Commission Report 2002 (Romania)

• Progress since the last Regular Report
• Overall assessment
• Conclusion

Chapter 10: Taxation

Progress since the last Regular Report

Since the last Regular Report, Romania has made some progress, particularly in the alignment of its VAT legislation.

In the area of indirect taxation, Romania has made significant progress in aligning with the acquis by the adoption of a consolidated law on VAT in June 2002. The law introduces a comprehensive definition of taxable persons, reduces the list of incompatible VAT exemptions, and introduces VAT exemptions provided for under the acquis. The law also establishes principles for determining the place of taxation and sets out new provisions for the right of deduction. In an attempt to tackle fraud on VAT refunds, the new VAT law has introduced heavy criminal penalties.

New legislation on excise duties entered into force in January 2002. Among other provisions, excise duties were increased for all harmonised product categories and the definitions were reviewed, bringing them closer to the acquis. The taxable regime applicable to alcohol has been unified, with the same duty rate applied to both ethyl alcohol and spirits.

As regards direct taxation, a revised Profit Tax Law was adopted in June 2002. Under the new law, the reduced rate of 5% on profits made from exports will be phased out completely by January 2004. Certain fiscal facilities for small and medium-sized enterprises and taxpayers established in disadvantaged areas and free zones will also be gradually eliminated.

As regards administrative co-operation and mutual assistance, no progress can be reported.

Over the reporting period, Romania has continued to modernise its tax administration and to improve the revenue collection system. Measures have been taken to reduce tax arrears. Assistance and information to tax payers have been further developed. Also, a strategy to improve the administrative capacity of the tax administration was approved in February 2002. The strategy covers the period until December 2006 and will be revised each year. Romania has also committed itself to develop a Code of Ethics by mid-2003.

Overall assessment

Although the new VAT law represents an important step forward, alignment remains incomplete in a number of areas, such as exempted activities - with or without the right of deduction. Rules which are not compatible with the acquis also exist, including the general rules on the chargeability of the tax, rules on the place of taxation, and rules on the payment of VAT. Romania still has to transpose provisions concerning the special VAT schemes.

Concerning excise duties, while recent legislation represents progress, a major effort is still needed (mainly regarding the alignment of the scope of exemptions as well as of rates and structure of all harmonised product categories). Furthermore, Romanian legislation does not appear to contain provisions to allow small foreign breweries, that are not registered as taxpayers in Romania, to benefit from the same reduced rates as locally registered breweries. In this respect, it has to be emphasised that the acquis does not permit differentiated taxation levels based on origin. The duty suspension scheme, and in particular the provisions on tax warehouses, still needs to be adopted. Given the complexity of this essential part of the excise acquis, Romania should urgently start preparing for its transposition and implementation.

Concerning direct taxation, Romania will have to align its legislation further with that of the acquis. Legislation will have to be reviewed in order to eliminate potentially harmful tax measures, so as to comply with the Code of Conduct for Business Taxation to the same extent as current Member States upon accession. The Commission`s initial technical assessment of potentially harmful measures applied in Romania is ongoing.

Despite efforts made during the reporting period, the administrative capacity of the Romanian tax authorities remains weak and fraud on VAT refunds has reached significant proportions. The revenue collection and the refund systems are in need of major improvement. The elaboration and application of the Code of Ethics should be given a high priority in order to address issues related to corruption and to improve administrative practices.

As regards inter-connectivity, no detailed plans concerning the VAT Information Exchange System have been drawn up. Romania will need several years to complete these tasks and be in a position to meet the obligations of the acquis.

Conclusion

In its 1997 Opinion, the Commission stressed that the acquis in respect to direct taxation should present no significant problems. As regards indirect taxation, the Commission pointed out that, although a start had been made, a sustained effort was required to comply with the EU acquis concerning VAT and excise duties.

Since the Opinion, Romania has made progress towards alignment with the taxation acquis although this has been at a slow pace. Transposition of legislation on indirect taxation has continued over recent years although it is not yet complete. Further, legislative adjustments are still needed, also in the area of direct taxation. Despite recent efforts, only limited results have been achieved in modernising the tax administration

Negotiations on this chapter continue.

Romania should focus further efforts on addressing outstanding legislation to complete transposition of the acquis, as well as on reinforcing its capacity for implementation and enforcement. Administrative reforms should focus on improving the revenue collection and the refund systems as well as reducing fraud on VAT refunds.

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