The provisions of the regulation, which introduces 70% taxation of undeclared income received by individuals from unspecified sources, leave room for a number of interpretations, among which the definition of the meaning of the phrase “income whose source is not established” is of particular importance. Although this phrase was also used in the previous ruling, in the text of Article 117 of the Fiscal Code, the increase to 70% of the tax on income from unspecified sources creates an additional share, both for taxpayers and for tax authorities, to determine the exact category of income to which the increased quota.

In addition, this discussion acquires special importance in the context of certain uncertainty regarding the timing of the application of the increased tax rate and the pressure that these provisions exert on taxpayers in order to declare the received income and ensure the rate of 10% (the general rate of taxation of the income of individuals according to the Tax Code) . In particular, the question is whether voluntary compliance by taxpayers (by declaring certain income for taxation) before the entry into force of the new provisions on 1 July 2024 warrants the application of the 10% rate or whether the authorities could challenge the source of income during the audits carried out after declaring for the purpose of applying the increased quota of 70%.

The aspect described above is emphasized by the possibility of individuals to voluntarily declare certain incomes in the general category provided by the Tax Code “income from other sources” (defined in Article 114 of the Tax Code). This category includes all incomes that are not defined in other sections of the Tax Code, but there is no exhaustive list of them. Thus, if the tax authorities, during the verification of the tax situation of individuals, find that it is impossible to determine the exact origin of these incomes, although they were declared as income from other sources, such a finding could lead to the application of the 70% quota?

The answer to this question should also take into account other specific references to Article 117 of the Fiscal Code, which was amended by Law 296/2023 and through which the new tax rate was introduced. This article provides that “any income FOUND fiscal authorities, in accordance with the provisions of the Tax Procedure Code, the source of which is not established, are imposed at the rate of 70%, which applies to adjusted tax base. Through the tax ruling, the tax authorities will determine the amount of the tax and dues.” These additional coordinates, established by the text of Article 117, provide the necessary context for the application of interpretations that provide a possible solution.

Possible interpretations

The answer to the specified question can be “yes” in the interpretation that the identification or “find” the final determination of the source of income is carried out in the context of the audit conducted by the tax authorities and is determined only in a relative aspect according to the taxpayer’s previous declaration (the source may be reclassified by the tax authorities during the audit). This perspective is based on the literal interpretation of the text of Article 117 (which refers to an unspecified source, not the absence of a declaration) and the premise that the identification of the source has a material dimension (that is, the exact determination of the source of income), which is not fulfilled by a simple formal process of declaration in the category of income from other sources sources

Thus, a situation may arise when, although the taxpayer has submitted a declaration of income, the tax authorities cannot accurately determine their origin based on the documents and explanations provided to them. In this interpretation of the text of the law, it can be concluded that the impossibility of establishing the origin of income by the tax authorities and the change in the classification of the source of its origin (from the one specified by the taxpayer in his own declaration to unspecified) fulfills the conditions provided by the law for taxation of these incomes in the amount of 70%.

On the contrary, there may be another answer“No”,based on the premise that the income statement is the key element to identify the source and this approach is sufficient to warrant the application of the general tax rate of 10%.In such a scenario, any post-declaration regulatory findings regarding the absence of a clear indication of the origin of the income will not result in the application of the increased tax rate of 70% (this issue of origin may be the subject of other investigations into the legality of the income).

This interpretation is confirmed by the text of Article 117, since the increased tax rate of 70% can be applied (according to these provisions) only if adjustment of the tax base. Declaring income in the category provided by the Tax Code “income from other sources” entails the application of a general rate of 10% for these incomes. The lack of certainty regarding the origin of income and the possibility that it can be classified in another category provided by the Tax Code will not lead to taxation at a different rate (i.e. higher than 10%) or with reference to a higher base (since taxable income from other sources, as a rule, it is carried out on the basis of gross income, deductions are possible only for certain subcategories of income from other sources).

In this context, the adjustment of the tax base could be carried out only if additional income was detected (since it is necessary that during the control there was a difference between the declared income and the one detected by the auditors). Therefore, based on the way the law is developed, it can be said that there is a 70% tax applies only to undeclared incomebecause only in this case the tax base is adjusted.

This aspect is confirmed by another provision of the Fiscal Code, which states that “the fiscal authority shall issue a tax ruling whenever it establishes or changes the tax base“. Therefore, if the tax base does not change (taxable income remains declared by the taxpayer), the tax ruling is not issued, and therefore there is no possibility to apply the tax increased by 70%, since it has no basis for application.

In addition to these interpretations (currently anticipatory and theoretical), it is important to note that, according to the law, every taxpayer is obliged to declare all his income correctly, completely and on time. This voluntary compliance by taxpayers through the declaration of income (which seems to be the aim of the recent tax changes) could potentially guarantee the application of the general tax rate (10%) provided for in the Fiscal Code, as mentioned earlier. within the framework of the second interpretation.

In addition, such an action reduces the risk of additional penalties and fines for late declaration and payment of tax liabilities, and also has the potential to reduce the tax risk on the basis of which taxpayers are selected for audit. The interested taxpayer can choose voluntary compliance, including during the audit, since the provisions of the Tax Procedure Code do not contain prohibitions in this case.

In conclusion, before the new tax rate comes into force, i.e. until 1 July 2024, we recommend that individuals who are affected or believe they may be affected, carefully analyze their financial situation and take into account the scenarios above.

Materials for the conclusions of Catalin Barbu, manager of the income tax department of Deloitte Romania and Rezvan Bratil, managing lawyer of Reff & Asociatiții | Deloitte Legal