Since the entry into force of the New Fiscal Code in 2016, the Romanian Ministry of Finance has been working on issuing secondary legislation aligned with the newly introduced provisions. Several amendments and additions have already been introduced into the New Fiscal Code and official statements have been made to assure investors that the Romanian tax environment is stable.

For the first time in a long time, we feel that the redraft of Romania’s tax legislation has pretty much hit the mark. But the road from the tax legislation – no matter how taxpayer-friendly – to Romanian businesses is full of potholes which are managed with the ut-most efficiency by the Romanian tax watchdog (the National Agency for Tax Administration or “NATA“). Simply put, the main problem with the Romanian tax environment remains the administrative apparatus in charge of implementing, overseeing and enforcing the tax legislation.

One particular aspect of this apparatus – which remains one of the worst examples of administrative procedure that all countries should avoid if they want to be attractive for foreign investors – is the VAT registration process.

Since the beginning of 2015, a number of legislative changes were enforced regarding the VAT registration of Romanian companies established in accordance with Romanian Company Law no. 31/1990. As recent practice has shown, these changes have caused serious issues for Romanian companies, since they introduce the concept of “assessing one’s intention and capability to carry out a business activity” as an essential criterion for approving VAT registration applications or for maintaining existing VAT registration numbers.

Of course, a foreign investor always has the option to set up a branch of its foreign business and this branch will undergo a much less painful VAT registration process. It is not less true that this loophole, whether intended or accidental, is not always the best operational solution for penetrating a new market, but is definitely one that can be considered and should be considered quickly because the door is closing on it, if one were to take into account recent statements made by Romanian officials.

On the other hand, Romanian companies who apply for VAT registration in Romania have no other chance but to follow the “regular” process and submit a special form proving their intention and capability to carry out economic activities. This form is long and contains a number of questions regarding the company, its administrators and shareholders, and needs to be submitted together with a number of additional documents.

The good news is that following discussions with the Romanian business community, this form was recently simplified and now contains fewer questions and documents to be attached. The bad news is that according to this latest set of amendments, the category of taxpayers who can receive the request to submit the VAT form in order to prove their intention and capability to carry out a business and therefore keep their VAT number has been extended to cover all taxpayers who are found by the NATA to have a high tax risk. The tricky part is that the criteria based on which the risk is assessed are not necessarily public. You can draw your own conclusions from this.

Secondly, once the VAT form is submitted, the information therein is assessed by tax officers against criteria which, again, is not publicly known. For all these reasons, one can never anticipate if or when they will receive the request to submit this form or what the outcome will be once the form is submitted.

While it is true that the current form of the relevant legislation prevents tax officers from refusing VAT registration applications or from cancelling VAT registration numbers arbitrarily, without offering the proper legal or factual grounds that lead to the rejection or cancellation, the entire process remains unpredictable and this unpredictability is a major deterrent for investors to set up shop in Romania.

The NATA is now undergoing a major modernisation process from which it wants to emerge as a well-functioning revenue administration, based on voluntary compliance. However, as this process implies shifting both the organisation and its people towards a desired future state, we wonder how effective this will be, considering that the organisational culture of the Romanian administrative process mostly resists change. In this day and age, the main requests for tax advisory services come from taxpayers, who are in one form of conflict or another with tax officers.

The main problem with the Romanian tax environment remains the administrative apparatus in charge of implementing, overseeing and enforcing the tax legislation.