Romania speeds up in the race to improve VAT collection

The Romanian Tax Authorities (RTA) continue racing to reduce the VAT deficit and fraud in respect of VAT collection. According to the latest VAT Gap Report published by the European Commission (see here and here), seven European states remain above the EU median for their VAT gap in 2021. VAT collection remains a significant challenge in Romania, which recorded again the highest VAT gap in the EU, with a VAT revenue loss of 36.7% in 2021, approximately EUR 9 billion. In comparison, the lowest VAT gaps for 2021 were recorded in Finland (0.4%), Spain (0.8%) and Estonia (1.4%). 

Low VAT collection is not a new issue for Romania and has been persistent in holding the first place when it comes to having the highest VAT gap in the EU. Significant VAT collection losses have been a major challenge for the country and their budget deficit for a long time. 

In response, the RTA has recently implemented a series of measures aimed at reducing this deficit and combating fraud.  

Reforming Romania’s tax administration 

Romania has a long history of adopting measures to improve VAT collection sporadically. These include: the VAT split mechanism, the VAT statement detailing local transactions, electronic cash-registers, prohibitive rules for VAT registration and the list can go on. Most of them failed sooner rather than later due to poor implementation, together with the fact that the Romanian VAT administration was severely lacking the necessary digital capacities.   

In 2021, the RTA adopted a most comprehensive reform of the tax administration through Romania’s National Recovery and Resilience Plan (NRRP). Based on digitalisation, the reforms aim to reduce the VAT collection deficit by 5% by 2026 compared to 2019. Some of the proposed measures have already been initiated, such as: 

• the Standard Audit File for Taxes (SAF-T) reporting,  

• connecting electronic cash registers to National Agency for Fiscal Administration (NAFA) servers,  

• an electronic invoicing system and RO e-Transport, and 

• a digital platform for monitoring high-tax-risk goods shipments. 

Measures adopted 

The implementation of SAF-T, in conjunction with other tax measures, has helped other EU Member States to combat the VAT gap, including Poland, Portugal, and Austria, which are among the countries with the highest VAT collection rates. However, as Romania is so far behind other countries, it has decided to implement the second version of the SAF-T model as provided by the Organidation for Economic Co-operation and Development (OECD). This model requires the highest volume of information split into five modules – general ledger, receivables, debts, fixed assets and inventory. 

The measure was announced by the RTA in 2021 and applied from 1 January 2022 for large taxpayers. Medium-sized taxpayers were obliged to submit SAF-T from 1 January 2023, while small taxpayers will be required to report from 1 January 2025. 

With the considerable amount of data to be reported, the short implementation timeframe was the biggest challenge for taxpayers and their advisers. Although the RTA now have available data from large and medium-sized taxpayers from the last two years, we note that at September 2024 there have been no visible signs of how this data is being used for tackling fraud and increasing VAT collection. 

The next measure adopted was electronic invoicing through a national system entitled “RO e-Invoice”. This system became mandatory from 1 July 2022 and was implemented in phases for business to government (B2G) transactions, followed by business to business (B2B) transactions involving certain types of goods considered high risk. The system is mandatory for all B2B transactions between taxable persons established in Romania and for B2B supplies having the place of supply in Romania and performed by non-resident companies registered for VAT purposes in Romania. A future development of this measure will be its extension to business to consumer (B2C) transactions, starting with 1^st of January 2025. 

An additional measure adopted by the RTA is the e-Transport system, a digital platform which aims to monitor the transport of certain goods in Romania. This measure is applicable for national road transports of high tax risk goods and international road transports (arrivals and dispatches in/out of Romania) of all types of goods. It consists of the obligation on the supplier/beneficiary of the transaction to notify RTA of the transport and obtain a unique identification number of the transport which has to be available to the driver during the entire journey on Romanian territory. 

This system goes beyond other compliance obligations as the companies liable to perform the reporting are not only required to report information they have available regarding the transactions performed, but the reporting also includes multiple logistical data which needs to obtained from multiple stakeholders such as their business partner in charge of organising/performing the transport, freight forwarders, transport operators etc. The sanctions for failure in this almost real-time reporting, entered into force starting 1^st of July 2024.  The results are quite questionable at this moment – increased waiting times at the Romanian border crossing points and a high number of taxpayers sanctioned for non-, or wrong, compliance. 

These measures, which have proved successful in other Member States, give the RTA greater control over transactions carried out by traders, with real-time access to a large volume of data designed to help identify fraudulent transactions.  

In addition to having all the data available from the above measures, the RTA implemented another system in August 2024, namely e-VAT. Similar to other EU Member States, the RTA will generate a pre-filled VAT return by using the data centralised from different IT systems such as RO e-Invoice, RO e-Transport, RO e-SAF-T, RO e-Cash Register, the integrated customs IT system, etc. Meanwhile, companies will still have the obligation to prepare and file their VAT returns. Where there are discrepancies between the RTA data and the taxpayer’s return, the taxpayer will be required to provide explanations. Such measure has been intensively challenged by the business environment and the accounting professional bodies who consider this an additional burden at the level of the tax authorities in a context where the tax administration already have multiple levels of data available via the other digital reporting.  

Finally, e-VAT has been adopted with certain relaxations, such as a 6-months penalty free period and an extension of the deadline for providing explanations in case of differences in the data reported compared to the one centralised by the tax administration. 

Major challenges emerging 

Considering the urgency in tackling tax fraud, the tax inspection process is facing a major paradigm shift for which the readiness and ability of the RTA to analyse and process the significant amount of data generated, will be essential. Additionally, this process entails significant costs and investments both from the taxpayers and from the RTA.  This implementation of multiple and complex measures in a short timescale is a delicate issue which creates notable technical and human resource challenges. 

Thus, it’s essential for the RTA to follow a stable and predictable legislative frame and for taxpayers to provide feedback and help the authorities solve any practical issues observed. 

As we are only in the early stages of measures implemented by the RTA, it’s too soon to say whether results will successfully reduce Romania’s VAT gap and combat tax fraud. 

Taxpayers should continue to monitor the authorities’ efforts to protect budget revenue and the effects this will have on the business environment that, in the short term, will face unprecedented challenges and cost.