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In 2023, Romania remained in last place in Europe in terms of VAT collection, a position it has held almost constantly for the past decade, despite the numerous anti-fraud legislative measures implemented by the authorities. Moreover, despite the general European trend in recent years, Romania has managed the “performance” of increasing its VAT GAP, while even the countries around it, with which, until yesterday, it was in the same group – Bulgaria, Hungary and Poland – have made significant steps in reducing this indicator. For those not familiar with the term GAP, VAT GAP is defined as the shortfall in value added tax collection. In other words, it is the difference between the amount of VAT that economic operators should remit to the budget and the actual amount collected by the state.
In this context, it is not surprising that Romania became a case study for the European Commission at the end of last year. But the government in Bucharest hopes that with the implementation of the new measure to combat tax evasion by introducing the E-invoice system, things will change. Although the system has been going strong since 1 January this year, surprising even the biggest sceptics, it remains to be seen how well it will work after July the 1st, when the six-month grace period given to firms to switch to the new system ends.
According to the latest VAT collection data analysed by the European Commission, between 2019 and 2021, Romania’s VAT GAP increased by 4% from a low of 32.7% in 2018. At the same time, at EU level, the collection rate increased by around 2%. The overall EU VAT gap has decreased by around €38 billion, from €99 billion in 2020 to €61 billion, an “unprecedented” improvement compared to previous years, according to the European Commission. According to it, most countries have made progress in VAT collection, due to “specific policy responses, in particular those related to the digitisation of tax systems, real-time transaction reporting and electronic invoicing”.
Romania’s GAP deficit in VAT collection is about 30 times higher than those recorded in Finland (1.3%), Estonia (1.8%) and Sweden (2%) – top-ranking countries in Europe – and more than 10 percent higher than that reported by the last-ranked country ahead of it, Malta (24.1%). Significant deficits were also recorded in Greece (17%) and Lithuania (14.5%). An analysis of the evolution of Romania’s VAT GAP compared to that of the surrounding former communist countries – Bulgaria, Hungary and Poland – reveals even sadder conclusions.
The three countries have managed to reduce this indicator dramatically since 2018, reaching 4.9%, 4.4% and 3.3% respectively in 2021. This is despite the fact that all three countries have a significant self-consumption component (consumption in small households of own products, on which VAT is not charged, not being invoiced) as does Romania. In addition, Hungary has the highest standard VAT rate in the EU at 27% (in Romania it is 19%). In all these countries an important role has been played by the digitisation of tax systems, and measures have been introduced gradually over a number of years to allow the environment to adapt to the system.
Bulgaria, Hungary and Poland have applied much the same measures, which the Romanian authorities have also implemented. The only measure that Romania has not tried is the detailed recording and real-time declaration of VAT transactions, as has been done in Hungary. In this context of Romania’s inability to tackle tax evasion and its failure to pass the VAT collection test, the European Commission last year devoted a chapter to it called “Romania – case study on the persistent high VAT collection deficit”.
“Unlike other EU countries, Romania has experienced a persistent and high VAT collection deficit in recent years. Since 2000, the first year in which the VAT collection deficit was studied, it has hovered above the 30 percent threshold. In addition, the VAT compliance deficit has been significantly higher than in any other Member State over the entire period from 2000 to 2021. Between 2013 and 2021, it ranged between 33.2 and 39.7 percent,” the European Commission document states.
The Commission’s experts also note that the significant reduction in the VAT rate by 4% in 2016 and a further 1 percentage point in 2017, on a range of goods, “did not have a noticeable impact on the evolution of the VAT compliance gap. “VAT is a consumption tax, and the VAT GAP is the gap between the amount that should be collected by the state from this tax and what is actually collected. According to economic analysts, the increase in this indicator in Romania is all the more alarming because consumption has increased in the last two years. On the other hand, it is a serious warning signal that something is not working, even though Romania has implemented measures requested by the European Commission in recent years, which have worked in other European countries. In Romania, neither the regulation of measures such as AMEF, RO e-Invoice, RO e-Transport and SAFT, nor even the tightening of penalties for tax evasion have yielded the expected results. Nor is the fact that Romania has low VAT rates on some products – 5% and 9% – a predominant factor in keeping this indicator at the high level of 36%-37%, say economic analysts. The obvious conclusion: fraud, i.e. some firms have found “loopholes” in circumventing these regulations and have defrauded the state budget with the possible complicity of tax control bodies. This was recently confirmed by the Minister of Finance, Marcel Boloș.
“The VAT gap shows that we are the country with the highest tax evasion and the greatest financial indiscipline in the management of this vital tax for our country,” Minister Boloș explained why it was necessary to introduce the e-invoice system.
“What advantages do we have from this module? Simple! One: we reduce the VAT gap, the greatest achievement for our country, if this goal is achieved. It brings in an additional billion euros in revenue, and I’ll tell you, non-academically, it completely eliminates the telephone method, the lobbying, the intervention in the organisation of tax inspections, no more going off to do all sorts of… no! The e-invoice module and the anti-fraud tax module will tell where the tax inspection teams go and I warn very strongly that they will work with tax secrecy whose sanctions, in terms of leaks and use of data there, will be extremely drastic,” the Finance Minister added.
Nearly €2 billion VAT collection deficit in Romania
According to the Minister of Finance, the deficit in VAT collection last year amounted to more than 9 billion lei, which the government plans to reduce by about half this year.
“The VAT for 2023 we ended with VAT collections of 104 billion lei. In 2024, we have set a target of 115 billion lei, and from the fight against tax evasion, with the help of the e-invoice module and the module to combat tax evasion, another 5 billion lei, so a heavy task for us, 120 billion lei”, Marcel Boloș pointed out.
The E-Invoice system came into force on 1 January, the date from which it is compulsory for all supplies of goods and services. It requires all companies to report invoices issued through the system within 5 days of their issue. By the 1st of July 2024, however, invoices issued and received in paper format, pdf/mail, as at present, will run in parallel, but their reporting in the RO e-Invoice system is mandatory regardless of the form of the invoice. From the 1st of July 2024, invoices will only be sent via e-Invoice and only invoices sent and validated in the system will be considered as original invoices.
The system, implemented through the Ministry of Finance, is operational from 2022, but the transmission of invoices through it was mandatory only for private companies in their relations with state entities, for those related to goods with fiscal risk and for travel agencies issuing invoices based on holiday vouchers.
Romania applied to the European Commission (EC) in January 2022 for a derogation from EU VAT legislation to extend the scheme to all commercial transactions. The reason was that ANAF still needed time to prepare its IT systems to withstand a sudden increase in the number of taxpayers accessing its servers. So far, although some errors have been reported in the system, 2.7 million invoices with a total value of 16 billion lei have been taken so far in the first week of January alone, according to an announcement by Minister Boloș, who estimates that they will soon want 1 million invoices a day.
“Bad news for those who thought the system wasn’t working,” he concluded.
In the same context, Boloș warned that after the 1st of July, failure to register in the e-Invoice system is an offence and companies risk heavy fines. However, after a few days, he came back saying that “the system has been improved”, the main problem – that the system allowed duplicate invoices to be entered – has been solved. The statement came after insistence from the private business community that the system had been malfunctioning since its early days. Many entrepreneurs also complained about the bureaucracy involved in signing up to the system, and large companies, including a mobile phone company, announced that they could not implement the system from the 1st of January.