Indirect tax compliance presents unique challenges to small, medium and large entities in Romania. A mix of increasingly complex business activities, a limited period of time to do the processing and reporting, as well as ongoing regulatory changes regarding reporting requirements have made managing indirect tax a function in itself for Romanian entities.
VAT reporting – preparation and submission of VAT returns – is no longer a monthly activity, but rather a complex and constant process for businesses. Thus, more and more entities are looking into clearly defining the process from data extraction to preparation/submission of the VAT return, documenting such processes and using technology and automation solutions for VAT reporting.
The electronic exchange of the reliable accounting data folder structure (SAF-T), as originally proposed by the OECD and subsequently implemented in countries across Europe, such as Poland, Portugal, France and Austria, intends to give tax authorities immediate access to the relevant data in an easily readable format. This leads to electronic VAT inspections being much more efficient and effective.
Similarly to other European countries, ongoing regulatory changes in Romania, such as the introduction of the extended Form 394, highlight the need to use technology to ensure proper and timely reporting. ERP systems and bookkeeping software also need additional development to ensure compliance with the VAT requirements, as well as limiting the need for manual intervention in the reporting exercise.
Although Romanian entities would incur additional short term costs for preparing the system, training personnel, etc., the broader picture of digitalisation of VAT compliance and reporting process presents a welcome long term impact of such a trend.
With tax administrations around Europe increasingly shifting from random VAT checks to full VAT data analytics by making use of technology, both Romanian tax authorities and taxpayers will have to adjust their processes and align with the changes taking place. The complex VAT landscape is moving with fast and certain steps towards digitalisation. Digital technology is becoming increasingly necessary to ensure correct and complete periodical VAT reporting.
Trends in VAT audits
Over the past year, there has been an increasing trend in the number of tax audits, re-assessed tax payments and issues raised. We have noticed a heightened interest on indirect taxes and VAT is the "lucky winner", on which the tax audit bodies are putting a special emphasis.
Everything starts from assessing the fiscal risk, based on criteria that includes declarations made in Form 394, the period since the last VAT refund was requested, etc. It then continues with issuing the tax audit notice (often interpreting the fiscal procedure provisions on the edge and covering a larger period than legally applicable), and subsequently the actual on-field tax audit.
When it comes to the actual tax audit, there are two concerns:
- The length of the audit (generally significantly exceeding the legal deadline); and
- The technical issues raised.
Since it is common knowledge that the Romanian tax authorities are very formal and detail oriented they are carefully analysing taxpayer invoices. If such invoices cannot be amended, then deductions of the related input VAT are denied. The same approach is taken with respect to supporting documents proving the actual supply of services for the purpose of the taxpayer's business, where the authorities tend to look beyond the substance at elements that are not VAT related, but which trigger non-deductible VAT.
This approach is creating a burdensome amount of documentation for taxpayers to justify VAT exemptions. For example, although the Romanian VAT Law seems to be in line with the European VAT Directive and case law regarding the proof of transport of goods to another EU member state or third country for exempting intra-community supplies or exports, the practice of the Romanian tax authorities is far more burdensome. In this respect, they use the CMR document as the key piece of evidence to prove the movement of goods (although companies may have more sophisticated and precise alternative systems in place, being able to track with higher precision the movement of goods). Further, the CMR signed by the beneficiary is sometimes requested by the authorities (although the commercial terms may make it difficult to obtain in practice). Separately, the tax audit bodies request a customs export declaration on the name of the exporter in order to exempt exports.
The length of the tax audit is another factor of concern, since in practice tax audits may take between six months and a few years (although the law is precise on the term for finalising the tax audit).
In conclusion, while we would reasonably expect that such increasing practices to make the tax audit bodies more sophisticated, our fieldwork shows the opposite. So does the IMF's report on the large taxpayers' office work, which highlights some inefficiency reasons and related immediate remediation actions.
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