PM Victor Ponta said last week that Romania needed to find new financing sources for the budget, as the country is lagging behind on tax collection in the EU, stressing that the 16 percent flat tax will remain unchanged.
Romania’s tax collection for the budget stands at around 31-32 percent of GDP, while France achieves 57 percent, according to the PM. He said the core issues lay in the tax collection, where fiscal agency ANAF is the main authority. The PM added that the management change at ANAF that occurred this spring had brought EUR 221 million of extra revenue each quarter.
“Aside from better tax collection, the government should get more involved in attracting EU funds, by improving the mechanism that ensures the internal management of these funds,” said Florin Gherghel, head of the tax department at Noerr Finance & Tax.
Taxpayers in certain areas of the economy are unaware of or refuse to pay social contributions, VAT and profit tax, which impact collection rates, according to Luisiana Dobrinescu, partner at law firm Dobrinescu Dobrev. She added that the cumbersome fiscal legislation and the “rudimentary” electronic tax record system managed by ANAF suppressed collection levels.
From 2013 ANAF will implement a major reform program with support from the World Bank. The agency aims to set up regional offices and move most of the regular operations online.
Dobrinescu says the staff restructuring at ANAF was having a “strange outcome” as fiscal inspectors had been laid off, while those with administrative jobs were being kept on board.
“This is the reason why VAT reimbursements are made in six to eight months, instead of 45 days, because there aren’t inspector teams available for controls,” said the law firm partner.
Stronger efforts to counter bribery and fiscal evasion were cited by the PM as another potential source of revenue. Fiscal evasion is set to reach EUR 18 billion this year, according to specialists.
“If we want to have more money for school, healthcare and roads, it is impossible to do it with the current budget,” said Ponta.
An increase in royalties for mineral resources and different VAT thresholds are currently on the table of decision makers.
Gherghel said the authorities should avoid raising taxes as this will increase evasion and hit the budget collection rates.
Questioning the flat tax
Romania adopted the 16 percent flat tax in 2005 in order to cut red tape and spur investments.
“Maybe the flat tax wasn’t the main attraction, but it was certainly one of the main reasons why foreign investors decided to invest in Romania,” said Gherghel. He warned any increase would force foreign companies to change their business and that they could cut some of their existing investments.
Dobrinescu said the flat tax was important for investors, but its benefits had been eroded by the fiscal instability.
“The impossibility of entrepreneurs to budget their costs for at least three years determined the migration of many investments in Bulgaria,” said Dobrinescu.
Gherghel concluded that neighboring Bulgaria, with its 10 percent tax rate, is considered to be more predictable on tax increases.