The uncertainty and instability generated by the pandemic resulted in many Romanian companies urgently activating their risks and business continuity plans (BCP). While some companies are prepared and have plans in place, many others are still searching for the instruments which would help them continue their activities in our current circumstances.
It is true that companies should carefully review the possibility to activate their BCPs during these times but equal attention should be given to a review of own fiscal and tax policies. Looking forward, we can anticipate a severe constriction of business, with certain industries to suffer more than others.
In such macroeconomic context, we see it essential to maintain a functional economy, both at macro and micro levels. A key aspect in our view is to maintain an adequate level of liquidity for all those involved in the economy. Ensuring that individuals (whether employees or self-employed) maintain their income levels and cash flow could probably prove itself to be the most important factor in helping consumption and, therefore, those industries which we anticipate will be the most affected. In other words, the lack of income for individuals could lead to a major deterioration in the financial outlook of a majority of industries, from the banking system, commerce, logistics to services which, in turn, could lead to a decline in other auxiliary industries. This potential “death spiral” would then critically and negatively affect the State Budget (affecting, therefore, not only Government investments but also those sectors of the economy which are essential and are financed directly by the State).
Romanian authorities have already announced that they are in search of incentives and solutions which would diminish the economic impact of the current situation on the Romanian economy as a whole. One option under discussion was to defer the payment of local taxes, however, such a measure is obviously not going to be a solution, either short or medium term, for the anticipated impact the current situation could have on Romanian businesses.
Ideas concerning VAT, tax on profit, tax on income, social security contributions and health insurance mandatory contributions or any other tax or contribution, have not yet been part of the conversation. A deferment or rescheduling of any, or some of these taxes, could represent a sustainable solution for the improvement of the working capital of companies and could help impede chain blockages in the economy as a result of non-payments or, even insolvencies.
We strongly believe that under these circumstances, an open dialogue between public authorities and the business environment is truly essential. We find the public authorities’ message that they are open to ideas, and their desire to find and implement solutions quickly and efficiently, encouraging, helpful and critical to the near future of the Romanian economy.
We believe that any measures implemented by the Government should be based on maintaining an adequate level of liquidities, avoiding payment blockages and maintaining full employment to the extent possible (or alternatively, providing significant support to the unemployed). In these circumstances, VAT as well as salary taxes and contributions have a major impact both on companies’ liquidity and the state budget.
One of our key recommendations is provide help with regard to VAT payments. This would be done by deferring the timing of VAT payment obligations to the state from the current method of VAT payments being due upon the issuance of invoices to requiring payment of VAT only upon the cashing of the relevant invoice.
In brief, this would entail that the obligation to declare and pay the VAT to the state budget occurs upon receipt of payment by the tax payer. As a consequence, the right to request the deduction of the VAT for acquisitions would, in this case be born upon payment of the supplier. We find this system beneficial as it directly impacts companies’ cash flow as VAT is neither income nor expense for a company but only a tax to the state budget.
Currently this system is only available to SMEs whose turnover does not exceed RON 2,250,000 (a little under Euro 500,000 at the moment). But, in our view, the current economic circumstances justify broadening the applicability of the system to all taxpayers in Romania. This could diminish the impact such tax has on the taxpayer’s cash flow. In addition, considering that the Government already has the platform in place for certain taxpayers, we believe that extending the applicability of the system could be done without major efforts by the authorities and the implementation could be done quickly and efficiently. We also believe this could be done without diminishing significantly the incoming revenue from VAT to the state budget as well as avoiding blockages in the private sector.
Most certainly many other measures will be taken into consideration, especially given the flexibility showed by the European Commission with respect to budgetary deficits of EU member states as well as the relaxation of state aid limitations. Certain EU member states, such as Germany, have already announced a series of tax and financial measures which are meant to aggressively support both business activities and people. Of course, Romania should not import, mutatis mutandis the measures passed by other countries for their own economies as each country has its specific conditions, however, we believe that the Government, along with the business community in Romania, should be able to identify those incentives and measures appropriate for Romania.
For example, we believe that the National Bank of Romania will play a major role in Romania during the immediately future, having a huge responsibility not only in what concerns the reference interest rate or the value of the national currency, but also in its quality as regulator of the banking system. Furthermore, the Government will probably have to significantly increase the volume of its internal and infrastructure investment.
But the challenges we face will not be solved by the Government alone. The private sector will have to prove financially mature and responsible by implementing smart cost controls, having efficient management and analysis of working capital and investments as well as having reasonable and thoughtful dividend and financing policies.
These circumstances will, without a question, test the strength and maturity of the entire country, however, we strongly believe that an open dialog between the government and the private sector should help identifying those financial and tax measures which we believe to be the only way that would help the economy through the difficult road of rebounding. But this needs to start happening now.
Oana-Mihaela Motoi, Managing Partner, Cromwell Evan Global
Iuliana Andronache, Partner, Cromwell Evan Global
Diana Neagu, Partner, Vernon | David