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Surprising VAT Rate Increase to 24%

26 Jul 2010

From 1 July 2010 the standard Romanian VAT rate increased to 24%. This move took most businesses by surprise. Although rumoured in the past to be an alternative to cutting public pensions by 15%, which has been ruled as unconstitutional, the Government Emergency Ordinance only published the increase in VAT on 28 June 2010, just three days before coming into effect.

The Government also introduced additional measures aimed at reducing tax fraud, which introduce further administrative burdens for taxable persons registered for Romanian VAT purposes. Those taxable persons who intend to continue (or start) to carry out intra-Community trades after 1 August 2010 will need to register in the new Register of Intra-Community Operators in order to preserve validity of their Romanian VAT numbers in the VIES system. Taxand Romania assesses the effects of these sudden changes.

The hike in VAT to 24% was introduced by the Romanian Government as an alternative to the proposed 15% reduction in the pensions to cover the gap between state budget revenues and expenses.

Businesses only had 3 days to prepare their systems and decide on their pricing policies to be compliant with the increase. Companies with limited or no VAT deduction right (such as banks, insurance companies, and healthcare clinics) will feel the effects of the increase in the VAT rate directly in their costs and will need to think of ways to maximise their VAT deductions wherever possible.

The change in the VAT rate also raises a series of administrative problems, especially for transactions where invoices were issued or advances were cashed in prior to 30 June 2010, but where the transaction will be finalised after 1 July 2010. Producers and retailers granting or receiving volume discounts at year end will also need to carefully link those discounts to each two semesters of the year, as the VAT rates applicable for those discounts are now different (19% for the first semester and 24% for the second semester).

The introduction of the Register for Intra-Community Operators adds an administrative burden for all companies registered for Romanian VAT purposes that carry out intra-Community supplies and / or acquisitions, as well as companies that supply or receive services to / from other EU partners. As of 1 August 2010, all companies that need to preserve the validity of their Romanian VAT numbers in the context of intra-Community trades will have to fulfil the formalities of registering with the Register of Intra-Community Operators. The main requirement for registration is the provision of criminal records for all shareholders and administrators of Romanian companies (except for joint stock companies, where only the administrators need to provide their criminal records). For foreign companies with VAT numbers in Romania, it is still not clear what documents will be needed for registration in the new register. However, according to draft application norms to the Fiscal Code, it appears that the criminal records of the foreign company itself will need to be provided. Given the short period of time remaining to 1 August 2010, we should expect this new requirement to cause significant administrative problems, especially when criminal records of foreign individuals and companies will need to be obtained.

Taxand's Take

The effects of the increased VAT rate to 24% are expected to reflect in the overall consumption of the Romanian market, and will also cause administrative problems to companies dealing with transactions that commenced before 30 June and ended after 1 July. Businesses operating in the Romanian market will have to adapt their pricing policies to the new VAT rate. Those operating in the financial or healthcare sector, that have limited or no VAT deduction right, will need to find solutions to maximise their VAT deduction right in order to smooth out the impact of the VAT increase on their costs.

All companies operating in Romania and dealing with intra-Community transactions will need to register in the Register of Intra-Community Operators to preserve validity of their VAT numbers in intra-EU trade. Otherwise, their EU partners will no longer be able to exempt intra-Community supplies to invalid Romanian VAT numbers or issue invoices without VAT for supplies of services that are normally reverse charged, as the Romanian VAT number will no longer appear valid in the VIES system. We recommend businesses to start registering as soon as possible to avoid last minute queues at the tax offices.

Your Taxand contacts for further queries are:
Angela Rosca
T. +40 21 316 04 93

Alina Zarzu
T. +40 21 316 04 93

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