions are compulsory and MUST be attempted

Section B – ALL
 SIX questions are compulsory and MUST be attempted

Tax rates and allowances are on pages 2–5.

Do NOT open this question paper until instructed by the supervisor.

Do NOT record any of your answers on the question paper.

This question paper must not be removed from the examination hall.

The Association of
Chartered Certified
Accountants
SUPPLEMENTARY INSTRUCTIONS

1. Calculations and workings should be made to the nearest lei, unless instructed otherwise.
2. All apportionments should be made to the nearest month, unless the law requires otherwise.
3. All workings should be shown in Section B.

TAX RATES AND ALLOWANCES

The following tax rates and allowances are to be used in answering the questions irrespective of the time period the
question refers to.

Personal income tax

General tax rate 10%

Income from employment

Benefits
Limit for non-taxable gifts 150 lei/person/occasion
Limit for non-taxable voluntary pension contributions paid by the employer €400/year
Limit for non-taxable voluntary health insurance and medical subscriptions
paid by the employer €400/year
Limit for non-taxable daily allowance 2·5 x public institutions’ threshold
Daily allowance accepted for public institutions’ employees for
business trips within Romania 20 lei/day/person
Valuation of use of company owned car benefit in kind 1·7%/month
Deductions
Deduction allowed for voluntary pension contributions paid by the employee €400/year
Deduction allowed for voluntary health insurance and medical subscriptions
paid by the employee €400/year

Personal deduction
The value of the personal deduction shall be given in each question.

Income from the sale of immovable property owned by an individual

Income Tax rate
Up to 450,000 lei 0%
Above 450,000 lei 3% of the amount exceeding 450,000 lei

Income from renting

Lump-sum deductible expenses quota 40%

Intellectual property income

Lump-sum deductible expenses quota 40%

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 Self-employed income
The limit of deductibility for protocol expenses 2%
The limit of deductibility for compulsory subscription expenses
paid to professional associations 5%
The limit of deductibility for subscription expenses paid to professional
associations other than compulsory ones €4,000/year
The limit of deductibility for social expenses 5%
The limit of deductibility for sponsorship expenses 5%
The limit of deductibility of voluntary pension contributions paid for the
self-employed person €400/year
The limit of deductibility of voluntary health insurance and medical
subscriptions paid for the self-employed person €400/year
Reference interest rate set by the Romanian National Bank for loans
denominated in lei 2·50% p.a.
Limit of deductibility for expenses connected to cars not entirely used
for business purposes 50%

Investment income
Tax rate for capital gains from the sale of shares 10%
Tax rate for interest received by individuals 10%
Tax rate for dividends received by individuals   5%

Prize income
Tax rate for prize income 10%
Non-taxable threshold 600 lei/day/prize

Pension income
Non-taxable threshold for pension income 2,000 lei

Corporate income tax

General tax rate 16%
Limits for legal reserve 5% of profit but no more than 20%
of share capital
Fixed threshold for deductibility of exceeding borrowing costs €200,000
Variable threshold for deductibility of exceeding borrowing costs 10%
Inflation rate for prepayments of corporate income tax 3·1% p.a.
Maximum value of deductible expenses for subscriptions to
non-profit organisations other than those which are compulsory or due
to the chambers of commerce and to employers’ organisations €4,000/year
The limit of deductibility for protocol expenses 2%
The limit of deductibility for social expenses 5%
Maximum value of tax credit for sponsorship expenses 20% of the corporate income tax
but no more than 0·5% of sales
revenue
Limit of deductibility for expenses connected to cars not entirely used for
business purposes 50%

3 [P.T.O.
 Corporate income tax for very small companies
Turnover threshold €1,000,000
Tax rate
– no employees 3%
– one or more employees 1%

Straight-line depreciation periods (for tax and accounting purposes)

Class of asset Period in years
Buildings 50
Machines and equipment 10
Computers and printers   3
Cars*  5
* Limited to a maximum 1,500 lei/month
Note: The straight-line depreciation method for the above periods should be used in all cases, except where a question
specifically indicates another method and/or period is to be used.
The minimum value of an asset for tax depreciation purposes is 2,500 lei.

Tax on dividends paid to legal persons

For dividends paid to legal persons resident in Romania, EU or
EFTA countries 5% or 0%
For dividends paid to other non-residents 5%

Social security, health care insurance and work insurance contributions

Persons obtaining employment revenue
Employee Employer
Social security fund 25%
Health care insurance fund 10%
Work insurance fund 2·25%
Persons obtaining revenues, other than employment
Social security fund 25%
Health care insurance fund 10%
Minimum monthly salary 1,900 lei

Value added tax (VAT)

Standard rate 19%
Reduced rates 9% and 5%
Annual threshold for VAT registration 300,000 lei
Annual threshold for a monthly tax period €100,000
Annual threshold for applying the cash accounting scheme 2,250,000 lei
Threshold for special VAT registration for intra-EU acquisitions of goods 34,000 lei
Limit of non-taxable protocol gifts in goods 100 lei/gift
Limit of non-taxable goods and services offered as sponsorships 3‰ x turnover/year
Limit of deductibility of VAT of expenses connected with cars not
entirely used for business purposes 50%

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 Exchange rate
Euro/lei €1 = 4·60 lei
Note: This rate should be used in all cases except where a question specifically indicates another rate is to be used.

Interest and penalties

Interest rate for late tax payments 0·02%/day
Penalty level for late tax payments 0·01%/day
Penalty for not declaring taxes 0·08%/day or 0·02%/day

5 [P.T.O.
Section A – ALL 15 questions are compulsory and MUST be attempted

Please use the grid provided on page two of the Candidate Answer Booklet to record your answers to each multiple choice
question. Do not write out the answers to the MCQs on the lined pages of the answer booklet.
Each question is worth 2 marks.

1 In relation to the computation of exceeding borrowing costs for the determination of corporate income tax, which
of the following items should be included?
(1) Interest expense relating to a five-year bank loan
(2) Interest revenue from a current account
(3) Dividend revenue
(4) Interest expense relating to a three-year loan from the parent company, which is not an accredited financial
institution
A 2 and 3 only
B 1, 2 and 4
C 4 only
D 1, 2 and 3

2 Andrei, a self-employed trader of goods, applies the real system in computing his personal income tax. For 2019, he
estimated his income tax liability for his activity to be 18,000 lei. Andrei made income tax payments of 3,000 lei
on 15 September 2019, and 7,000 lei on 10 March 2020. His realised net annual taxable income for 2019 was
220,000 lei.

What is the final amount of income tax payable by Andrei on settlement for the tax year 2019?
A 12,000 lei
B 22,000 lei
C 4,000 lei
D 19,000 lei

3 Angel SRL, a Romanian company, has two permanent establishments: one in Country A and one in Country B.
Romania and Country A have a double tax treaty which agrees that double tax relief is given using the exemption
method. Romania and Country B have a double tax treaty which agrees that double tax relief is given using the ordinary
credit method. Angel SRL has all the documents needed to apply any double tax relief available in 2019. The following
information is supplied for 2019 (the rules for determining taxable revenues and deductible expenses in Country A and
Country B are the same as in Romania):
For the activity For the activity For the activity
in Romania in Country A in Country B
Taxable revenues (lei) 1,500,000 200,000 800,000
Deductible expenses (lei) 900,000 50,000 400,000
Corporate income tax rate (%) 16% 5% 25%

What is Angel SRL’s corporate income tax payable in Romania for the year 2019?
A 112,500 lei
B 96,000 lei
C 60,000 lei
D 84,000 lei

6
4 Florin is a professor of tax law at a university. In 2019, he also earned revenues of 780,000 lei working as a
self‑employed lawyer, and 356,000 lei from teaching law to students in private classes. Florin is registered for value
added tax (VAT). For both independent activities he used his family home: 70% of the house is allocated to family use,
and 30% to business use. In 2019, Florin received invoices for the house utilities, showing total VAT paid of 50,000
lei. He also purchased office supplies which were used for both his lawyer work and private tuition, which included
total VAT of 20,000 lei.

What is the amount of input value added tax (VAT) which Florin may deduct in 2019?
A 11,200 lei
B 35,000 lei
C 24,150 lei
D 30,350 lei

5 Which of the following statements in relation to the due dates for the payment of tax are TRUE?
(1) Companies with more than three employees can opt to pay the employment income tax monthly or quarterly
(2) Companies with a turnover of more than 3100,000 can opt to pay value added tax (VAT) monthly or quarterly
(3) The tax due under the special scheme for corporate income tax has to be paid by the 25th of the month following
each quarter
(4) Companies which have a tax year different to the calendar year have to pay the final corporate income tax due on
settlement by the 25th of the third month following the end of the tax year
A 1 and 4
B 3 and 4
C 2 and 3
D 1 and 2

6 Ovidiu started a self-employed activity on 1 July 2019. His estimated and realised net income for 2019 is 20,000 lei.
Ovidiu chooses to pay social security contributions at the minimum level accepted by the law, if he is liable to pay it.

What is the amount of social security contributions payable by Ovidiu for the tax year 2019?
A 0 lei
B 5,700 lei
C 2,850 lei
D 5,000 lei

7 Anca, a writer of children’s books, wrote a book for which she received gross income of 20,000 lei in 2019 from the
publishing house for the intellectual property rights. In October 2019, she participated in a radio contest and won a
prize with a gross value of 3,500 lei.

What is the amount of income tax payable by Anca for the tax year 2019?
A 1,490 lei
B 2,350 lei
C 1,550 lei
D 2,290 lei

7 [P.T.O.
8 Restaurant SRL, a company with a restaurant activity and trade activity, applies both the specific tax and corporate
income tax. In 2019, the company had the following results:
Analysis:
Total Restaurant activity Trade activity
lei lei lei
Total revenues 8,000,000 6,000,000 2,000,000
Total expenses
– Fully deductible expenses directly
connected to each activity 3,000,000 1,800,000 1,200,000
– Protocol expenses, which cannot be
allocated to a specific activity 120,000

What is the amount of standard corporate income tax (excluding specific tax) payable by Restaurant SRL for the
tax year 2019?
A 128,000 lei
B 123,200 lei
C 124,000 lei
D 125,440 lei

9 Which of the following income must be included to determine whether or not an individual is liable to pay health
care insurance contribution for incomes other than employment income?
(1) Income from the sale of immovable property
(2) Investment income
(3) Rental income
(4) Pension income
A 1 and 2
B 1 and 4
C 2 and 3
D 3 and 4

10 Water SRL pays value added tax (VAT) on a quarterly basis. The VAT due for the first quarter of 2019 was 20,000 lei,
and the VAT due for the second quarter of 2019 was 30,000 lei. Water SRL failed to submit the VAT returns for the first
two quarters on time. Both VAT returns were submitted on 10 August 2019, and the entire VAT liability of 50,000 lei
was paid on 10 September 2019.

What is the total amount of interest and penalties payable by Water SRL for the late payment of value added tax
(VAT)?
A 1,251 lei
B 1,668 lei
C 834 lei
D 465 lei

8
11 Forest SRL pays standard corporate income tax and applies the system of prepayments of tax. The final tax computed
for 2019 is 90,000 lei before applying the corporate income tax exemption for reinvested profit. In 2019, Forest SRL
made an investment of 800,000 lei which qualifies for the exemption for reinvested profit. The company’s accounting
profit in 2019 is 300,000 lei.

What is the amount of corporate income tax exemption available for the reinvested profit in the tax year 2019?
A 90,000 lei
B 128,000 lei
C 80,000 lei
D 48,000 lei

12 Tree SA pays standard corporate income tax and its tax year is equal to the calendar year. During 2019, it decided to
change its tax year to match its financial reporting year end of 31 July. The change will take effect from 1 August 2019.

Which of the following statements is/are true in relation to Tree SA’s change of tax year?
(1) The option to change the tax year from the calendar year to the year ended 31 July must be made 30 days or more
before 1 August of the first changed tax year
(2) The option to change the tax year from the calendar year to a chosen period of 12 months can be made irrespective
of the financial year used by the company for financial reporting
(3) For the first changed tax year, the corporate income tax return shall cover the period 1 January 2019–31 July
2020
(4) Tree SA must announce in 2018 that it wants to change the tax year in 2019
A 1 and 3
B 3 only
C 2 and 4 only
D 1, 2 and 4

13 Which of the following statements is/are TRUE in relation to the payroll tax system as applied to employees?
(1) Income tax is withheld by the employer who must declare and pay it to the state budget
(2) Social security contributions and health care insurance contributions must be declared and paid by the employee
using the unique return
(3) All employees benefit from a personal deduction
(4) Income tax paid by the employer during the year represents a prepayment of the final tax which is due by the
employee at the end of the year
A 1, 2 and 4
B 3 and 4
C 1 only
D 2 and 3

9 [P.T.O.
14 Rain SRL is a tax consultancy company registered for value added tax (VAT). According to its client contracts, whenever
the consultancy work requires travelling, Rain SRL claims all travel expenses from its clients in addition to the
consultancy fee. In May 2019, Rain SRL’s employees travelled from Bucharest to Cluj where they assisted a client
during a tax audit.
Rain SRL invoiced this client on 31 May 2019 for the services provided and travel expenses.
Rain SRL charged 300 lei/hour + VAT for the tax consultancy services and, based on a timesheet approved by the
client, in May 2019 the company provided 20 hours of consultancy.
Travel expenses incurred were:
– flight 800 lei + 19% VAT
– accommodation 1,200 lei + 9% VAT
– taxi expenses 100 lei with no VAT
(the taxi providers were not registered for VAT as they applied the exemption for
very small companies)

What is the total amount of output value added tax (VAT) which Rain SRL should charge on its invoice to the
client?
A 1,539 lei
B 1,140 lei
C 1,400 lei
D 1,520 lei

15 Lavinia is a self-employed individual and her income tax due for 2019 is 30,000 lei. Lavinia wants to allocate her
income tax to a charitable association and she wishes to donate the maximum possible amount according to the law.
She has chosen to donate to:
– an association which protects animals which does not have at least one licensed social service (NGO 1), and
– an association which has at least one licensed social service (NGO 2).

What is the maximum amount which Lavinia can donate to charity by allocation of her income tax, and to which
association(s) should she donate?
Maximum amount NGO
A 1,650 lei NGO 1 and NGO 2
B 600 lei NGO 1 and NGO 2
C 900 lei NGO 1
D 1,050 lei NGO 2

(30 marks)

10
Section B – ALL SIX questions are compulsory and MUST be attempted

Please write your answers to all parts of these questions on the lined pages within the Candidate Answer Booklet.

1 Laurenţiu Popescu is employed by Lake SRL, a company which applies the standard corporate income tax scheme.
Laurenţiu’s gross employment income is 4,500 lei per month, and in 2019, he also received the following benefits in
kind from Lake SRL:
– a monthly fidelity bonus of 10% of gross income;
– a company car, which Laruenţiu used 30% for business and 70% for personal purposes. Lake SRL’s monthly
expenses relating to the car were 2,500 lei and only 50% of these expenses were deducted by Lake SRL for
corporate income tax.
– On his birthday in December 2019, Laurenţiu received a present of 2,000 lei. At Christmas he received a present
of 300 lei for himself and a present for each of his two children (Matei aged 15 and Maria aged 19) of 200 lei per
child. All presents were given in cash. The amounts stated are the gross values of the presents.
In addition to his employment income, in April 2019 Laurenţiu Popescu started a self-employed activity for which
he estimated that his net income in 2019 would be 12,000 lei. He decided that if he is liable to pay social security
contributions for incomes other than employment income, he would choose the lowest value of taxable base permitted
by the law. At the end of 2019 his realised net income was 18,500 lei.

Required:
Calculate the social contributions due by Laurenţiu for all incomes earned in 2019, clearly stating for the
self‑employed revenues the social contributions due based on his estimated and realised income.
Note: List all items of revenue referred to in the question, indicating by the use of zero (0) any item for which social
contributions are not payable.

(10 marks)

11 [P.T.O.
2 Mountain SA, a construction company, is registered for value added tax (VAT) in Romania with a monthly VAT period.
In May 2019, to improve the quality of its workforce, it became a certified provider of continuous professional training
for different jobs in the construction field, authorised with the Ministry of Education. The following activities were
performed by Mountain SA in May 2019:
Date Event VAT exclusive
amount
lei
5 May 2019 Invoiced a client for construction works in Cluj-Napoca. 30,000
10 May 2019 Issued an invoice for an advance payment for construction works which
will take place in Bulgaria 20,000
15 May 2019 Received a monthly invoice for accounting services 4,800
17 May 2019 Provided training services in Bucharest and invoiced the clients attending 28,000
25 May 2019 Received invoices for materials bought and used in construction works 10,000
30 May 2019 Bought furniture to be used in its professional training activity 3,000
Mountain SA’s headquarters are located in a new building Mountain SA bought in July 2018 for 300,000 lei (VAT
exclusive). Mountain SA applied the reverse charge mechanism to the new building. With effect from May 2019, the
building has been used 20% for professional training purposes and 80% for the activity of construction works.
It should be assumed that:
If VAT is applicable, the standard VAT rate is to be applied.
All suppliers and clients are registered for VAT in Romania.
The cash accounting scheme does not apply.
If any adjustments are required for VAT purposes, they will be performed in May 2019.

Required:
(a) Explain the difference between zero rated supplies (rom: ‘scutite cu drept de deducere’) and exempt
supplies (rom: ‘scutite fără drept de deducere’) for value added tax (VAT), and give TWO examples of exempt
supplies. (2 marks)

(b) Calculate Mountain SA’s output VAT, input VAT and VAT due to/from the state budget for May 2019.
(8 marks)

(10 marks)

12
3 John is a resident of the United Kingdom. On 1 February 2019, he relocated from the United Kingdom to Bucharest,
to start employment on a four-month contract with Rose SRL, a company established in Bucharest, Romania. When
he started, there was the possibility of an extension of his employment for a further four months. On 31 May 2019,
Rose SRL did not offer an extension to John’s employment contract and John returned to the United Kingdom.
On 1 February 2019, David, a Romanian resident and an employee of Rose SRL, was assigned to Austria for a
five‑month period to manage a project for Rose SRL. During the assignment period, David continued to be paid by Rose
SRL.
In February 2019, John and David received the following amounts from Rose SRL:
Notes John David
lei lei
Gross salary 8,500 2,200
Life insurance premium (1) 1,800 0
Total daily allowance for all 28 days of February 2019 (2) 1,000 20,500
Participation in Rose SRL’s profit 0 3,000
Relocation costs (3) 1,800 700
Touristic services for the employee and his family (4) 2,500 0
Notes:
(1) Rose SRL paid a life insurance premium of 1,800 lei for John, in accordance with his employment contract.
(2) Rose SRL paid a daily allowance to John, considering he made a business trip from the United Kingdom to
Romania for 28 days, and to David, considering he made a business trip from Romania to Austria for 28 days.
The daily allowance for public institutions’ employees for business trips within the United Kingdom and Austria is
€35/day.
(3) Rose SRL paid for the transportation of John and David’s family and personal belongings from the United Kingdom
to Romania and from Romania to Austria respectively.
(4) John had three days of holiday leave and took his family to a mountain resort. He paid 2,500 lei for this holiday
and Rose SRL reimbursed him the whole amount, in accordance with his employment contract.
(5) The minimum period for a foreigner to be considered resident is 183 days in both the double tax treaties between
Romania and Austria and between Romania and the UK.
(6) There is no personal deduction available to John or David for the month of February 2019.

Required:
(a) Explain why John and David are liable to pay individual income tax in Romania. (2 marks)

(b) Calculate the employment income tax payable in Romania by John and David for February 2019.
Notes:
1. List all items referred to in the question, indicating with the use of zero (0) any item which has no impact
on the employment income tax computation.
2. Ignore any social contributions due. (8 marks)

(10 marks)

13 [P.T.O.
4 Garden SA is an agricultural company established in 2012 with a share capital of 100,000 lei. From inception to
2017 it applied the standard corporate income tax rules, but with effect from 1 January 2018 it has applied the special
scheme of corporate income tax for very small companies.
In 2019, Garden SA recorded the following quarterly figures:
Total Q1 Q2 Q3 Q4
’000 lei ’000 lei ’000 lei ’000 lei ’000 lei
Revenues:
Agricultural product sales 3,700 500 2,000 1,000 200
Subsidies 1,500 300 1,200 0 0
Changes in work in progress 0 500 (300 ) (200 ) 0
Exchange rate differences 40 30 0 0 10
–––––– –––––– –––––– ––––– ––––
Total revenues 5,240 1,330 2,900 800 210
–––––– –––––– –––––– ––––– ––––
Expenses:
Cost of agricultural products 4,400 1,000 1,800 700 900
Salaries 610 100 210 300 0
Two cash registers 5 5 0 0 0
Sponsorships 9 0 3 6 0
Exchange rate differences 15 0 8 7 0
–––––– –––––– –––––– ––––– ––––
Total expenses 5,039 1,105 2,021 1,013 900
–––––– –––––– –––––– ––––– ––––
Additional information:
(1) The cash registers were put into business use in the first quarter of 2019.
(2) In April 2019, Garden SA decided to offset 10,000 lei from its legal reserve with losses recorded in previous years.
The legal reserve was created in 2012 and was fully deducted for corporate income tax purposes.
(3) In June 2019, Garden SA gave a sponsorship of 3,000 lei to a school which has no licensed social service.
(4) In July 2019, Garden SA gave a sponsorship of 6,000 lei to a non-profit association which has two licensed social
services.
(5) From January to September 2019, Garden SA had five full-time employees, and used 50 day-labourers during the
summer months. From October to December 2019, Garden SA had no employees.

Required:
(a) State the conditions which a company must fulfil for the special scheme of corporate income tax for very small
companies to apply. (2 marks)

(b) State which of the revenues recorded by Garden SA should be included, and which should not be included, in
the taxable base for the special scheme of corporate income tax for very small companies. (2 marks)

(c) Calculate the corporate income tax payable by Garden SA for each quarter of 2019. (6 marks)

(10 marks)

14
5 Mircea, a Romanian resident, started a self-employed management consultancy services business on 20 January
2019. Mircea determines his income tax using the real system. For 2019, he estimated a gross revenue of 200,000 lei
and deductible expenses of 120,000 lei.
During 2019, Mircea recorded the following:
– With effect from February 2019, he issued invoices for consultancy services of 30,000 lei/month. All invoices are
issued on the last day of each month and are cashed in 45 days.
– From February 2019, he paid a monthly subscription of 500 lei under a contract with a private medical clinic to
provide him with medical services.
– In March 2019, he bought office supplies for 30,000 lei. During 2019, he used all of the materials except
materials costing 5,000 lei which were stolen from his office by thieves in December 2019. Mircea has not
insured his goods and he cannot claim the loss from anyone.
– He bought a professional printer for 5,040 lei in April 2019 and started using it in May 2019. He bought the
printer using a cash donation of 5,040 lei received from a friend.
– In July 2019, he placed a purchase order with a company in France (an EU member state) for a three-day training
course in management. The company accepted the order, sent a trainer to Romania to train Mircea and invoiced
10,000 lei. The French company did not provide Mircea with a certificate of residence in France. Accordingly, in
August 2019, Mircea paid withholding tax in relation to the income paid to the non-resident company of 1,905 lei
using the gross up method.
All acquisitions are paid on the same day they are made.
In addition to his self-employed activity, Mircea rents two apartments: one apartment was rented from March 2019
for a monthly rent of 10,000 lei, and the other apartment was rented from September 2019 for a monthly rent of
12,000 lei. According to the contract, the rent is cashed on the last working day of each month to which it relates.
Mircea does not consider this activity as ancillary to his self-employed activity, but a distinct business area.
Mircea’s wife, Georgiana, is not employed but receives interest from a bank deposit account. She made the deposit of
500,000 lei in October 2016 for a five-year period and earns annual interest at a rate of 5%. The interest computed
for one year is paid in October each year.

Required:
(a) Explain, giving reasons, why Mircea is liable to register for value added tax (VAT). Explain the procedure for
registration and clearly state the date when Mircea must start charging VAT. (3 marks)

(b) Calculate the income tax payable by Mircea for 2019 and state the deadline for paying the tax.
Notes:
1. List all items referred to in the question, indicating with the use of zero (0) any item which has no impact
on the computation.
2. Ignore any social contributions implications. (10 marks)

(c) Calculate the income tax payable by Georgiana for 2019 and state the deadline for paying the tax.
(2 marks)

(15 marks)

15 [P.T.O.
6 Earth SA is a 100% owned subsidiary of Sky GmbH, a company established in Germany. Earth SA is a juice manufacturer
established in Arges county, Romania, and is subject to standard corporate income tax. Earth SA uses the calendar
year as its tax year for computing its corporate income tax. For 2018, it computed a corporate income tax liability of
2,580,000 lei.
In 2019, Earth SA took the option to apply the system of prepayments of tax and, in addition, decided to change its
tax year from the calendar year to the period from 1 May–30 April. Accordingly, the first amended tax year is 1 May
2019–30 April 2020.
During 2019, Earth SA received a tax audit which verified the corporate income tax calculation for 2018 based on the
information below:
Note lei
Total revenues
Sales revenues (1) 125,036,000
Revaluation of non-current assets (2) 2,000,000
––––––––––––
127,036,000
––––––––––––
Total expenses
Raw materials (3) 70,000,000
Inventory losses (4) 580,000
Management fees from the parent company, Sky GmbH (5) 300,000
Sports facility subscription for employees (6) 2,800,000
Gross salaries and social contributions (7) 30,000,000
Value of a discontinued investment (8) 2,100,000
Depreciation of non-current assets (9) 800,000
Corporate income tax expenses 2,580,000
––––––––––––
109,160,000
––––––––––––
Notes:
(1) Sales revenues are obtained solely from the sale of juices produced by Earth SA.
(2) In 2017, Earth SA revalued its non-current assets to market value, which was lower than the net book value.
Therefore, Earth SA recorded an expense for the related impairment. In 2018, Earth SA revalued its non‑current
assets again to market value which had increased considerably. Accordingly, the increase in value which
corresponded to the reversal of the impairment booked in 2017 was recorded to revenues.
(3) Raw materials include an amount of 860,000 lei for materials bought from a supplier who was an inactive
taxpayer at the moment of acquisition. The supplier did not obtain the tax reactivation until the tax audit.
(4) Inventory losses were recorded as follows:
– 220,000 lei relating to raw materials for which the expiration date (established according to the law) had
passed, so they were destroyed by Earth SA; and
– 360,000 lei relating to missing raw materials, which were not found during the physical inventory count and
the fault could not be assigned to a specific person.
(5) The parent company, Sky GmbH, received services from a third party consultant for drafting the development
strategy to be implemented across the Sky GmbH group in the next five years. As Sky GmbH considers that all its
subsidiaries should share this cost proportionally, it allocated a part of the cost to each subsidiary and invoiced the
cost as management fees. No documentation was provided in respect of the services performed and the benefits
for Earth SA, but the invoicing observes the transfer pricing rules as established in the group’s transfer pricing file
(the cost plus method is used, all invoices being issued at cost plus 5%).
(6) According to the collective labour contract, Earth SA gives all its employees access to the sports facility. Earth SA
does not consider this to be a taxable benefit for its employees.
(7) The gross salaries are 29,340,000 lei and the work insurance contribution is 660,000 lei.

16
 (8) In 2016, Earth SA invested in a new production facility located in a village in Arges county and capitalised all
related expenses as an asset in progress. However, in 2018 the City Hall decided to change the destination of the
land where the construction had started from buildable to agricultural land. It ordered Earth SA to demolish the
construction which was not yet finished. As a result, Earth SA recorded into expenses the entire value of the asset
in progress. No compensation was received by Earth SA for this loss.
(9) The accounting depreciation of non-current assets is based on 16,000,000 lei, being the accounting value at
1 January 2018, depreciated over 20 years with effect from 1 January 2018. This accounting value is lower than
the acquisition value by 2,000,000 lei which was registered as an expense on 31 December 2017.
The tax audit finished on 1 August 2019 and the final decision was communicated to Earth SA on 5 August 2019.

Required:
(a) Calculate the corporate income tax payable by Earth SA for 2018 based on the information provided by the
tax audit.
Notes:
1. List all items referred to in the question, indicating with the use of zero (0) any item which has no impact
on the corporate income tax calculation.
2. Ignore any legal reserve requirement. (9 marks)

(b) Assuming Earth SA accepts the tax audit conclusion and pays the difference on 10 August 2019, calculate
the interest and penalties due. (2 marks)

(c) Calculate the prepayments of income tax due by Earth SA for the period 1 January 2019 to 30 April 2020,
clearly stating the amount due at each deadline. (4 marks)

(15 marks)

End of Question Paper

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