PwC Accounting, Tax & Legal Framework* *connectedthinking

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide 2 19 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

PwC Legal Framework* Laura Luputi - Associate Lawyer D&B David & Baias *connectedthinking

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide 4 19 October 2005 Contents  Part I – Overview of current legal framework  Part II – Financial leasing versus operating leasing

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide 5 19 October 2005 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

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide 6 19 October Governmental Ordinance no. 51/1997 as subsequently amended and completed by Law 571/2003 (Fiscal Code) and Law 533/2004  Liabilities of the parties  Organisation and operation of leasing companies  Leaseback Part I: Current legal framework

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide 7 19 October Governmental Ordinance no. 51/1997 as subsequently amended and completed by Law 571/2003 (Fiscal Code) and Law 533/2004  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 Part I: Current legal framework

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide 8 19 October 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 Part I: Current legal framework

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide 9 19 October 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 Part I: Current legal framework

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 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) Part I: Current legal framework

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 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 Part I: Current legal framework

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 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 Part I: Current legal framework

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005  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

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005  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; Part II: Financial leasing versus operating leasing

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005  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? Part II: Financial leasing versus operating leasing

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005  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; Part II: Financial leasing versus operating leasing

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 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; Part II: Financial leasing versus operating leasing

PwC Accounting and Tax Framework* Richard Grotendorst, Tax Manager PricewaterhouseCoopers *connectedthinking

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 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.

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 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 leaseOperating lease  Leasing companies in Romania generally apply OMF 94  applicability of IAS 17  Definition:

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 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

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 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

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 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

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 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 (3) Determine the net present value (NPV) of the minimum lease payments (including payments that are reasonably certain to be made)

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 Finance Lease or Operating Lease? (4) Conclude on whether or not all the risks and rewards have been substantially transferred from the lessor to the lessee (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) (3) Determine the net present value (NPV) of the minimum lease payments (including payments that are reasonably certain to be made) Cancellation provisions Rights and obligations at end of lease Renewal options

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 Finance Lease or Operating Lease? (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

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 Finance lease indicators Specific examples or indicators of a finance lease within IAS 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.

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 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.

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 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.

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 Summary Lease classification Financial leaseOperating 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 termNo 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 lesseeThere can be several users of the asset All indicators need to be considered, applying substance over form

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 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.

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 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.

PwC Indirect Taxes* Daniel Anghel, Senior Manager PricewaterhouseCoopers *connectedthinking

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 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 Impact on particular taxes

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 Financial Institutions - Scope … are not only:  Banks  Insurance Co’s …but also:  Leasing Co’s  Treasury Department  Investment Funds  …etc.

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 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

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 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

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 Supply of services vs. delivery of goods in different EU countries (*) VAT treatment for IC leasing of means of transport

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 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

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 Current Road… Imagine a truck transporting goods…… Romania Hungary

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 New Road … Additional costs/ Documentation Logistics Intrastat Accounting Human Resources Legal IT Systems Austria Transfer Pricing Romania Hungary Additional compliance and reporting

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 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

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 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 AccessionAfter Accession

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 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 ?

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 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)

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 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

Accounting, Tax & Legal Framework PricewaterhouseCoopers D&B David si Baias Slide October 2005 Your worldsOur people © 2005 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers. PwC