Update: PM Tudose: Split VAT – mandatory as of January 1, 2018. The SMEs Council and Ernst&Young criticize the Gov’t idea

Prime Minister Mihai Tudose has announced that the split Value-Added Tax (VAT) will be optional for a time, but as of January 1, 2018 it will become mandatory.

“It will be optional in the first stage, as far as I understand from the finance minister. You can do this or not, but from January 1, it will be mandatory because everybody wants everything from the government, but when the government erects some fences things only get easier (…) Fire-fighter costs, ambulances cost, hospitals cost. All this is unsustainable if supported by the income tax only. (…) Let’s stay within normalcy limits. There is no alternative, because I do not know when someone may take the money and run. I cannot guard 100,000 business operators,” Tudose told Romania TV private broadcaster on Wednesday.

He explained that companies that do not currently pay VAT can no longer continue the same practice, but “75% of the payers are all right.”

“Because when you get the VAT, it does not go into your pocket, it goes into the government’s tap,” said Tudose.

He explained that VAT has two components and that, at present, some companies are going bankrupt after not paying VAT for a time.

“When you go buy a package of biscuits, you see the shelf price at the counter with two components: the price for the biscuits and the VAT, which is what Romanians pay the government (…), it is what used to be a tax on the movement of goods. Today, we are talking about Romania — 25% of the money that the citizens have to pay for the goods and that has to come to the government, is leaving or going away, disappearing. How? By various methods: some do not pay at all and pray not to get caught, others, with more or less imagination, after collecting some money that they do not pay to the government, declare their companies bankrupt,” added Tudose.

Heavy criticism

The National Council of Small and Medium-Sized Private Enterprises in Romania (CNIPMMR) and Ernst & Young Romania do not support the Government’s initiative to enforce on the companies the obligation to make special VAT accounts – split VAT, ziare.com reports.

In a press release issued on Wednesday CNIPMMR has sent the reasons why it does not support this measure:

“The project initiator did not apply the SME Test, did not analyze the effects on the activity of small and medium enterprises, (…) did not respect the principles of taxation, namely to provide  information to taxpayers, (…) and the predictability of the taxation, according to which it has to ensure the ‘stability of taxes and of compulsory contributions’ for a period of at least one year in which no changes can be made in the sense of increasing or introducing new taxes, duties and mandatory contributions,” the release reads.

CNIPMMR also shows that investors need legislative stability and predictability, deciding on investments by taking “revenue and spending measures for at least 3 to 5 years and taking into account all the elements, especially the fiscal ones.”

The Council states that the implementation of the VAT breakdown payment “will have significant negative effects on SMEs, including:

• Additional costs generated by changes in accounting information systems;
• Additional bank charges and fees;
• Affecting cash flow and blocking money;
• Increasing bureaucracy;
• Significant effort of technical implementation;
• Non-clarification of all procedural aspects

Ernst&Young Romania, through the voice of Chief Executive Ioana Iorgulescu, has also criticized the idea of ​​split VAT.

“The question remaining, however, is how does the split payment help us? More specifically, what is the effect, in figures, on increasing the VAT collection rate on the budget? Is it worthwhile or not to commit significant costs for changing the IT systems, hiring additional staff to be able to track daily receipts and payments in separate accounts?” Iorgulescu asks.

She underlines that the new mechanism is considered “a measure to combat tax evasion and fraud by increasing voluntary compliance and the rate of VAT collection.”

The deadline for implementing this measure, optional as of September 1 and mandatory from October 1, is unrealistically short and shows that business needs were not taken into account, for example, the adaptation of IT systems and the identification of operational solutions (and not last but not least, material solutions).

Iorgulescu also shows that the implementation of this measure violates the EU provisions and “it would have been of interest to find out the opinion of the European Commission on the impact of this measure in Romania, but this is not available, given that no consultation has been requested.”