University of Bucharest

Faculty of Political Science

The Romanian Legal System

Final Paper Fiscal Policy in Romania

Written by Vlad Costea, under the coordination of Asist. Dr. Felicia Bejan

2013

I.

Introduction

In both economics and political science, the term fiscal policy is used to denote the use of spending and taxation in order to influence the economy1. Through fiscal policy, regulators attempt to improve unemployment rates, control inflation, stabilize business cycles and influence interest rates in an effort to control the economy. Fiscal policy is largely based on the ideas of British economist John Maynard Keynes (18831946), who believed governments could change economic performance by adjusting tax rates and government spending.

All of the governmental funds originate from taxation, so that the state apparatus is kept functional. In simple macroeconomic terms, the legislator can drastically change the economic landscape: if the taxes are reduced by the government, then the citizens will have more money, therefore both consumption and investments will increase; on the other hand, if the taxes are increased, then the people have less money to spend, but usually benefit from welfare programs or infrastructure. According to Article 138, paragraph 1 of the Romanian Constitution, Taxes, duties and any other revenue of the State budget and State social security budget shall be established only by law2.

In Romania, the Ministry of Public Finances is organized and functions as a specialized organ of the central public administration that has legal personality, under the subordination of the Government. The Government is the one that applies the strategy and financial governing of the public finances. Since the Governmental Ordinance 86/2003 that entered into force in January 2004, The National Agency of Fiscal Administration (from this point on, it will be referred to as NAFA - in Romanian, ANAF) has taken the prerogatives of administering the states finances from the Ministry of Finance3.

Arthur OSULLIVAN, Steven M. SHEFFRIN, Economics: Principles in Action, Pearson Prentice Hall, New Jersey, 2003, p. 387 2 Constitution of Romania, Title IV Economic and Public Finance, Article 139 Taxes, duties and other contributions, Paragraph one, Available at: http://www.cdep.ro/pls/dic/site.page?id=339&par1=4&idl=2 3 http://www.anaf.ro/public/wps/portal , Consulted on November 2 nd 2013

II.

The Romanian National Agency of Fiscal Administration (NAFA)

The budget should be balanced, the treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt, the mobs should be forced to work and not depend on government for subsistence.4 Otto Passman, Senator of Louisiana (In office: 1947-1977)5

Since obtaining its juridical person, NAFA has divided in three branches: The Financial Guard, The National Authority of Borders, the regional directions of public finances and the General Direction of Public Finances from Bucharest. However, in order to reduce the administrative spending and reorganize the institution in a more efficient way so that the Romanian states 80 billion Euro debt to the World Bank would be paid, in the summer of 2013 NAFA has reduced the number of administrative offices to only 221 fiscal administrations, with 8 regional directions and 47 local offices.6 Thus the Financial Guard and the National Authority of Borders have been dissolved, as their attributes had been taken over by the remaining employees of NAFA.

As a specialized organ of the central public administration, NAFA is responsible with applying fiscal administration policies by administering the budgetary revenues and by the procedures of managing, collecting and controlling of the fiscal matters. Another prerogative is the maintenance of partnership relations with the contributors. Since Romania has joined the European Union in January 2007, NAFA is also responsible with information exchange on taxes, management and taxes collection with the other E.U. member states. Its mission is that of finding resources for the societys public spending, the efficient administering of taxes and contributions, and also providing fiscal information to the
5

Congressional Record [House], "History's Warning", 25 April 1968 , p. 10635, Available at: http://www.archive.org/stream/congressionalrec114dunit#page/n631/mode/1up 6 http://www.zf.ro/zf-24/anaf-preia-activitatea-vamii-garda-financiara-se-desfiinteaza-si-apare-directia-generalaantifrauda-in-cadrul-fiscului-11059247 , Consulted on December 3rd 2013

government, so that the economic policy is adapted. There are two principles that lay at the foundation of the organization: the equality of the contributors in front of the tax and the efficiency of collecting budgetary funds. Furthermore, the NAFA has the following priorities 7: 1. The encouragement of voluntary conformation it serves the purpose of preventing the fiscal fraud, as it broadens and expands the quality of services by the use of simplified, comprehensive procedures. 2. Fight against fraud through high quality fiscal control that is oriented towards the highrisk sectors. 3. Efficiency in the process of collecting taxes and social contributions, in order to guarantee the required budgetary funds.

When it comes to objectives, NAFA looks forward to the following8:

A. Fighting against tax evasion by the improvement of fiscal control and fight against both international and intra-communitarian frauds B. Supporting businesses by improvement of the tax-return system, the encouragement of fair tax-paying contributors who for macroeconomic reasons are in times of trouble, the assurance of a broader liberty when it comes to the wanted fiscal obligation of the contributor, limitation of financial obligations for the dissolving contributors, and the implementation of a digital system that enables contributors to have controlled access to their files C. The modernization of services and the perfecting of procedures through an easier declaration system, the development of an electronic platform for faster communication, faster transfer of data to ensure proper communication with the contributor and the improvement of the use of a single account; respectively, for the perfecting of procedures, the objectives include the simplification of paying fiscal

7 8

http://www.anaf.ro/public/wps/portal, Consulted on December 2 nd 2013 Ibidem

obligations, the development of a Call Center, and the improvement of the institutional communication that will increase the transparency in relation to the press D. The prevention of evasion in the collecting phase by the improvement of the collaboration with the Ministry of Administration and Internal Affairs and the deduction of accounts belonging to commercial entities that have bank accounts opened in commercial banks E. Improvement of collection of budgetary receivables via acceleration in the collection of arrears, and the improvement of evaluation procedures in situations of enforcement, insolvency and solidary responsibility

For a better understanding of the phenomena, some of the terms are to be explained: Tax evasion is an illegal practice through which individuals, corporations or trusts deliberately misinterpret the law in order to avoid paying taxes. Misrepresentation may take the form either of underreporting income, inflating deductions, or hiding money and its interest altogether in offshore accounts.9 According to Law no. 50/2003, published in the Official Monitor no. 146/19.03.2013, any tax evasion practices are punished by law with imprisonment that, depending on the nature of the infringement, can last between 6 months and 15 years10 Receivables are an asset designation applicable to all debts, unsettled transactions or other monetary obligations owed to a company by its debtors or customers. They are recorded by a company's accountants and reported on the balance sheet, and they include all debts owed to the company, even if the debts are not currently due.11

III.

The Fiscal Code

The first version of the Fiscal Code was published in the year of 2003, with a number of 298 articles. During its 10 years of existence, the document underwent over 100 legislative changes,
9

http://www.law.cornell.edu/wex/tax_evasion, Consulted on December 3 rd 2013 http://www.mdm.ro/2013/pedepsele-pentru-evaziune-fiscala-valabile-din-22-03-2013/, Consulted on December 3rd 2013 11 http://www.investopedia.com/terms/r/receivables.asp, Consulted on December 3 rd 2013
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as the number of words has tripled, 100 more articles have been added and only 25 of the original 298 articles were left unchanged12. All of these changes have left economists, public servants, businessmen, but also regular citizens who want to stay informed, in a rather confusing situation, with a very difficult legislative framework in which the formerly known provisions could always be questioned. Even though physically the number of articles is still 298, the modifications have been made by the French model, with the addition of paragraphs so that if counted, as of December 2013, the number of articles is 41113. Moreover, there are only 25 articles that were never modified throughout the 10-year existence of the Fiscal Code and they include general descriptive matters and settle local taxes and tariffs. On the other hand, the articles that underwent the most modifications regard excise tax and VAT (Value Added Tax). With so many rapid changes, with an average of 12 modifications a year, Article 4 of the Code has often been infringed - as it is the one which states that The present code shall be modified and completed only by law, promoted, as a rule, 6 months before the date when such law enters into force.14 According to Article 1 of the document entitled General Provisions, The Fiscal Code shall establish the legal framework for the taxes and duties provided in Article 2, which are income to the state budget and to local budgets, shall specify the taxpayers which must pay such taxes and duties, as well as the manner of calculating and paying such taxes and duties. The present code shall include the procedure modifying such taxes and duties. Likewise, by this code the Ministry of Public Finance shall be authorized to draw up methodological norms, instructions and orders for the application of the present code and of the agreements for the double tax avoidance.15.

Other provisions from the same article state: 2. The legal framework for the administration of the taxes and duties governed by the present code shall be provided by the legislation on fiscal procedures.16

12

http://www.zf.ro/zf-24/10-ani-de-cod-fiscal-100-de-modificari-legislative-si-un-text-de-trei-ori-mai-lung11718563, Consulted on December 3rd 2013 13 Ibidem, BDIN, Dan, In interview for the cited source 14 http://codulfiscal.fincont.info/titluri-detalii.php?id=57, Consulted on December 3rd 2013 15 Ibidem 16 Ibidem

3. In fiscal matters, the provisions of the present code shall prevail over any provisions from other statutory instruments; in case of conflict among such provisions, the provisions of the Fiscal Code shall be applied.17 4. If any provision of the present code is contrary to any provision of any treaty which Romania is a party to, the provision of such treaty shall be applied.18 5. Any measure of a fiscal nature which represents a state aid shall be granted according to the provisions of the Government Emergency Ordinance No 117/2006 on the national procedures in matters of state aid, as approved with amendments and additions by the Law No 137/2007.19 Article 2 designates the Taxes and Duties Governed by the Fiscal Code20: a) The profit tax; b) The income tax; c) The tax on the incomes of micro-enterprises; d) The tax on the incomes obtained from Romania by non-residents; e) The tax on representative offices; f) The value-added tax; g) The excise duties; h) The local taxes and duties.

IV.

Direct and Indirect Taxation in Romania

The direct taxes are by definition those that draw sums of money directly from individuals or enterprises. The most basic direct taxes are the tax on income, the tax on profit, taxation on capital gains.21

17 18

Ibidem Ibidem 19 Ibidem 20 http://static.anaf.ro/static/10/Anaf/Legislatie_R/Cod_fiscal_norme_2013.htm#_Toc304299634, Consulted on December 3rd 2013 21 http://www.capital.ro/definitie/termen/vezi/impozite-taxe-directe.html, Consulted on December 3rd 2013

Furthermore, examples of direct taxes will be given, in relation to the most important contributors to the states budget. The employer has to pay to the states budget the Social Insurance Contribution (in Romanian, CAS), the Health Social Insurance Contribution (CASS), the Contribution for Unemployment Insurance (CA omaj), the Contribution for Holidays and Compensation (CCI), the Contribution for Labor Insurances and Professional Diseases (CAMBP), and the Contribution to the Guarantee Fund for the Paying of Salary Receivables (FGPCS). Regardless the total sum of money that is paid to the employees, all of these direct taxes have to be paid. The employee on the other hand has to pay the Social Insurance Contribution (CAS), the Health Social Insurance Contribution (CASS), the Contribution for Unemployment Insurance (CA omaj), and Tax on Salary Income (IVS which is 16% since 2005 and those who are paid with minimum wage are exempted). Firms, Companies Individual Enterprises and Authorized Individuals pay 16% of their profit or incomes, whilst Microenterprises pay 3% of their turnover. Moreover, individuals who gain from dividende out of stock market shares will be taxed 16% of these incomes. By far the most important the the most discussed of the indirect taxes is the Value Added Tax (VAT). According to the Fiscal Code, its value in Romania is 24% of the products value 22. There are also products that benefit from VAT reduction to 9% and products that are exempted from the payment of VAT (such as medical services, teaching and tutoring, social services).23 Excise taxes are added to certain goods and the producer or seller is expected to raise the price in order to make a profit. It is a heavier tax than the VAT and it triggers products such as gasoline, natural gas, electricity, luxury products, tobacco or alcohol (taxation on the latter two is also referred to as sin tax, for health and religious reasons). There is also another category of occasional indirect taxes, that require certain prerequisites to be met: fines (when a certain law or norm is broken), notary taxes, stamp duties. All of the above-mentioned taxes are applied at the governmental level and the money obtained is meant to support the state apparatus and administration. Locally, there are a few specific taxes such as tax on transportation, tax on buildings, tax on crops/terrains, advertisement tax, taxes for pet owners, taxes for crossing bridges, other tourist taxes.

22

The Fiscal Code, Title VI, Articles 125, Available at: http://static.anaf.ro/static/10/Anaf/Legislatie_R/Cod_fiscal_norme_2013.htm#_Toc304299634, Consulted on December 3rd 2013 23 http://www.cabinetexpert.ro/2009-06-17/bunuri-si-servicii-scutite-de-tva-pentru-operatiuni-desfasurate-inromania.html, Consulted on December 3rd 2013

V.

Conclusion

Romania is ranked at the 134th position in an international chart of business taxation, with a total tax rate of 42.9%.24 Under the mask of a unique quota of 16%, there are hidden costs that draw away foreign investors.25 These two reviews prove why the Romanian fiscal policy is inefficient and in discordance with the development and investment plans. There are plans of releasing a simplified and more comprehensive Fiscal Code in January 2014, which will hopefully establish a more efficient and productive framework for economic growth for both individuals and legal persons. Also, a wiser administration of the funds inherited by taxes is required, so that no tax raises would be necessary. However, it is not only the state policies, but also the fraud-sanctioning and prevention apparatus namely the NAFA that should be a watchdog of good practice in tax money collection. In a perfect economic situation, tax evasion is minimal and the tax raises become unnecessary, as the state-apparatus is fueled by the estimated amount of money, according to the status-quo tax rates. In order to achieve economic prosperity, a whole new economic mindset has to emerge in the Romanian society, in order to increase responsibility and promote the liberal democracy values that safeguard the individual freedom and well-being.

24

http://www.doingbusiness.org/data/exploretopics/paying-taxes, Consulted on December 3 2013 25 http://www.realitatea.net/minciuna-despre-taxele-mici-din-romania-firmele-platesc-biruri-mai-mari-decat-inrd 10-tari-din-ue_1315747.html, Consulted on December 3 2013

rd

Bibliography:
OSULLIVAN, Arthur, and SHEFFRIN, Steven M., Economics: Principles in Action, Pearson Prentice Hall, New Jersey, 2003, p. 387 BRGARU, Mihai, Codul Fiscal i Norme Metodologice de Aplicare Cu ultimele modificri i completri aduse prin O.G. nr. 88/2013 (M. Of. Nr. 593 din 20.09.2013). C.H. Beck, Bucharest, 2013

Online Sources:
http://www.anaf.ro/public/wps/portal, Consulted on December 2nd 2013 http://static.anaf.ro/static/10/Anaf/Legislatie_R/Cod_fiscal_norme_2013.htm#_Toc304299634, Consulted on December 3rd 2013 http://www.archive.org/stream/congressionalrec114dunit#page/n631/mode/1up, Consulted on November 25th 2013 http://www.cdep.ro/pls/dic/site.page?id=339&par1=4&idl=2, Consulted on November 25th 2013 http://codulfiscal.fincont.info/titluri-detalii.php?id=57, Consulted on December 3rd 2013 http://www.cabinetexpert.ro/2009-06-17/bunuri-si-servicii-scutite-de-tva-pentru-operatiunidesfasurate-in-romania.html, Consulted on December 3rd 2013 http://www.doingbusiness.org/data/exploretopics/paying-taxes, Consulted on December 3rd 2013 http://www.investopedia.com/terms/f/fiscalpolicy.asp, Consulted on November 25th 2013 http://www.investopedia.com/terms/r/receivables.asp, Consulted on December 3rd 2013 http://www.law.cornell.edu/wex/tax_evasion, Consulted on December 3rd 2013 http://www.mdm.ro/2013/pedepsele-pentru-evaziune-fiscala-valabile-din-22-03-2013/, Consulted on December 3rd 2013 http://www.realitatea.net/minciuna-despre-taxele-mici-din-romania-firmele-platesc-biruri-maimari-decat-in-10-tari-din-ue_1315747.html, Consulted on December 3rd 2013
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http://www.zf.ro/zf-24/10-ani-de-cod-fiscal-100-de-modificari-legislative-si-un-text-de-trei-orimai-lung-11718563, Consulted on December 3rd 2013 http://www.zf.ro/zf-24/anaf-preia-activitatea-vamii-garda-financiara-se-desfiinteaza-si-aparedirectia-generala-antifrauda-in-cadrul-fiscului-11059247, Consulted on December 3rd 2013

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