The need for tax reform – challenges for Romania’s current tax system

The tax law in Romania is not always clear and, moreover, the issue of low tax collection rates has sparked more and more interest over the past few years, especially after Romania started to feel the consequences of the economic crisis.

They say two things are certain in life: death and taxes. If we speak about taxes only, we have to ask ourselves if that rule always applies to Romania. In the context of the economic crisis, in order to compensate the downturn in collected revenues, the need for a more efficient tax collection system became greater.


According to statistics provided by the national tax authorities at the end of 2013, the level of collection of recoverable arrears from companies was of only 73%(1), compared with 77%(2) in 2012. In order to fill the gaps, certain measures had to be adopted. As we have been accustomed, the easiest way for the authorities to fill a tax gap in Romania is by introducing or increasing a tax. This was the case with the increase of the VAT rate a few years  ago or, more recently, when the tax on special constructions was adopted.


It is questionable, however, whether such an approach should still be continued especially now when measures to stimulate the economic recovery are rather needed. Cliché or not, the reform process of the tax system may still be an answer.


In 2013, the National Agency for Fiscal Administration entered a complex process of reorganization whose main purpose, according to tax authorities, is to increase the efficiency of tax collection and reduce its operating costs.


Beyond doubt, the change of the current tax system has become a real challenge for the tax authorities and has been always a request of the business community. From the taxpayers’ point of view the objectives of the reform process should cover several important areas:

? encourage transparency on how the collected taxes are used in the benefit of the taxpayers;
? ensure the predictability and coherence of the tax system by reducing legislative changes taken overnight;
? offer on-the-spot clarification for the current legal provisions and ensure a continuous update of the tax law with the business trends development;
? increase professionalism of the tax inspectors;
? reduce bureaucracy by smoothing the processes and procedures, by updating the operational systems and by eliminating
various taxes.


As part of the process, creating a new layer at regional level responsible for support functions, planning, coordination and control of the subordinated units strengthened the organizational structure of the tax administration. Also, an antifraud structure with eight regional units centrally coordinated was created. 


For sure, the reform is an ongoing process, which requires time to reach the assumed objectives (it is envisaged that the   process would be completed in 2018). It is a good sign that it has already started and, as previously mentioned, taxpayers and investors have certain expectations as a result of this process. Some of the reform areas requested by the business  community are detailed below.


Efficiency and transparency of governmental expenses/ collected taxes

One of the main concerns generally raised by taxpayers is that the taxes they pay to the state budget are not efficiently used. Such concern comes from the decreasing quality of public services and low level of investments in areas for public interest, such as education, health, infrastructure etc.


In order to counterbalance this negative perception of the taxpayers, tax authorities should ensure that public funds are efficiently used and that such information is properly communicated to the public/ taxpayers.


A starting point could be drawing a clear long-term investment strategy for public expenditures, similar to the budgets prepared by the companies. It would be great if the taxpayers could know how the state funds are to be spent in order to bring benefits for all citizens and businesses of the country. Of course, such a strategy should be properly implemented.


For sure, increasing the transparency in using the public money and having a clear plan for the future may prove challenging, but that is necessary to increase the taxpayers’ trust and in the end, their voluntary compliance with declaration and payment of taxes.


Predictability and coherence of the tax system

It is well known that a stable economy with a coherent tax system attracts investors to that state. The question is what the authorities do in this respect. Over the last period, most investors in Romania have publicly stated that the level of  unpredictability of changes in our tax law makes them reconsider their business plans for the future.


Creating a stable tax climate where the major changes of the tax legislation are announced in due time are issued only after public consultations and proper impact analysis, would allow taxpayers (current or future) to have a proper planning for their business and thus it would be easier for them to invest in existing or new businesses.


Also, it should be considered the fact that the adoption of tax laws by the Executive instead of the Parliament, as in the regular cases, increases the unstable climate. The way of issuing new tax legislation encourages the perception of the investors that the unpredicted changes of the law are on the spot solutions found by the Executive to cover the necessary uncollected funds.


Tax authorities should be aware that creating and promoting a stable tax environment would encourage investors to bring new business in our country which impacts directly on increasing revenues to the state budget.


Offer on-the-spot clarifications and ensure a continuous update of the tax law

In the current context, where the tax law is in a continuous change - both in terms of new taxes introduced or often changes of the tax legislation – and is many times unclear, it is quite difficult for a regular taxpayer to be compliant. And such a situation does not arise due to bad will, but due to the struggle to follow all the changes and to apply them correctly to their businesses.


Even if it is about day-to-day issues or other complex questions, taxpayers often need clarifications from tax authorities. However, in many cases, the answers to their official queries are either coming too late or are unclear. This situation already created at the level of the taxpayers the perception that tax authorities are not actually doing enough to assist them in solving their tax problems.


For this reason, besides the improvement of the administrative aspects by promoting a centralization of the offices where the taxpayers would be able to solve their issues easier and the elaboration of various tax guides (such as guides for individuals regarding the declaration of the income obtained from Romania and also from abroad, tax guide regarding the recovery of the VAT paid in another state, member of the European Union etc.), tax authorities should also consider the active day-to-day assistance.


More specifically, the taxpayers’ trust would surely increase if tax authorities were more diligent in giving clear and quick answers to their requests on aspects related to the interpretation of the tax law. When it comes to diligence, tax authorities should have in mind that delaying a response to a binding rule may significantly impact the activity of that taxpayer: it may lead  to transactions or investments delayed or even cancelled. And, of course, less business means less taxes to the state budget.


Increase professionalism of tax inspectors

The relationship between tax authorities and taxpayers has a significant role in encouraging a positive attitude at the level of taxpayers as regards the payment of the taxes.


One controversial trend noted by taxpayers is that, usually, companies compliant with the tax legislation are generally subject to more frequent tax audits in the tax authorities’ attempt to raise more taxes from them, while the grey and the black economy flies under the tax authorities’ radar. Given that the gap in the taxes collected to the state budget is determined mainly by tax evasion, tax authorities should have a greater focus on this area.


Another aspect noted during the tax audit is that many times tax inspectors do not follow the ‘presumption of innocence’ and act from the very beginning as if the taxpayer is trying to avoid and escape paying their taxes. By changing this approach (and in, fact, being compliant with the law), together with encouraging productive discussions between taxpayers and tax inspectors during the tax audits, could prevent the unintentionally noncompliance in many cases and thus encourage voluntary compliance.


A different focus with great impact on the attitude of the tax inspectors is the improvement of both technical and soft skills.  Considering the fast changes of the business models and the widespread of multinational companies in our country, the periodical information and training of all tax inspectors should be a method  to update them on the latest developments of the tax legislation and to eliminate different approaches of different tax inspectors on the same tax issue.


Spread the applicability of the electronic compliance system

Over the last years, taxpayers have had logistic difficulties in reporting and paying their tax liabilities. The introduction of the electronic system for the tax returns at the end of 2010 is probably one of the most appreciated measures by taxpayers. From that moment on, large and medium taxpayers are required to submit their fiscal forms through electronic means of transmission at distance, through the National Electronic System. For other types of taxpayers, electronic reporting may be used as an alternative method of reporting.


In addition, progress has also been made regarding the online fiscal file, which can now also be accessed by taxpayers on  the website of the National Agency for Fiscal Administration. Thus, taxpayers can opt to have access to information regarding their submitted returns and unpaid liabilities in real time.


It is clear that one important step in encouraging the taxpayers’ tax compliance was taken by implementing the electronic informational system. However, extending the applicability of this system to all categories of taxpayers and for all taxes (eventually within the same electronic database) would be for sure one big step ahead. Furthermore, introducing the
possibility to obtain different types of documents from the tax office (i.e. tax residency certificates, certificates attesting taxes paid, etc.) through electronic means can significantly reduce the time of response and streamline the current redtape procedures.


So far, clear steps were taken by the tax authorities to create the premises of a much needed fiscal reform. Looking ahead, taxpayers have high expectations  about the outcome of the reformation process. The main outcome potentially desired is a change in the mind-set of both taxpayers and authorities towards encouraging voluntary tax compliance. 



1) Based on the Performance Report for 2013, issued by the Ministry of Finance, pg.13
2) Based on the Performance Report for 2012, issued by the Ministry of Finance, pg.9