Why does Romania have the weakest VAT collection in the EU. The lesson given by Bulgaria, the European champion to reduce the gap
Romania and Bulgaria have been involved in programs carried out by the World Bank to increase VAT collection. However, the two countries had different journey. Romania remained at the bottom of the standings, far from any EU state, while Bulgaria reached the middle of the standings. The main difference: Romania gave up the reform, in 2019, by the decision of the Dăncilă Government.
Romania has the highest VAT collection deficit in the EU (the so-called VAT GAP), 30.6%, according to the last European Commission report, valid at the level of 2022.
VAT receiving deficit is the difference between VAT that can be collected theoretically and which is effectively collected. For comparison, the European average is 6%.
The losses of Romania, of the order of billions of euros
Romania occupies the last position in this ranking for several years. A small progress was made, in 2022 when there was a reduction of 4.2 percentage points compared to 2021. Then, the deficit was 36.7%.
In nominal terms, Romania has lost 8.47 billion euros, ranking after Italy, Germany and France, the report of the commission shows, according to euraliv.ro. The total VAT revenues in Romania were 19.2 billion euros.
At the opposite end, Cyprus (0.7%), Portugal (1.3%) and Ireland (1.7%) have the lowest VAT deficits.
Bulgaria “has reached a very good yield”
Unlike Romania, Bulgaria has gradually succeeded in the last decade to reach the tail of the ranking towards the middle. It is now ranked 15th out of 27, with a deficit of 7.7%. In 2021, Bulgaria had a deficit even smaller, of 4.9%.
“Bulgaria, which in the years 2000-2010 was even worse than Romania at VAT collection has now reached a very good yield of VAT collection, reflected by a VAT GAP of 4.9%, below the European Union average,” shows a government course in 2023, in which it writes that Romania has sabotaged its VAT collection program.
The Dăncilă government has given up on the Reform with the World Bank
In Romania, in 2013 the process of reform of the fiscal administration was initiated, also in collaboration with the World Bank, an important pillar being the modernization project similar to that of Bulgaria, with a financing of 70 million euros.
The main objectives of the program, with the initial completion term 2019, subsequently extended for 2021, were to increase the efficiency and efficiency of the collection, to improve the tax compliance and to reduce the tax burden.
In June 2019, Prime Minister Viorica Dăncilă and the Minister of Finance, Eugen Teodorovici, officially signed an amendment regarding the loan agreement for the project to modernize the fiscal administration.
Through this amendment the Romanian state showed that it no longer needs the money of the International Bank for Reconstruction and Development, part of the World Bank group. Basically, he gave up the program.
Why did Romania give up the reform?
“There was no political will for increasing VAT collection. There are huge pressures on the decision -makers from the evasion networks, which proliferate in the underground economy. There is a lot of money that remain in their pockets. Increasing the collection would mean giving up this money,” the hotnews said.
The concrete measures taken by Bulgaria
“They made regional tax administrations and everything moved to the electronic, from payments to the register,” explains the economist Ionuț Dumitru Reform Reformation, according to the Financial newspaper.
Digitalization is also one of the solutions.
Governance course offers the examples of four EU states that have high progress in combating evasion, in 2013-2021, after digitalization of tax administrations:
- Latvia (18 -percentage reduction of VAT collection gap)
- Hungary (reduction with 17.6 percentage points of the VAT collection gap)
- Poland (22 percentage discount of VAT's collection gap)
- Slovakia (22 percentage discount of VAT's collection gap)
Another effective measure for reducing tax frauds is the reverse taxation, in which VAT payment is made by the last link in the commercial chain. The reverse tax mechanism is a measure that transfers the liability for the final payment of the VAT to the state budget from the seller to the customer.
“The reverse taxation represents a way of simplifying the payment of the value added tax. This is not made by any VAT payment between the supplier/provider and the beneficiary of some deliveries/provisions, the latter, for the operations made, the tax related to the entries and having the possibility, in principle, to deduce the respective tax”, in an AIAF document.
