Romania seeks to mend leaking budget

Newsroom 11/11/2013 | 08:38

With a EUR 653 million shortfall in revenues following the second budget revision, the government has put forward a raft of tax proposals applicable from 2014, in a bid to fill the state coffers. Experts outlined to BR short-term fiscal measures that could boost revenues without increasing the tax burden.

By  Ovidiu Posirca

Failures in tax collection

Daniel Chitoiu, finance minister, said in late October that the revision, which was vetted by international lenders, was “not pessimistic, but realistic”.

Chitoiu commented that the state’s tax take was down by 0.2 percent of GDP by October, and the government plans to take 33.8 percent of GDP in taxes this year, still below the EU average. He added that he believes Romania should collect more in taxes, and if it fails to do so, he will take drastic measures against those who did a poor job.

“Certainly, a negative revision was inevitable, because, as we warned during the previous revision, most of the revenue estimations were rather unrealistic,” said Ionut Dumitru, president of the Fiscal Council, a think tank, quoted by Agerpres newswire.

He added that the negative revision involved the reduction of expenses, partly through the increase in the budget deficit.

The government agreed last week with the IMF and the European Commission to hike the budget deficit from 2.3 to 2.5 percent of GDP this year, expressed in cash terms. Romanian officials said more funding would be funneled towards the co-financing of EU funds.

“I hope to meet and even exceed our budgetary targets in the fourth quarter,” said Chitoiu. The minister is pinning his hopes on a fiscal package worth RON 3 billion (EUR 675 million), which bundled a new tax on the profits of utilities and energy companies benefiting from the liberalization of gas prices with the expansion of the tax base in the agriculture sector.

The authorities were able to collect only 25 to 30 percent of the EUR 52 million they expected to get from utility firms this year, with Chitoiu suggesting that more money will go into the state coffers this winter, when gas consumption will soar.

Take falls during ANAF reorganization

The finance minister pinned the blame for the fall in tax revenues on the reorganization of the tax administration arm ANAF, adding that the authorities will have greater firepower in tackling tax evasion from next year.

“ANAF and the political machinations behind this institution are responsible for the poor collection capacity, because there are certain categories of taxpayers that do not face a single inspection, not even once every five years, and these are not corner shops but businesses with millions of RON in turnover,” Luisiana Dobrinescu, partner at law firm Dobrinescu Dobrev, told BR.

The government will launch a new anti-tax fraud department this month, which will have closer ties with other enforcement authorities to recover losses from evasion.

“The reorganization of ANAF cannot be the sole reason that the collection is below expectations. Another explanation could be the growing number of firms that are defaulting on their debts to the state, underpinning in part the high level of these taxes,” Ionut Bohalteanu, partner at law firm Musat & Asociatii, told BR.

Aside from the ANAF reorganization, the tax take was also dented by the reduction of VAT on bread to nine percent and the enforcement of the VAT cash collection system, suggested Dobrinescu. ANAF announced last month that it had collected 7.3 percent more in revenues in October than during the same period of last year, at RON 1.1 billion (EUR 247 million).


Short-term solutions for higher collection

Earlier this year, Romania borrowed more than EUR 70 million from the World Bank in an effort to fix the tax collection system and improve its image among taxpayers.

The main sources of Romania’s fiscal woes that need to be addressed are the legal instability, unclear legislation and poor fiscal administration, suggests Dobrinescu of Dobrinescu Dobrev. “Unfortunately, the pool of good taxpayers is getting smaller and cannot cope with another increase in taxes, to cover the growing tax evasion hole,” said Dobrinescu.

Mihaela Mitroi, partner, tax and legal services leader at the professional services firm PwC Romania, says the fiscal authorities should concentrate more on investigating the areas that are particularly vulnerable to tax evasion.

“In recent years, ANAF has been moving in a vicious circle where inspectors are largely blocked by solving VAT refund requests, which is detrimental to the more visible combating of tax evasion,” Mitroi told BR. However, she adds that although 70 percent of inspectors issue VAT refunds, this is the area where Romania performs poorly.

A study by the European Commission, the executive arm of the EU, found that Romania collected only 58 percent of the VAT due in the 2001-2011 period. The PwC partner calls on the authorities to amend the VAT legislation so as to reduce the number of companies seeking a VAT refund.

She suggested the reverse charge be reintroduced for the delivery of new constructions. The same mechanism should also be applied to VAT due at customs.

In addition, the implementation of the VAT group would free transactions made between members of a group from VAT. Another avenue that could boost tax collection would be the implementation of electronic tax returns, whose usage is growing at an EU level.

For instance, in Luxemburg and Germany, the tax authorities ask companies to submit predefined forms containing relevant fiscal information to streamline the inspection process.

Mitroi says this option is included in Romania’s Fiscal Procedure Code, but it has rarely been seen in practice.


Flat tax rate not enough for investors

The future of Romania’s flat corporate tax of 16 percent was on the line last month, after suggestions PM Victor Ponta replace it with a progressive taxation system of 16, 18 and 20 percent.

However, he backed down after a swift reaction from his party’s coalition partner, the National Liberal Party. PNL finance minister Daniel Chitoiu said his party would break the USL ruling coalition if the flat tax were to be changed.

Although experts agree the flat taxation system has allowed Romania to maintain its competitive edge and perform well in the race for foreign investments, the country needs to address other fiscal areas to enhance investors’ confidence. “In the context of the overwhelming taxation of wages and the unfair competition generated by the informal labor market and other types of evasion, the 16 percent rate is insufficient,” argued Dobrinescu of Dobrinescu Dobrev.


New taxes in 2014

Last week, the government announced plans to bring in new taxes in next year’s budget to support infrastructure investments and hike public sector wages and pensions. The new tax initiatives were agreed with a joint mission of the IMF, World Bank and European Commission which last week completed its first review mission under a EUR 4 billion precautionary deal.

“The revenues were weaker, and next year there will be additional expenditure for wages, pensions and other investments, so, clearly, to cover these costs you need to prioritize them,” said Andrea Schaechter, head of the IMF mission in Romania, quoted by Mediafax newswire

The authorities want to tax utilities and energy companies operating specialized constructions such as grids and offshore platforms, although the amount they will have to pay was still under discussion.

Every liter of diesel of gasoline will include a new EUR 0.7 excise in the final sale price, while all excises will be pegged to the inflation rate.

PM Victor Ponta defended the new fuel excises, saying the revenues would be funneled into a new fund designed to support the development of new road infrastructure projects.

Royalties for all mineral resources will be hiked by 25 percent. This will not apply to the oil and gas sector, where the government plans to change the royalties regime next year.

The state is aiming to increase the minimum wage by 12.5 percent to RON 900 (EUR 202) next year, and is considering a 5 percent cut in social security contributions paid by employers. However, the PM cautioned that the cut will be made in July 2014, only if the budget is able to cover it.

Romania will build next year’s budget on a deficit of 2.2 percent of GDP, down from 2.5 percent this year. Economic growth is expected to stand at 2.2 percent next year, the same as this year.



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