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Romania

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REFERENCES

Commission Opinion [COM (97) 2003 final - Not published in the Official Journal]
Commission Report COM(98)702 final [Not published in the Official Journal]
Commission Report COM(99)510 final [Not published in the Official Journal]
Commission Report COM(2000)710 final [Not published in the Official Journal]
Commission Report COM(2001) 700 final - SEC(2001) 1753 [Not published in the Official Journal]
Commission Report [COM(2002) 700 final - SEC(2002) 1409 [Not published in the Official Journal]
Commission Report COM(2003) 676 final - SEC(2003) 1211 [Not published in the Official Journal]
Commission Report COM(2004)657 final - SEC(2004)1200 [Not published in the Official Journal]
Commission Report COM(2005) 534 final - SEC(2005) 1354 [Not published in the Official Journal]

Treaty of Accession to the European Union [Official Journal L 157 of 21.06.05]

SUMMARY

In its July 1997 Opinion the European Commission took the view that the transposal of the Community acquis in the field of direct taxation should not pose major difficulties for Romania. As regards indirect taxation, the Commission requested Romania to make a sustained effort to comply with the acquis on VAT and excise duties in the medium term, although progress had already been made in some areas. It also felt that Romania should be able to participate in the mutual assistance arrangements as its tax authorities developed their expertise in this area.
The November 1998 Report noted that some progress had been made in the VAT field but stressed that efforts needed to be sustained in this area and in that of excise duties with a view to full alignment with the acquis. Further efforts were needed to strengthen the effectiveness of the tax authorities.
The 1999 Report indicated that Romania should continue its efforts to align its legislation with the acquis. The tax administration needed restructuring in order to improve its capacities and administrative cooperation. Tax reform, which would entail reducing VAT exemptions and increasing excise duty levels, was essential.
The 2000 Report noted that further alignment had been achieved in the area of VAT. The number of exemptions had been reduced and the charges and rates concerning the establishment of free zones had come under the standard system. Certain transactions formerly subject to a reduced rate were now exempt, and the scope of exemptions had been extended (construction of new buildings or buildings intended for religious purposes, extension or repair of existing accommodation). A procedure for VAT refunds had entered into force for foreign airlines and specific regimes for second-hand goods and tourism had been introduced. The VAT regime for property transactions had been brought into line with the acquis. A single rate of 19 % was now in force. With regard to excise duty, the system had been reformed but the rates applied to all products were below the minimum rates laid down by the EU. As far as mineral oils were concerned, the scope had been extended to include certain fuels (liquid fuel, diesel and oil) but a specific exemption had been granted to these fuels when they were intended for domestic use. With regard to direct taxation, the tax on company profits had risen to 25%, although a more favourable rate of 5 % was applied to profits from exports. In terms of administrative cooperation and mutual assistance, the pilot scheme had been extended to the entire country on 1 January 2000 and a new harmonised tax return had been introduced.
The 2001 Report noted that Romania had made some progress, especially on excise duties. The specific duty on cigarettes had increased, although the rate was still below the EC minimum. A single rate of excise duty had been introduced for all types of alcohol and alcoholic drinks. However, there had been no improvement in the alignment of VAT legislation. The same applied to direct taxation. Nonetheless, Romania had continued to modernise its tax administration by establishing training programmes and introducing IT systems.
The October 2002 Report stressed the progress made by Romania, especially in terms of aligning its VAT legislation. In June 2002, a consolidated law on VAT was adopted and the new legislation on excise duties entered into force in January 2002. Romania had also continued to modernise its tax administration and improve the revenue collection system. However, no progress was noted in the area of administrative cooperation and mutual assistance.
The 2003 report noted some progress on alignment with the tax acquis and in the field of administrative reform. However, it pointed out that Romania needed to keep up the pace of transposition in all areas of the acquis and devote particular attention to reforming and modernising its tax administration. It also needed to work on improving its IT systems.
In 2003 negotiations on the tax chapter were closed provisionally. Romania was granted a transitional period (up to December 2009) to apply the minimum excise rates to cigarettes. It was also allowed a derogation authorising it to apply special excise arrangements to the distillation of fruit spirit by small fruit growers. Other derogations were granted concerning VAT exemption for international passenger transport and VAT exemption and the registration threshold for small and medium-sized businesses. Overall Romania was meeting its commitments and requirements under the accession negotiations for this chapter.
The 2004 Report noted that Romania should continue its efforts to align its legislation with the acquis. Romania had consolidated its existing laws into a single Tax Code that entered into force on 1 January 2004 and provided for continuing alignment in various fields. The new tax procedure Code also entered into force on 1 January 2004. Other efforts were deemed necessary to complete these projects and reinforce administrative capacity.
The 2005 Report shows that Romania is generally abiding by its commitments in the fields of VAT, excise duties and direct taxation. Romania needs to complete legislative alignment on the acquis in several areas, such as the modernisation of its tax administration.
The Treaty of Accession was signed on 25 April 2005 and accession took place on 1 January 2007.

COMMUNITY ACQUIS

The Community acquis in the area of direct taxation mainly concerns some aspects of corporation taxes and capital duty. The four Treaty freedoms have a greater impact on national tax systems.

The legal framework for indirect taxation consists primarily of harmonised legislation in the field of value added tax and excise duties. This includes the application of a non-cumulative general tax on consumption which is levied at all stages in the production and distribution of goods and services and requires equal tax treatment of all domestic and import transactions. In the field of excise duties, the acquis consists of harmonised tax structures and minimum rates of duty together with common rules on the holding and movement of excisable goods (including the use of tax warehouses).

Finally, the Community legislation in the area of administrative co-operation and mutual assistance provides tools to avoid intra-Community tax evasion and tax avoidance for both direct and indirect taxation.

EVALUATION

Value-added tax

Romania's current VAT system incorporates the main principles of Community legislation. Recent changes include reducing the scope of exempt transactions, eliminating differences in taxation between imported services and similar domestic services and redefining the provisions governing exemptions for the export of goods, passenger transport and certain other services. The dual VAT rates in Romania have been increased to 22% and 11% respectively.

In 1999 VAT exemption was abolished in a number of areas, for example, land rental and health services. A reduced rate was applied to bread, advertising and newspaper selling (which were exempt until October 1998). A procedure was introduced for reimbursing VAT to taxpayers not residing in the country.

In 2000, the VAT legislation respected the EU principles in general but it needed to be adjusted again and supplemented in order to conform fully with the acquis.
In 2001, substantial harmonisation was still required in the field of VAT.

A consolidated law on VAT was adopted in June 2002, introducing a comprehensive definition of taxable persons, reducing the list of incompatible VAT exemptions, introducing VAT exemptions provided for under the acquis and providing for heavy criminal penalties for fraud on VAT refunds. In spite of this progress, alignment remained incomplete in a number of areas, particularly exempted activities - with or without the right to deduction. There were also some rules that were incompatible with the acquis, including the general rules on the chargeability of the tax, rules on the place of taxation, and rules on the payment of VAT. Romania still had to transpose provisions concerning the special VAT regimes.

In 2003 limited progress was made with VAT. Alignment with the acquis was not yet completed, particularly as regards exemptions, taxable persons, chargeability of the tax, the place of taxation, imports, payment of VAT and the introduction of the special VAT regimes provided for in the acquis.
However, the amendments to VAT legislation did introduce some VAT exemptions (letting and leasing of certain immovable property, provision of goods and services to the NATO armed forces). The definitions of the place of taxation for telecommunications, broadcasting and electronically supplied services were aligned with the acquis. Measures were also taken to implement a system of ex-post controls on the management of VAT refunds, significantly reducing the period for effecting the refunds.
In 2004 the new Tax Code introduced a reduced rate of 9%, which the acquis allows. In this context a number of VAT exemptions, contrary to Community legislation, that had been applied previously to a whole range of goods and services, were abolished and replaced by the reduced rate. VAT exemptions were introduced for the supply of goods in the context of diplomatic and consular relations, imports by international organisations and goods placed under the duty suspension arrangements, as provided in the acquis. Lastly, barter transactions were included within the scope of VAT, bringing these provisions into line with the acquis.
Further effort is still needed, particularly regarding exempt activities, taxable persons and special regimes. The VAT exemption and SME registration thresholds need to be reduced to the level agreed on during the negotiations. Provisions on intra-Community transactions also need to be prepared.
In 2005, Romania made progress by removing a number of VAT exemptions incompatible with the acquis. Increased efforts are required to guarantee complete alignment at VAT legislation. VAT registration and exemption thresholds must be standardised in line with the provisions of the Accession Treaty.

Excise duty

Excise duties are now largely regulated by legislation adopted since July 1997 to bring the country's excise rules more into line with Community requirements. New duty structures have been introduced and the fiscal supervision system for the production and distribution of alcohol has been extended. Other measures include the regrouping of products and product groups and a review of the taxation base. The rates of duty for important product groups (spirits and tobacco) have mostly been brought in line with the acquis.

Although the structure of Romanian legislation was increasingly brought into line with the Community arrangements throughout 1998, differences continued to exist, such as the absence of a duty suspension system and tax warehouses. Romania also applied very low rates compared with Community rates.

In September 1999, the Government decided to use the euro as the reference base for calculating excise duty (in 1998 Romania had used its own currency). The system of excise duty on tobacco, introduced in 1998, discriminated against foreign products.

Certain changes in 2000 enabled Romania to come closer to the acquis but it was far from alignment in terms of the minimum rates. As regards tobacco, alcohol and mineral oils, the Commission considered that it would be several years before legislation was brought into line.

In 2001, although some progress was made concerning excise duty rates, Romanian legislation still needed to be adjusted in relation to the structure of duties, exemptions and the rates applied.

New legislation on excise duties entered into force in January 2002. Excise duties were increased for all harmonised product categories and the definitions were reviewed, bringing them closer to the acquis. The taxable regime applicable to alcohol was unified, with the same duty rate applied to both ethyl alcohol and spirits. A major effort was still needed however, mainly regarding the alignment of the scope of exemptions and of the rates and structure of all harmonised product categories.

In 2003 Romania continued the gradual alignment of excise duties for all harmonised product categories although the duty rates applied remained well below the EU minima stipulated in the acquis. A major effort still needed to be made, particularly as regards alignment of the scope of exemptions and of the duty rates and structure of all harmonised product categories.
Romania started registration and authorisation of tax warehouse keepers in October 2003.

In 2004 the major change introduced by the Fiscal Code was the introduction of the duty-suspension regime and the definition of tax warehouses. This constitutes a major step towards alignment with the acquis. The Code also aligned mandatory exemptions with those stipulated in the acquis, as well as the exemptions for alcohol products. The structure of the duty on wines, fermented beverages and intermediate products has been aligned with the acquis. However, significant efforts are still required, in particular with regard to the level of the rates applied to the harmonised product categories, and the scope of exemptions for mineral oils. Romania should also take account in its legislation of the limits of the transitional period agreed during negotiations on spirits produced from fruits and grapes for own consumption.
In April 2005, Romania increased excise duties on tobacco products, alcohol and mineral oils, in line with its commitments. The EU minimum rate for mineral oils has already been reached.
Romania still has to adopt legislation introducing the reduced excise duty rate (50%) on distillation for own consumption by small fruit growers.
Efforts are still required to transpose the provisions on intra-community movements for all the harmonised product categories, and to adopt the Energy Directive.

Administrative capacity

Tax collection has deteriorated significantly in recent years and now contributes only 30% of the State budget. Control procedures for tax administration have been improved. Implementation of the reforms will, however, depend on strengthening the tax authorities at central and local levels. Cooperation and communication are needed with customs, financial authorities and the other institutions concerned.

Since 1998, the new legislation has shown a separation between the rules of procedure and the tax provisions. A tax procedures code has been drafted and a department to help taxpayers has been set up. Other measures have been taken to promote cooperation between national authorities and in the field of training. Nonetheless, the Commission Report for 1999 showed that the administration still exhibited weaknesses concerning the formulation of policies and tax collection.
Although the organisation of the tax administration improved in 2000, further modernisation was required. Despite the efforts made in 2001, Romania's administrative capacities were still inadequate.

In 2002, measures were taken to reduce tax arrears. Assistance and information to tax payers were further developed. A strategy to improve the administrative capacity of the tax administration was also approved in February 2002. The strategy covers the period until December 2006 and will be revised each year. Romania also committed itself to develop a code of ethics by mid-2003.

Despite this progress, the administrative capacity of the Romanian tax authorities remained weak and fraud on VAT refunds reached significant proportions. The revenue collection and the refund systems were in need of major improvement. The drafting and application of the code of ethics needed to be given high priority in order to address corruption issues and improve administrative practices.

The administrative capacity of the Romanian tax authorities remained weak in 2003 and fraud on VAT refunds was significant. Romania needed to continue modernising its tax administration, improving its revenue collection and refund system and developing an effective audit system based on risk analysis. It also needed to give priority to drafting and applying a code of ethics to address corruption issues and improve administrative practices.
However, Romania did carry out useful restructuring of its tax administration. It brought together in a single department the three administrations responsible for levying, monitoring and recovering social security payments and set up a National Fiscal Administration Agency, whose main responsibilities include tax collection, tax control and maintaining the register of taxpayers.
On the other hand, no significant progress was made on administrative cooperation and mutual assistance.

No substantial progress can be reported for 2004 either in the field of administrative cooperation and mutual assistance. With regard to information technology (IT) and interconnectivity, an important IT modernisation programme is underway to address both the IT operational capacity and interconnectivity issues. A National Agency for Fiscal Administration was set up, and became operational in January 2004. In February an Action Plan for 2004 was approved for the Agency. With regard to tax collection capacity, an IT-based database of taxpayers has been developed, containing all obligations and outstanding dues for each taxpayer.

In 2005, significant delays occurred in setting up the information exchange system and IT interoperability obligations. The National Agency for Fiscal Administration (NAFA) is now almost solely responsible for the collection of all revenues for the consolidated state budget. As stated in the report, the administrative capacity of the Romanian tax administration needs to be improved significantly. The level of tax collection in Romania is still low and the control capacity of the administration weak, particularly regarding VAT.

Direct taxation

As far as direct taxation is concerned, the November 2000 report noted that consideration should be given to whether the special tax rate applied to profits from exports was compatible with the rules of the Community and the WTO. In 2001, Romanian legislation had yet to comply with the principles of the Code of Conduct for Business Taxation.

A revised profit tax law was adopted in June 2002. Following the timetable laid down in this law, the reduced rate of 5% applicable to profits on exports was increased to 12.5%. Similarly, certain tax facilities for SMEs and taxpayers established in disadvantaged areas and free zones would also be gradually eliminated.

Romania adopted no new legislation on direct taxation in 2003, but needed to continue to align its legislation to eliminate potentially harmful tax measures.
No progress can be reported for 2004 on the transposition of the relevant EU directives. Romania still needs to transpose the Directive on interest and royalty payments and the savings Directive, and complete transposition of the parent-subsidiary Directive. Romania should also only introduce new tax measures which are in line with the principles of the Code of Conduct for business taxation, and will have to remove, at the latest upon accession, all harmful tax measures, so as to comply with the Code of Conduct to the same extent as current Member States.

In 2005, Romania made no progress in completing the transposition of the Directives concerning direct taxes. Concerning the taxation applicable to interest and royalty payments, Romania was granted a transitional period until 1 January 2011.

This summary is for information only and is not designed to interpret or replace the reference document.

Last updated: 15.12.2005
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