A Romanian company is engaged in the business of oil and gas production (drilling services).
In order to provide these services, it purchased general administrative services - such as IT, human resources, marketing, accounting and consulting services - from related companies (in a group).
These general administrative services were provided by entities based outside of Romania.? These entities provided the services to various companies in the group - including the mentioned Romanian company.? A reverse charge mechanism was applied for the acquisition of these services.
As it should be understood, part of the cost of these general services was allocated to the Romanian company.
The Romanian tax authorities considered that:
- the services were actually rendered,
- however, the taxpayer did not demonstrate a connection between the services and taxable transactions,
- the services were provided to multiple group companies and benefited other group members,
- therefore, it was not shown that the services were necessary for the taxpayer.
- The right to deduct exists when there is a taxable transaction.? This is the case when “there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the actual consideration for an identifiable service supplied to the recipient.”? This issue will have to be examined by the referring court (23-24).
- In addition, it must be established whether the purchased goods or services are used for the taxable activities of the taxpayer.? This, too, is for the referring court to assess.? Here, it must be determined whether there is a direct relationship between a specific input and a specific output transaction.? Alternatively, whether input transactions constitute the taxpayer's general costs, which are components of the price of the goods or services supplied by the taxpayer (25-29).
- Such links between input and output transactions should be assessed by taking into account “all the circumstances surrounding the transactions concerned and to take account only of the transactions that are objectively linked to the taxable person's taxable activity.”? Consideration should be given here to “the actual use of the goods and services purchased (...) and of the exclusive reason for that purchase” (30).
- In this case, the services purchased may have been related to the activities of other entities.? In this regard - purchases that are related to transactions by a third party - do not give the right to deduct.? In such a case, the right may be limited (31).
- To determine whether the right is limited, it must be established “in particular in the light of the contracts for the provision of services and the economic and commercial reality, the extent to which the services concerned were actually supplied in order to allow the taxable person to carry out its taxable transactions” (33).
- Here, it must be established that “the proportion of the costs relating to those services, borne by the taxable person, actually corresponds to the services which it received for the purposes of its own taxed output transactions” (34).
- What is not relevant is whether the acquisition of the services was necessary or appropriate. The deduction is not dependent on whether the activity is profitable.? The right to deduct is present even if the activity has not been realized.? So even if the taxpayer could not use the goods or services for his transactions for reasons beyond his control (35).
- As for the burden of proof - the onus is on the taxpayer to prove that he meets the conditions for deduction. ? The authorities may demand proof in this regard.? The evaluation of this evidence is carried out in accordance with the evidentiary rules of domestic law, taking into account the overall assessment of all facts (36-37).
