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EY: Implementing split VAT payment breaches Community provisions


The implementation of the VAT split payment breaches the Community provisions by failing to obtain a specific authorization from the European Council for a derogation from the VAT Directive regarding the payment of this tax, maintains Ioana Iorgulescu, Executive Director of EY Romania's Tax Advisory and Legal Services Department, in a document.

"Contrary to what is stated in the Explanatory Note, the implementation of this mechanism violates the Community provisions, primarily by failing to obtain a specific authorization from the European Council for a derogation from the VAT Directive regarding the payment of the VAT. In order to obtain such a derogation, Romania should have submitted a thorough impact study and, moreover, demonstrate that the mechanism would not affect the overall value of VAT revenues, collected at the final consumption stage. We are hereby expressing doubts about the fulfillment of these criteria," reads the document.

According to it, if indeed, the Romanian split payment mechanism were inspired by the Italian one (as the authors claim), the example should be followed through.

"However, there are significant differences as compared to the Italian model, starting with getting the derogation imposed by Community legislation, the people and the sector of activity being considered (that is, the deliveries of goods and services to public authorities, following statistical evidence on fraudulent practices in this area), the operating mechanism and its temporary enforcement (as, in fact, any measure meant to combat tax evasion and fraud, which derogates from the general rule). The European Commission's opinion on the impact of this measure on Romania would have been of interest, but it is not available given that no consultation has been carried out in this respect," the quoted source said.

Poland's split payment system is different from the Romanian one, says Iorgulescu, being an optional and temporary one.

"Moreover, years of analysis, studies and adaptation to the Polish economic environment have led to this form," according to EY.

The company claims that the stated purpose of the system is to eliminate or significantly reduce unfair competition from defrauders.

"In practice, the system means "punishing" the bona fide taxpayers by blocking financial resources (with associated negative financial and commercial consequences) in the accounts dedicated to VAT and their restitution (if case may be) only with authorization from the National Tax Administration Agency (ANAF). Yet, we do not know how and how long. Therefore, the system implies the unavailability of taxpayers' resources and making them available to the state budget before the legal term, without any interest or any other tax incentive (such as, for example, granting a good rating in order to reduce the fiscal risk and accelerate VAT reimbursement)," the quoted document reads.

According to it, on the administrative side, in addition to the huge costs (in the hundreds of thousands of euro, depending on the company size) that would have to be mobilized to adapt the information and financial accounting systems, the monitoring of split payments will become much more complex and will require additional resources from companies.

"Think of an operator in the field of telecommunications, obtaining revenues from various beneficiaries (people who are taxable or not, registered for VAT or not, for operations subject to different VAT rates) both in cash and as bank transfer (not to mention the 'multipurpose' cards or other types of vouchers) with available bank accounts opened at five commercial banks (at least). After the entry into force of the VAT split payment, in addition to investment in adapting the ERP system, such a company should have to set up a department to deal exclusively with monitoring payments of VAT made by beneficiaries, which would be a real barrier to conducting its meant activity. And what about the companies that use an outsourced services centre (SSC)? From India!" the EY official further says.

Non-resident individuals registered for VAT purposes in Romania will have the obligation to open VAT accounts.

"Such an obligation is added to the numerous administrative obligations (we mention here only Declaration 394) which, however, turn Romania into a business environment unattractive to foreign investors. We should also not forget the disproportionate penalties, which amount to up to 50 percent of the unpaid VAT amount, flagrantly contradicting the principle of proportionality. We hereby reiterate that the general interpretation principles of the Community law, developed by the Court of Justice of the European Union, represent secondary European legislation and must necessarily be taken into account (being above the national law). On the other hand, we wonder (yet again) whether the state institutions (for example ANAF) are really prepared to cope with this change, both in terms of administration and control. The following question that follows (legitimately): what will be the penalty for ANAF if it will not be able to manage this mechanism and approvals for cash withdrawals from separate VAT accounts will not be given within reasonable time (for example 3 days if we apply reciprocity)," the consultancy company further adds.