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  • Service: Tax, Global Indirect Tax
  • Type: Regulatory update
  • Date: 12/12/2013

Romania – The mandatory cash accounting system and why it failed 

GITB Romania
What happens when a legislative measure aimed at supporting a certain category of company that faces cash-flow difficulties turns out to be a hindrance, because it creates new difficulties, not only for the companies concerned, but also for a significant part of the business environment? Solutions can always be identified. However, the flexibility and willingness of the local tax authorities to take the necessary actions to remedy the situation is a decisive factor.

Mandatory VAT cash accounting scheme


Starting from 1 January 2013, Romania introduced the VAT cash accounting scheme to help small and medium sized enterprises that have difficulties in paying their output VAT to the authorities before they have received payment from their customers. Although, in theory, this appears to be simple, the implementation and the application of the system have turned out to be far from easy and have triggered a critical response from the business environment.


The VAT cash accounting system became mandatory for all taxable persons with a turnover below 500,000 euros (EUR). Taxpayers falling under this scheme are only allowed to deduct input VAT incurred when they pay it to their suppliers. They are also required to collect output VAT when paid, but no later than 90 days from the issue of the invoice. This system not only affects companies that are required to apply the VAT cash accounting scheme but also their clients, which may be large companies which do not fall within this system.


What went wrong?


The problem started with the initial objective of the measure: to help small and medium sized enterprises that experience cash flow problems due to the payment of VAT before they actually receive payment from their clients. Such a mandatory VAT cash accounting system fails to take into consideration that not all taxpayers benefit from the implementation of such a scheme. What happens to those businesses that are usually in a VAT recoverable position or those businesses that are paid on time but usually buy on credit? Their VAT deduction right is postponed until payment without any other advantage to balance this drawback.


Currently, due to the requirement to collect output VAT within 90 days of the issuing of the invoice, the VAT cash accounting system is helpful only for those businesses that receive payment within 3 months. All other taxpayers that are required to apply the scheme find themselves stuck with input VAT that is not allowed for deduction unless paid, but are required to collect VAT on their supplies after 3 months, even when they do not receive payment.


Another important practical concern is that large companies, not covered by this system, see their activity affected by trading with firms that do apply the VAT cash accounting scheme. Recovery of input VAT incurred on acquisitions from these suppliers is postponed until payment. In practice, this leads to administrative burdens due to regular checks to identify and distinguish between suppliers, separate recordings and ultimately, cash-flow deficiencies. As a logical consequence, some of these large companies choose to cease their operations with taxpayers that apply the system.


The first 10 months of the mandatory VAT cash accounting system in Romania have revealed all these problems and led to one conclusion, the need for a more flexible approach – an optional scheme.


How would an optional VAT scheme balance things?


The Romanian tax authorities have been receptive to complaints and suggestions made by the business community on this issue. As a consequence, plans are currently under way to replace the mandatory system with an optional, more flexible one that would allow companies to analyze whether this structure would benefit them and make their choice accordingly. Although a draft proposal in this respect was brought up with the business community for discussions, the date when this optional scheme will be introduced is still uncertain.


One thing is sure; the road to fiscal simplification and efficiency is paved with good intentions. However, if these intentions and measures are not linked with the current economic reality and their immediate impact on the business environment, these objectives may not be achieved.


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Global Indirect Tax Brief - December 2013

GITB - December 2013
Global indirect tax brief brief brings together articles on international VAT developments, written by KPMG member firms' VAT professionals worldwide and will be of interest to anyone managing VAT in an international business environment.

More Global Indirect Tax Briefs