The Romanian tax authorities just issued a press release regarding an audit performed on the activity carried out by the local subsidiary of a multinational pharmaceutical group. The Romanian authorities claim that this entity generated damages to the Romanian State Budget of approximately EUR 10 million, due to the manner in which it has structured its activity which further led to not paying VAT in Romania.

This is the first time the Romanian tax authorities issue such a statement and it shows their commitment to challenge the form of transactions and even a group's business model, as implemented in Romania.

Their investigation was aimed to assess a local VAT fixed establishment for the non-resident entity, the beneficiary of the services invoiced. This is a critical point for the local market, as having success in their endeavours would create a precedent to be further applied for all entities activating in the pharmaceutical sector and not only.

It is important to mention that the tax authorities have also notified the criminal authorities which are expected to investigate the case.

This press release demonstrates that this exercise will continue and we expect other local subsidiaries of multinational groups to be subject to tax investigations.

Please find below an English translation of the press release (that was already picked up by the major financial publications in Romania) that summarizes the main aspects raised by the Romanian tax inspectors within this investigation.

"A multinational pharmaceutical company generated damages for the Romanian State amounting to approximately EUR 10 million

The tax inspectors of the General Directorate for Large Taxpayers (GDLT) reviewed the activity of a company specialized in trading pharmaceutical products and assessed the amount of RON 44.79 million (approx. EUR 10 million) as damages resulting from VAT not paid to the state budget. In July 2016, GDLT notified the criminal authorities in order to ensure the recovery of the damages.

The company rendered on Romania's territory marketing, promotion and authorization services for the parent company located in another EU Member State, but invoiced these services as if the activity was performed in the respective Member State. Thus, the company unjustly benefitted abroad of exemption from payment of VAT, with the intention of avoiding the payment of VAT in Romania.

Moreover, the same multinational company performed payments to tourism agencies for the participation of doctors and pharmacists to internal and international specialized events, as well as to companies that organize medical events (congresses, conferences, lectures, symposiums, forums, publications etc.). For these services, the company claimed the deduction of the corresponding VAT and presented them as sponsorship and donation actions, although they were granted free of charge, being organized by the company in order to promote the products on the Romanian market.

In this manner, was also avoided the liability to charge VAT for medicines granted free of charge as donations to hospitals, residential homes, foundations or as samples to doctors, when in fact the products were granted with the purpose of generating subsequent orders for distributors of medicines".