Romania to embark on cashless revolution

With the country’s hidden economy hovering at around EUR 40 billion, the government is planning to roll out new regulations that limit cash transactions for individuals and companies, in a move experts say must be sustained by stronger fiscal evasion legislation and tax audits.

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According to a draft bill by the Ministry of Finance, which was published in late January, the government wants to forbid cash payments for the purchase of land, houses and cars, no matter the transaction value. Both buyers and sellers that ignore this provision would be fined.

“The fine for breaching the law, which would stand at 25 percent of the paid sum, is comparable to the VAT level, the tax which is mostly targeted for missing trader fraud,” Luisiana Dobrinescu, partner at law firm Dobrinescu Dobrev, told BR.

“In addition, making bank payments mandatory enhances the authorities’ capacity to compare taxpayers’ effective expenses with their declared income.” She suggested this would help, for instance, investigations into public sector workers who are on a low income and yet own luxury cars and homes.

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“The acquisition of works of art and property are the main means of money laundering, which is why I think this is an appropriate measure,” explained Dobrinescu.

Electronic payments help shrink black economy

The country’s shadow economy accounts for 28 percent of GDP, second in the EU only to Bulgaria on 31 percent, according to a 2013study by Visa Europe, the payments technology business. Other studies have found that one quarter of Romania’s workforce is undocumented, further enhancing the role of cash in the economy. In addition, the penetration of banking services in rural Romania, where close to half of the population lives, remains limited.

Catalin Cretu, area manager for Romania and Croatia, Visa Europe, argues that reducing cash circulation could be an effective way to fight the grey market.

“We have repeatedly said that cash is the fuel of the shadow economy and we believe that this measure will stimulate electronic payments and help take part of the shadow economy into the ‘white zone’, which means higher revenues for the Romanian state that can be channeled into investments or other objectives,” Cretu told BR.

He cited studies carried out by Visa, which show that increasing electronic payments of 10 percent annually for at least four consecutive years can shrink the shadow economy by up to 5 percent. The manager says that getting more companies, especially SMEs, to use electronic payments should shed more light on the underground economy. The company also launched a national strategy last year, promoting card usage in the public sector.

Lower transaction limits on cash payments

The government is aiming to reduce transaction limits on cash payments between companies and individuals. According to Mediafax newswire, cash payments between companies and to individuals will be limited to RON 2,000 (EUR 441) per day, from RON 10,000 (EUR 2,208) per day, or RON 5,000 (EUR 1,100) for a single supplier. Anything above these thresholds will be liable for a 25 percent fine.

“Fiscal evasion is mainly fueled by cash, and wholesalers of fruit and vegetables and consumer goods conduct almost 99 percent of their operations in cash. In addition, in the cereals and bakery sector, payments are mainly made in cash, and companies pay individuals in cash,” said Daniel Chitoiu, finance minister, in late January, quoted by Agerpres newswire. He says the new measures would stop individuals from buying cars or houses with “bags of cash”.

Dobrinescu of Dobrinescu Dobrev described the threshold of RON 2,000 as quite small. “Furthermore, considering how the draft bill is worded, it seems that the payment of an invoice in installments, which is legitimate, would be punishable,” said the partner.

Local tax collection lower than EU average

Policymakers have promoted the latest fiscal changes, as part of a wider effort to increase tax collection. Experts estimate that the country is able to collect around 31-32 percent of GDP in taxes, still below the EU average of 39-40 percent of GDP.

Last year, ANAF absorbed some smaller tax enforcement agencies and redesigned its activity at a regional level, through a modernization program bankrolled by the World Bank. The authorities also want to set up an integrated IT system in the next four years and make the overall system “friendlier” for taxpayers.
“In 2013, we reformed ANAF from the point of view of territorial structures and we reorganized all structures that previously had duties in the area of combating and reducing fiscal evasion,” said Chitoiu.

A new anti-fraud department was set up in the fiscal agency recently, tasked with investigating serious tax fraud. Last week, anti-fraud inspectors busted a Chinese-led firm that had deprived the state of EUR 9 million of tax. The firm was importing electronic appliances, without paying profit tax or VAT. The inspectors are working closely with prosecutors to streamline such investigations.

Ovidiu Posirca

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