VAT in Romania: Evolution throughout the economic crisis and prospects for the future

Romania currently has the fifth highest VAT rate in the EU, after Hungary (27%), Denmark, Croatia and
Sweden (25%).
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The VAT rate of 24%, which is currently applied to taxable operations, was introduced on the 1 of July
2010, when the economic crisis which started in 2008 was at its peak. The Romanian Government
adopted some cyclical tax measures: raising the VAT rate from 19% to 24%, taxation of pensions
(measure which was not implemented due to a decision of the Constitutional Court).

This, corroborated with the fact that the salaries for the employees in the public sector (which accounted
for 25% of the total work force in 2010) were also reduced by 25%, led to a plummet in consumption.

Although, at first, revenues from VAT increased the treasurys liquidities, the measure backfired. Below
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you can find the revenues from VAT at the state budget, for 2009-2014 :

Year 2009 2010 2011 2012 2013 2014 (estimated)

Revenue (bn. EUR) 7.85 9.49 11.41 11.21 11.91 11.44
GDP (bn. EUR) 120,41 126,74 133,3 133,8 144,28 150,66
% 6.52 7.49 8.56 8.37 8.25 7.59
VAT revenue YoY - 20.8 20.2 -1.75 1.06 -3.94
change (%)
Real GDP growth -7.1 -0.8 1.1 0.6 3.4 2.9
rate (YoY) %

As you can see, the measure of raising the standard VAT rate added an average of 20.5%/year to the
revenues from VAT, in 2010 and 2011.

However, the value that was cashed by the government in 2012-2014 is approximately the same as in
2011, despite the fact that the GDP growth rate was of 0,6% in 2012, 3.4% in 2013, and it is estimated
that it will be 2.9% in 2014. This means that the tax evasion on VAT has grown.

The National Tax Administration Agency has started implementing some measures for the decrease of
tax evasion in Romania, by making it harder for companies to register for VAT purposes (a background
check was introduced and the companies who want to register for VAT purposes have to prove that they
are able to conduct economic activities). This way, the agency wants to avoid the registration of
phantom companies, which are the last in a chain of fictitious transactions that lead to false VAT
reimbursements.

Also, an action was started against companies who fail to issue receipts when selling goods to people, by
adding sanctions and introducing the possibility of the people to leave with the goods if the cashier does
not provide a receipt. Secondly, a lottery was started by the Ministry of Finance, which works by selecting
a value and a date, the winners being the people who are in possession of receipts with matching
numbers.

In February 2015, the Ministry of Finance published a project for the modification of the Romanian Tax
Code, with the Finance Minister admitting that the National Tax Agency has troubles with the collection of
the tax. They considered it would be better to decrease the overall taxation in Romania, as we are also
struggling to attract foreign capital, which has been scarce in the past years.

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Data available from the Romanian Ministry of Finance and Eurostat
As such, regarding the VAT, the Government will introduce the following:
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The standard VAT rate will be reduced from 24% to 20%, starting January 1 2016.
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The plan also includes the further decrease of the VAT rate from 20% to 18%, from the 1 of
January 2018.
The reduced VAT rate of 9% will also be applicable to meat, fish, vegetables and fruits. At the
present time, the reduced VAT rate is applied to books and press, glasses and other prosthetics,
medicine, accommodation, bread and other wheat products, access to museums, theatres and
others

Overall, these measures seem quite appealing. If they are fully applied, then in 2018, Romania will have
the second lowest VAT rate in the EU, with only Luxembourg having a lower one (17%).