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Law with a Pinch of Tax

CEEIHM Issue 1.1.
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Crenguta Catanea, Head of Legal at Romprest, draws from her in-house and consultancy experience to emphasize how important it is for GCs to train themselves to be taxation/fiscal-literate – and how they should develop that capability.

CEEIHM: Tell us a bit about how you became a legal consultant.

Crenguta: I’d have to say it is a surprise to me as well that I ended up practicing law. Had anyone told me I was going to work in this field when I was in high school I would never have believed them. In fact, at the time, I was enrolled in a bilingual (my native Romanian and English) mathematics and computer science program.

When I graduated from high school, I enrolled in a university program focused on international studies and diplomacy (working in diplomacy and traveling the world was really my childhood dream).

One year into my degree, I came to the conclusion that I was studying a lot of foreign countries’ legislation but I had no clue about the Romanian regulations. As a result, once I commenced my second year of university studies, I also enrolled in law school – more out of curiosity than anything else, really.

After several years of parallel studies, I realized I enjoyed law more than any other field of activity I had tried (such as informatics, sales, and teaching). While my dream of becoming a diplomat persisted, I undertook an MA degree in the field, but I tend to be a rather grounded and realistic person – especially with regards to myself – and that was when I realized that it was quite overwhelming to try to overcome all the bureaucracy in order to snatch up a spot in the diplomatic corps and that this would be an unattainable goal. Still, I didn’t turn to the law simply as a fallback. I always remember this one joke: “‘Any law has a loophole,’ explains a famous law professor to his students. ‘The smart ones find it, the wealthy ones buy it.’ ‘And what happens to those who don’t have money and can’t find it by themselves?’ a student asks. That’s who the laws are made for,’ replies the professor.”

I feel this joke highlights the beauty of practicing law and this was the main pull factor for me. It’s a very challenging job, but also extremely satisfying.

CEEIHM: You have mentioned developing an affinity for the world of taxation. How did that come about?

Crenguta: I practically grew up with it. My dad is a tax inspector and he did this job for practically his entire life. When I was asked as a child what I wanted to be when I grew up I told everyone that I want to be like my father, to carry around my papers in my big briefcase. Growing up I realized I needed to draft the papers to be able to carry them around but I can say that we are lucky, now, to have new technology that makes the job much easier. I think I knew what VAT was when I was three years old. Also, I think it helped me a lot that I studied mathematics. This helps a lot, because I have my mind structured more around numbers than a normal lawyer does.

Later down the line in my career, I got to work as a consultant and later became the head of legal at a consultancy firm that focused heavily on tax and legal. That’s where I really realized how much I like this domain. It gave me a platform that exposed me to many different case studies through different clients. While I was involved in other matters as well, from Corporate/M&A to Restructuring, Tax Law was the one I found I enjoyed the most.

CEEIHM: And how has this affinity towards the fiscal world helped you in your current role?

Crenguta: There is a far more general aspect. Last time I checked, Romania had one of the most complex tax systems in the world. I think it comes somewhere in the top five in regard to the number of applicable taxes. The sheer complexity of all of these is reason enough, and, in Romania, I think it is mandatory for companies of a certain size to have a counsel specialized in tax law or fiscal consultancy. In theory, that’s a tax consultant working in-house but, unfortunately, the tendency is to simply have the accountants cover this fiscal side as well. If you ask me, that’s potentially very damaging and risky for Romanian business owners. Accountants are specialized in number crunching and getting that balance sheet in order. Fiscal structuring and responsibilities towards the tax authority are equally critical but are often neglected by accountants, especially since they tend to lack mastery of the fiscal legislation and, more importantly, a knowledge of the fiscal procedures.

The practice in Romania is that you pay your taxes based on what you report to the authority. The problems arise when you have a fiscal audit or a tax inspection down the line, and it happens often that a tax inspector will have a different interpretation of the nature of your revenues and expenses while invoking the substance over form principle – a different interpretation as to what is deductible and what isn’t for example. And those interpretations can vary greatly even between the members of the tax authority. In one example, after a tax audit the authority imposed a fine of around EUR 70 million and when the tax authority’s decision was challenged and the tax & legal consultants explained to the tax authority the specific facts and the nature of their business, the fine was lowered to a couple of hundred euros. Thus, it’s mostly about timing, and that is why I recommend that major Romanian major taxpayers have an in-house consultant so they can efficiently communicate with the tax authority on a regular basis.

CEEIHM: Why is relying on an external consultant insufficient?

Crenguta: I’d say it’s the same logic as with your legal counsel – a member of the team who is there all the time, gets personally involved, and knows all the company’s matters from A to Z. External advisors only get involved in those matters that you pass on to them, analyzing only the situation that the client exposes – and most clients tend to be subjective. Most external consultants don’t spend much time thoroughly investigating the activity of the client, nor have access at all times to all the objective facts necessary to understand the whole context. Giving such matters to an external consultant means they only get to analyze what you put at their disposal, which means that, at times, they’ll fail to make relevant connections between certain fact situations. The analysis should be objective in order to provide the best/relevant solutions. 

At the same time, when we talk about fiscal matters, we need to remember that legislation in this field also contains incentives for taxpayers. A consultant will not be able to know all the specifics of the company’s activity and, as a result, will tend to try and generalize solutions – putting them into pre-existing boxes they tend to use – while an internal consultant can find a couple of fiscal incentives applicable that can save the company big amounts of money.

CEEIHM: Do you believe that GCs, in general, should pay more attention to this field, or is it simply a field that has played well for you only?

Crenguta: I think it’d be best if all my peers were to develop an affinity towards this fiscal world and learn to relate to it. From my experience, I’ve seen less than a handful of legal consultants or lawyers who are able to develop and exploit these fiscal areas truly effectively. My whole background, from high school to family setting, has helped me to understand numbers, accounting, and fiscal aspects, and to apply them in a legal context as a tax & legal consultant and also as an insolvency practitioner.

CEEIHM: What’s the second-best-case scenario?

Crenguta: I am working with a colleague who is a fiscal consultant. There are still plenty of areas of accounting that I cannot fully understand – why they work the way they do or why they go in a specific box. She spends time with me and tries to run me through it, which I then translate into a “legal” language to plead before the courts of justice and/or authorities. As such, my advice would be to hire a fiscal consultant within your team as a second-best case scenario.

CEEIHM: How would you advise your peers to get “inducted” into the world of taxation? What has proven to be the most useful resource for you to learn about this world?

Crenguta: Experience. You need to have an affinity first and foremost of course – if you don’t want or don’t have the patience to analyze a P&L report or a balance sheet, for example – and most lawyers don’t really care about those – there is little you can hope to improve on. If there are penalties to be calculated, lawyers tend to pass it on to the accountants. They simply don’t care about the numbers, they care only about the words that they are mastering before courts. But if you don’t show or are not able to show relevant proof from a fiscal standpoint to the judge, you will not stand a chance in court, mostly due to the legitimacy of the administrative act principle, even though the burden of the proof belongs to the tax authority. Start slowly, try to read the legislation and try to digest it, including with a great deal of patience, mostly because the fiscal laws are constantly changing and you need to review them continuously, because if you stop for a while, you can easily find yourself losing track. If you don’t follow it day by day you just cannot keep up.

CEEIHM: Indeed, taxation is notorious for being an ever-changing field. How do you stay apprised of the constantly changing environment?

Crenguta: You simply need to follow it on a regular basis. Get access to dedicated portals and follow the website of the tax authority. But I don’t think it will suffice to only follow and read it. You have to put it in practice. This is why I said “experience” earlier. It is one thing to read it as a novel and another to have to apply the matters you read about. Now, most are lucky not to have to challenge a tax decision on behalf of their company very often. Putting yourself in a position to gain experience as a consultant is critical here. Remember, as an in-house consultant, the tax authority can only control you so much – once every five years for example. You shouldn’t wait for those kinds of incidents to start learning about the fiscal world. Indeed, fiscality has several facets to it and the very first one is that of compliance. That is where you can, and should, start gaining that invaluable experience. Roll up your sleeves – sit next to your fiscally-experienced consultant and fill in those tax returns every month. Have the relevant legislation next to you and try to apply it directly while doing so. Ultimately, you’ll find yourself in a better place in terms of fiscal compliance from that simple exercise.

CEEIHM: Aside from taxation, what would be one area of business that you believe many GCs often overlook in terms of their professional development?

Crenguta: Restructuring. When I say restructuring, I am not referring to insolvency procedures. I am referring to restructuring from a fiscal and commercial standpoint – where we reorganize the activity of the company and structure it so that it is profitable/more organized, or more so, as a business. It can mean business transfers, incorporation of new entities, setting up the correct taxation structures for each entity/business line, and so on. It is difficult to do this with a Romanian company. Most Romanians as business owners think that their property and the company’s property is the same thing. I think this is the main reason for a lot of problems that Romanian business owners have with authorities – tax authorities, the AML Office, even the police. This is a big problem in our business culture and one of the reasons I couldn’t implement many restructuring plans for Romanian companies.

But I have also worked for clients worldwide or for the rare open-minded Romanian businessperson who found it to be a very profitable endeavor. I wish it would be more common. Once you go through a real restructuring process like the ones I am describing, shareholders see the result and they can see how much they can profit from organizing their businesses effectively from a fiscal and corporate perspective.

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