Poor tax collection, VAT fraud and unreported labor are the main causes of fiscal evasion in Romania, which is set to reach EUR 18 billion this year, or 15 percent of GDP. So say specialists including representatives of the Ministry of Public Finance and the National Bank of Romania. BR asked the experts how this long-standing problem can be remedied.
Romania has a low tax collection rate of 32 to 33 percent of GDP, which is 10 percent below the EU average due to the complexity of the tax system and the compliance burden that makes investors avoid the country, while local players turn to tax planning and (lawful) tax avoidance schemes and tax evasion, according to Daniel Anghel, partner, fiscal consultancy at PwC Romania.
Romania ranks 154th for time spent paying taxes as it takes 222 hours per year to make 113 payments, according to the 2012 Doing Business Report by the World Bank and IFC.
The tax to GDP in Romania is around 27 percent, which is the lowest in the EU apart from Latvia and comparable to Slovakia and Bulgaria, according to Alin Chitu, tax senior manager at Tuca Zbarcea & Asociatii. He adds that around one quarter of the total tax revenue comes from VAT, while social contributions account for 35 percent.
“As estimation, probably the tax evasion accounts for around 7 percent of GDP if we compare the tax to GDP ratio in Romania with EU 27 average and adjust the result with fact that the level of direct taxes is among the lowest in Romania,” explained Chitu.
The national fiscal administration agency, ANAF, whose remit it is to tackle fiscal evasion, is fighting on two fronts: addressing areas prone to fiscal evasion such as agri-food, tobacco, alcohol and oil products, while modernizing its own structure, which is vulnerable to corruption.
Taxman mans up
Serban Popa was appointed president of ANAF this April and set as the main priority the fight against powerful tax-evading groups with financial muscle that can wield influence in the higher ranks of ANAF.
“The fight with these groups is a priority. We will restructure the agency to face these challenges,” said Popa.
The World Bank will grant a EUR 75 million loan to support the modernization of ANAF through to 2016. Restructuring the fiscal authority at a regional level and improving the quality of its employees are some of the key objectives, along with upgrading the IT&C infrastructure.
The fiscal agency, which had 27,026 employees in December 2011, administers 7.95 million taxpayers, out of which 6.2 million were individuals.
The largest share of employees is included in the fiscal administration, while the customs authority and the financial guard have a combined 4,000 people.
There are on average 294 taxpayers for one ANAF employee. The agency has been restructured, shedding 13.6 percent of employees since 2008. However, the budgetary revenue collected rose by 10.7 percent to RON 157.5 billion (EUR 37.1 billion) in 2011, which is 28.8 percent of GDP.
Sums and assets seized by the fiscal controller amounted to EUR 66 million (15.2 million) last year, in sectors with high risk of evasion such as intra-communitary transactions, tobacco products and cereals. Losses in the monitored sectors amounted to RON 1.1 billion (EUR 294 million).
ANAF was urged by former PM Mihai Razvan Ungureanu to curb fiscal evasion by at least 1.5 percent of GDP in 60 days, and Sorin Blejnar, head of the authority, was fired after reporting he had managed to collect only EUR 850 million, which is 1 percent of GDP.
Depoliticizing ANAF and naming the president of the agency in a similar way to the appointment of the central bank governor and investing him or her with equivalent power could develop the professional body, according to Chitu of Tuca Zbarcea & Asociatii Tax.
“From our discussions with tax inspectors we understand that their salaries were reduced by 50 to 60 percent and that the remuneration scheme does not allow incentives for high performers. Thus from a personal perspective it may be argued that the tax inspectors do not have the proper motivation to tackle fraud,” said Chitu.
High evasion on VAT
ANAF collected RON 47.9 billion (around EUR 11 billion) from VAT last year, which is an increase of 22 percent on 2010. A recent study on taxation trends in the EU-27 found that only half of the theoretical VAT revenues were collected in member states in 2010, with Romania having the fifth lowest VAT revenue ratio of 43 percent, followed by Latvia, Spain, Italy and Greece.
VAT fraud stood at RON 17.8 billion (EUR 4.4 billion) in 2010, which was 3.6 percent of GDP, according to the think tank Fiscal Council.
Overall fiscal evasion from VAT, CAS (social contributions) and income tax stood at RON 53.6 billion (EUR 12.7 billion) which was 10.3 percent of GDP in 2010, while the gross added value in the unreported economy stood at RON 112 billion (EUR 26.7 billion), representing 21.5 percent of GDP.
“Increasing VAT efficiency and broadening the VAT tax base, through the removal of exemptions and reduced rates currently applied to a wide range of goods and services, could substantially help increase revenues and reduce economic distortions in vulnerable economic sectors such as agriculture,” said the PwC partner.
Daniel Constantin, minister of agriculture and development, estimated tax evasion in the agricultural sector at EUR 2.5 billion.
“We want to oblige producers to issue invoices, because now 80 percent of the food is sold without invoices: bread, milk, meat,” PM Victor Ponta said last week in a broadcasted appearance. Officials say this would reduce VAT fraud in the sector by 20 percent and increase budget revenues by 35 percent or EUR 350 million.
Fiscal evasion is widely found in the FMCG sector, especially in the fruit and vegetable trade, tobacco and alcoholic beverages, and the unjustified increase in VAT boosted evasion, according to Ionut Bohalteanu, partner at law firm Musat & Asociatii – Tax Advisory. He argues for the continuous training of fiscal inspectors and ANAF employees and the establishment of clearer fiscal legislation, which prevents “creative” interpretations, as well making the fiscal amnesty fully functional, as ways to bring tax evasion down.
“VAT evasion is found mainly in the construction sector, it used to be found in transactions with grain, and it may appear in any chain transaction where more intermediaries are involved,” said Adrian Teampau, indirect tax manager (VAT) at Deloitte Tax. He added that transactions with intangibles are hard to prove as effectively rendered so the money can be moved into a loss-making entity or into an offshore account.
Lowering the paid taxes and setting up an integrated IT system that supports the electronic submission of all tax returns are some of the measures to tackle evasion put forward by Teampau.
Chitu of Tuca Zbarcea & Asociatii Tax said that enlarging the VAT reverse mechanism and increasing tax audits would increase tax collection, pointing to agriculture and the processing sectors as areas with rampant evasion.
The reverse charge mechanism for cereals and other products brought additional resources of EUR 50 million to the public coffers last year.
Ramona Jurubita, tax partner at KPMG, said the Romanian tax authorities need to focus more heavily on collection and address taxpayers with a high risk of tax evasion, instead of targeting honest taxpayers to raise easy money for the budget.
“We have seen many cases where good taxpayers won in Court against the decisions taken by the tax authorities and the state had to pay even higher amounts in damages,” said Jurubita.
Unreported labor bomb
There were 6.6 million people working in Romania last year, but only 4.2 million were officially employed, while unregistered labor made up 35.3 percent of the market, according to the Fiscal Council. The number of unreported workers increased by 4 percent year-on-year to around 2.3 million. This figure has soared by 30 percent since 2009, when Romania slipped into recession.
The fiscal evasion resulting from the avoidance of tax income and social security contributions (CAS) amounted to RON 30.8 billion (EUR 7.3 billion) in 2010, growing by 5.9 percent since 2009, or 30.2 percent since 2008, when Romania still had a booming economy.
Chitu of Tuca Zbarcea & Asociatii said reducing social contributions would be useful, but more jobs could become official if the taxable basis were capped at an acceptable level of three or four months’ minimum salary.
This year, the gross minimum wage is RON 700 (around EUR 161). A hike of 14 percent to around EUR 140 is planned for 2013.
“On one hand decreasing the level of social charges directly impacts the associated labor costs which obviously should no longer represent a rationale for illegal employment, particularly for entrepreneurs who struggle to keep their business running,” said Raluca Bontas, senior manager in global employer services at Deloitte Tax.
Bohalteanu at Musat & Asociatii – Tax Advisory said the lowering of CAS alone would lead to the legal employment of unreported workers. Increasing fines for employees that don’t sign labor contracts and more efficient inspections by the labor authority (ITM) and of fiscal methodology are some of the solutions that could bring unreported labor down.
Romania enforced a new Labor Code last year that aims to bring more flexibility to employment relations. In addition, bosses that use informal unemployment can face one or two years in prison or criminal fines if they employ more than five people without legal contracts. But there is a long way to go until the market gets back to where it was.
“One year after the entry into force of Romania’s new Labor Code, the economy has recovered only 100,000 jobs of the 650,000 or more lost during the crisis,” said Anghel at PwC.