By way of a recent measure that has resulted in numerous debates and raised significant criticism, the Romanian Government has decided to change the country's VAT payment system. The new VAT split payment mechanism's implementation is unique in the European Union, and affects all taxpayers registered for VAT purposes in Romania.
Under this new mechanism, VAT will be collected in a bank account, distinct from the current bank account, specifically where only the VAT-free amounts will continue to be cashed. Also, the input VAT incurred for acquisitions of goods or services will also need to be paid from the said VAT account.
The new VAT split payment mechanism:
- will be optional starting from 1 October 2017 and mandatory as of 1 January 2018 for Romanian and non-resident taxpayers registered for VAT purposes in Romania;
- covers all B2B transactions for payments made via bank transfers;
- expressly sets out the situations where the VAT accounts can be credited or debited;
- in certain situations, calls for prior approval from the Romanian tax authorities for transferring amounts from the VAT account into the current account of the taxpayers;
- allows for certain incentives for qualifying taxpayers which opt to apply the VAT split payment mechanism during the trial period 1 October – 31 December 2017 (ie a 5 % reduction of their corporate income tax or micro-company tax, the cancellation of penalties for outstanding VAT liabilities as at 30 September 2017, under certain conditions).
- the measure was introduced with the aim to improve VAT collection for the Romanian state, currently the lowest in the EU;
- concerns of the business environment have been raised at all levels, given the anticipated impact of this measure on compliant taxpayers;
- as of 1 January 2018, it is expected that this mechanism will significantly disrupt operational flows throughout the entire Romanian economy;
- although strongly disputed, the Romanian Government did not reconsider this measure;
- businesses in Romania have to adapt their IT systems within a relatively short timeframe, with significant costs in certain cases;
- this will not help reduce tax evasion, as the proposed mechanism covers only the VAT which was declared, but not paid;
- it is still uncertain if the European Commission will give the green light to the new rules.
In a year marked by a series of announced tax changes, some of them withdrawn before implementation, trust is slowly turning into scepticism, and it is hoped that the VAT split payment mechanism will remain only a plan on paper. While this is however an effective piece of legislation, taxpayers should not wait until 1 January to take actual measures for implementing the new mechanism.