Modernized tax agency and higher compliance key for higher tax take

Newsroom 03/04/2014 | 09:16

With budgetary revenues having fallen by close to 1 percentage point to 32 percent of GDP last year, according to the Ministry of Finance, tax experts outlined the key measures that could increase the tax take. They say that keeping the modernization of tax collection agency ANAF on track and increasing the compliance rate, while tackling tax evasion, should see Romania get closer to the average EU collection rate of 40 percent in the coming years.

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According to the Ministry of Finance, revenue to the consolidated budget rose 3.6 percentage points in nominal terms, but fell 0.9 percentage points of GDP, while expenses rose 3.8 percentage points in nominal terms but fell 0.9 percentage points as share in GDP to 34.5 percent of GDP.

Ioana Petrescu, the minister of finance, said earlier this month that streamlining the tax collection rate could be done by clamping down on tax evasion, which could pave the way for fiscal easing.

“The fiscal levers, which are the levels of taxes, will be used to encourage economic growth,” said the minister during an Aspen Institute event in mid-March, quoted by public radio station Radio Romania.

She cited the 5 percentage point reduction of social insurance paid by employers, and the tax exemption of reinvested profit as measures that could reduce the fiscal burden. Petrescu said the reduction of CAS could be passed this July.

Ioana Hockl, partner at ZRP Tax, said that easing labor taxation, such as social insurance and health fund contributions, could help limit black market labor. She called on the tax authorities to be more focused on chasing tax evaders, both individuals and companies, instead of increasing the tax burden on all taxpayers or excessively inspecting good-faith companies.

On tax collection, the minister of finance stressed that the ministry does not plan to increase collection on the short term, and that if a fiscal amnesty is passed, this will boost individuals’ motivation to evade tax.

“The collection rate has never gone above 30-35 percent of GDP, not even in the boom period. Tax evasion must be reduced, and voluntary compliance increased,” said the minister last week, quoted by daily Adevarul.

According to a study by Visa Europe, the payments technology business, Romania’s informal economy amounted to 28 percent of GDP last year, the second highest level in the EU. This means that close to EUR 40 million was funneled into the informal economy in 2013.

“Fiscal evasion could be discouraged by either reducing VAT on more goods, such as meat as well as other basic foodstuffs, or by taking proactive measures to increase compliance, the modernization of the tax administration, as well as the elimination or clarification of provisions which are subject to interpretation,” Ramona Jurubita, deputy head of tax at KPMG Romania, the professional services firm, told BR.

Ionut Bohalteanu, partner at law firm Musat & Asociatii, noted that increased pressure has been observed in the recent period regarding collection to the state budget.

ANAF to undergo five-year modernization

Last year, Romania’s Ministry of Finance inked a USD 92 million loan deal with the World Bank for the modernization of ANAF. The project, which will run through to 2019, aims to increase ANAF’s efficiency in collecting taxes and social contributions. At the same time, tax compliance should be improved through the reduction of the burden on taxpayers.

Daniel Anghel, treasurer of the Foreign Investors’ Council (FIC), the business advocacy group, commented that reforming the fiscal administration was crucial to increase the tax take.

He suggested fiscal inspection and control structures be overhauled, along with the elimination of overlapping inspections and differences in the application of fiscal legislation.

He added that ANAF’s IT infrastructure has to be upgraded to limit the payment time for taxpayers, while fiscal inspections should focus on sectors with high risks of tax evasion.

Neighboring Bulgaria is one of the EU members to have successfully modernized its tax administration with the help of the World Bank. The country has increased its tax take by 5-6 percentage points to 35 percent of GDP and split its tax authority into five regional bodies. Poland has pursued the same reform program.

The ANAF cut several hundred jobs last year, as it restructured its operations at a regional level. However, new jobs have been created due to the roll out of a new anti-fraud division in late 2013, which is tasked with tackling serious fiscal crimes.

“In the recent period there has been an increase in the fiscal inspection activity. Starting this year, taxpayers undergoing fiscal inspections will be selected based on a risk analysis,” Dan Badin, partner at Deloitte Tax, told BR.

ANAF also has a division tasked with investigating wealthy individuals who have lied in their tax statements. According to media reports, the authorities will impose a 16 percent tax rate on the undeclared income of these people.

Tackling tax evasion through compliance

According to Anghel of the FIC, tax evasion is the root cause of the poor collection rate in Romania. He said it could be tackled either by increasing constraints or by incentivizing voluntary compliance, or through a “well balanced” combination of the two.

“Unfortunately, the first option has already shown that it generates unwanted effects, negatively impacting fair-dealing companies,” said Anghel. “So we recommend the implementation of a voluntary compliance statement for all taxpayers, to increase voluntary compliance and tax collection for the state budget.”

He added, “Such a measure, associated with the reduction of sanctions for good taxpayers, or even the granting of bonuses for those meeting their fiscal obligations on time, and an increase of sanctions for tax evasion, could have positive effects on the medium and long term by increasing budgetary revenues, without the need for additional measures adjusting tax rates.”

Alexandru Ambrozie, partner at law firm Popovici Nitu & Asociatii, suggested Romania ask for a derogation from the European Commission, the executive arm of the EU, for enforcing reverse taxation in certain sectors, as a means to tackle serious tax evasion. He mentioned the identification of undeclared and bogus transactions, adding that shadow companies committing VAT and excises fraud should be another focus area.

He concluded that fewer changes in the fiscal framework along with an intensified effort by ANAF in assisting taxpayers should contribute to Romania’s effort to collect more in taxes.

Ovidiu Posirca

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