Hike in excises could see informal market expand

The government may benefit from higher budget revenues on the short term, following the 6.5 percent hike in excises this year due to changes in the calculation mechanism and planned increases in excises on tobacco and energy products, but collection may fall on the long run as more companies could be lured into the informal market to survive, say experts.

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Ramona Jurubita, deputy head of tax at KPMG Romania, the professional services firm, said the change in the rule establishing the exchange rate used to determine excise duties will see them grow annually, despite the real movement of the exchange rate and relevant provisions of EU directives in the field.

“Last year, the government promised not to raise excise duties, and although the rates themselves have not increased, in reality it has broken its promise because of the change in the way the exchange rate is calculated,” Jurubita told BR.

The level of excises will be pegged to the annual inflation rate, replacing the calculation mechanism involving the RON/EUR exchange rate established by the European Central Bank (ECB) on October 1. The exchange rate last year was 4.4485 RON/EUR, almost 2 percent lower than the previous year, which should have led to a decrease in the level of excises this year.

However, the authorities have maintained the exchange rate from the previous year of 4.5223 and updated it with the inflation rate, meaning that excises will be calculated this year at a rate of 4.7380 RON/EUR, which is 6.5 percent higher than expected.

“The use of this new mechanism and the increase of the level of excise duties for fuel will have a snowball effect since they may negatively impact companies acting in many economic fields, discourage potential investors and increase prices for the final consumer,” Ioana Hockl, partner at ZRP Tax, told BR.

Experts say higher excises do not mean bigger revenues

Aside from the general excise hike, the excise for motor fuels including gasoline and diesel is set to grow by an average of 20 percent starting April, also taking into account the new fuels excise of 0.7 percent in this category, according to tax specialists. The government expects to collect around EUR 500 million from the new excise this year, which will be funneled towards the construction of new motorways.

“In the first stage, this measure will lead to higher expenses for transport vehicles, but it will shortly have repercussions for the whole economy, with growing prices for all products and services as a result of the increase in transport costs,” Dan Badin, partner at Deloitte Tax, told BR.

Furthermore, excise duties for cigarettes are set to go up by 3.1 percent to EUR 84.3 percent per 1,000 cigarettes starting April 1, following a timetable devised in 2010. Last autumn, the authorities increased the excises on a wide array of luxury products including natural furs and large-engine vehicles.

“It is, however, unlikely that revenue collected from excise duties will increase by 20 percent in 2014 and the total amount collected will probably not even rise by 6.5 percent, which represents only the increase in sums to be paid due to the change in the rule to establish the exchange rate,” said Jurubita.

“Statistics over the last few years show that although there have been several increases in the level of excise duties, and also rises in the RON/EUR exchange rate year by year, the hike in revenues collected from excise duties has only just kept pace with the increase in the exchange rate,” she added.

Jurubita commented that the European Commission, the executive arm of the EU, may begin infringement procedures against Romania in response to the overhaul of the excise system, after many businesses objected to the move, claiming it breached EU directives.

She added that more companies may migrate towards the informal economy and some may go insolvent, resulting in job losses.

Meanwhile, consumption remains at a very low level. Jurubita said the recent apparent increase in domestic consumption was not real, as it was generated solely by a rise in consumer spending and not in volumes.

Ionut Bohalteanu, partner at law firm Musat & Asociatii, said that the contribution of domestic consumption to GDP will remain low this year, following the change in the computation of excises and the new fuel excise.

Overall, the KPMG expert reckoned the overall tax take of 30 percent of GDP could be impacted if the state fails to design measures to increase collection.

“Without improved collection rates, honest taxpayers will continue to pay more than they should,” said Jurubita.

She concluded that policymakers are likely to undermine investors’ confidence in Romania, by amending the legislation in a non-transparent and unpredictable manner, and by displaying a lack of concern with, and interest in, compliance with relevant EU rules.

Ovidiu Posirca

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