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New VAT Cash Collection System Favours SMEs

7 Oct 2012

Shortly after recent changes in VAT rates in June 2012, the Romanian tax law was amended again on 29 August 2012. Why? An attempt by the Romanian Government to improve Romania's competitiveness to support economic growth and to build the perception of an 'attractive' business environment for doing business.

The amendments target the business environment in general and, more specifically small and medium sized enterprises (SMEs) with a turnover of less than EUR 500,000. However, the amendments do include the introduction of other key changes regarding social security contributions. Taxand Romania provides a brief review of the new mandatory VAT cash collection system and how it will apply to SMEs.

Although the introduction of the VAT cash collection system had been long-awaited by Romanian business community, its implementation already raises certain concerns for the targeted companies, especially since it is anticipated to give rise to controversy and, potentially, affect the existing commercial relationship between companies. It is clear that the impact remains to be seen upon the actual implementation of the system, which will apply starting 1 January 2013.

According to the VAT payment scheme upon collection of invoices for companies with an annual turnover of less than RON 2,250,000 (EUR 500,000), the payment of VAT on the outgoing invoices will be deferred until the value of the goods or services delivered is cashed in. Similarly, the right to deduct VAT related to incoming supplies is postponed until the date the payment is performed. Thus, the right to deduct the VAT related to acquisitions performed from or between taxable persons that apply the VAT cash collection system cannot be exercised until the payment supplier has made payment, barring certain exceptions.

If a taxable person, required to apply the system does not collect the invoice issued within a maximum 90 calendar days from the date of issuing the invoice or from the legal deadline of issuing the invoice (in case the invoice was not issued according to the law), then the VAT would be become due on the 90th calendar day.

Application of the VAT collection system is mandatory for the taxpayers who fall below within the threshold and there are no provisions to allow other categories of taxpayers to apply the system. However, the VAT system does not apply to taxable persons which are part of a fiscal group nor for transactions performed between related parties. Other transactions are also excluded from the sphere of application of the system eg intra-community acquisitions of goods, imports or acquisitions of goods and services for which the reverse charge mechanism applies, and transactions subject to special regimes such as that of travel agencies, second-hand goods, works of art, etc.

The Romanian Government believes that this new measure will ensure a friendlier business environment for SMEs that currently face difficult periods and struggle with cash shortages. This new system will allow SMEs to pay VAT only when their outgoing invoices are cashed in.

As far as the budget revenue is concerned, it is expected that it will remain more or less the same once this measure is enforced. Considering the measure applies only to transactions that are settled via bank transfers, the Romanian Government hopes that this will discourage taxpayers to settle their invoices in cash, and rather increase traceability of operations, thus eventually limiting tax evasion.

Nevertheless, for large companies, this new system will entail amendments to their IT accounting systems in order to be able to detect, and account for, deductible VAT on suppliers' invoices at the time of payment, rather than booking the acquisition invoices. This will result in additional administrative costs for these entities.

Taxand's Take

The VAT cash collection system will certainly raise many challenges and questions for the Romanian taxpayers. Either if they are required to apply the system or are going to be involved in transactions with companies applying the system. Although the system may become a way to relieve certain taxpayers from financing the state budget at they own efforts, there will continue to be situations when taxpayers will continue to finance VAT from their own resources (for example, in the case where the supplier is a regular taxpayer, who does not apply the system, but the beneficiary does).

In terms of action points, taxpayers applying the system will be required to expand the current format of their books used for maintaining records, by adding a separate section designed to ensure the listing of the amounts paid / collected. Consequently, the overall VAT administration will become a more burdensome exercise for taxpayers since they will be required to allocate a greater level of resource and time for VAT compliance activities.

Regular taxpayers that enter into transactions with taxpayers applying the system will face difficulties too, as they will also be required to maintain a separate section for VAT deduction, organised by categories of suppliers and payments performed.

Your Taxand contacts for further queries are:
Angela Rosca
T. +40 21 316 06 45

Andrei Hadar
T. +40 21 316 06 45

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Taxand's Take Author