Romania’s Chamber of Deputies Budget Commission has today passed a bill approving a general VAT rate cut of 5% which is to take effect from 1 January 2016.
The move comes despite warnings from the European Commission and IMF that lowering the VAT rate from 24% to 19% could result in a negative impact on Romania’s budget deficit. The fiscal council forecasts a deficit increase of as much as €3.3bn next year with a jump to €6.3bn by 2019.
The IMF’s mission chief for Romania Andrea Schaechter has previously warned that sustainable fiscal consolidation, particularly revenue improvements, are needed before tax cuts are introduced. There has been further advice to Romania to ensure any tax cuts are accompanied by offsetting measures such as stronger revenue administration, better compliance and formalising of the economy.
A sharp reduction in VAT has been part of the Romanian government’s ongoing measures to reduce taxation and was spurred on by unexpectedly higher revenue in the first quarter of 2015. The country’s consolidated budget ran a surplus of 0.85% of GDP while public investment came in at near zero.
At the beginning of June, The VAT rate on food products was lowered dramatically from 24% to 9%. This subsequent general VAT cut is estimated by the government to boost the economy by about €8bn through to 2020, contributing 1.1% points to GDP growth and creating 145,000 new jobs.
Romanian authorities also hope today’s decision will encourage voluntary taxpayer compliance and result in a reversal of the rise in tax evasion that was seen after the VAT hike of June 2010.
Other future changes:
- a cut in excise duties on basic energy products is also provided for in the new fiscal legislation, with excise duties dropping by 20% for diesel fuel, 18.6% for leaded petrol and 16.6% for lead-free petrol
- drug prices will reduce by 20% from 1 July 2015
- there are plans to cut the VAT rate on printed books
- lower social security contribution levels are in the pipeline for both employees and employers from 2018
- a reduction on excises and taxes on dividends is planned as well as the cancellation of a tax on non-building constructions that was introduced in 2014.
The move by Romania is another step toward reducing its VAT burden, and it’s a trend that we are seeing elsewhere in eastern Europe – decreasing VAT to win over voters.
Similar moves are reportedly planned in Bulgaria and Slovakia, and every amendment leading to VAT cuts is being closely scrutinised by the EU. This is natural when you consider the current situation in Greece - where the government was spending too much and increasing the gap in the state’s budget for years. The European Union wants to avoid a repeat of the situation in other countries that may be mirroring Greece’s financial policy.
Entrepreneurs operating in Romania and those who are registered there for VAT have some time to upgrade accounting systems to reflect the approved change of the VAT rate.
It could also be expected that with a lower VAT rate, to ensure adequate levels of income to the state budget from VAT, controls and audits carried out by authorities may be tightened to increase tax collection efficiency.
We will continue to monitor the situation and bring you a full analysis.
For more information on how Europe handles VAT rates contact our VAT team.
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