Romania, caught in the vicious cycle of tax evasion

BNR Governor Mugur Isarescu stressed the idea that the imbalance between pension system contributors and beneficiaries is 14 years old. “No improvement can be seen!”

Tax evasion remains a more than delicate problem in Romania, a problem that worsens the deficits registered by the pensions fund and the health securities fund. Romania has for at least 14 years been caught in a vicious cycle resulting from the high number of beneficiaries of the pension system and the low number of pension system contributors and no improvement can be seen in this respect, the National Bank of Romania (BNR) governor Mugur Isarescu said on Tuesday, Agerpres informs.
“We clearly have a vicious cycle: five million pension beneficiaries and only four million contributors. This is not new! I raised this issue for the first time in the Parliament of Romania in my capacity as prime minister. Fourteen years have passed and, if you look at the figures, no improvement can be seen,” the head of the Central Bank said at the event dubbed ‘Mugur Isarescu and Guests.’ “One can use such a system only if the ratio is one to one,” he added. Isarescu also spoke of the “vicious inflation cycle” which Romania managed to break out of as late as after 20 years. “The current vicious cycles are minor, but we must break out of them,” he said. The governor said there was yet another “vicious cycle” of tax evasion and explained the greatest problem it generates is the fact that it destroys the market. According to him, a dodger of VAT has a 24 percent advantage over competing firms.
The National Bank chief commented on a proposal to return to the global tax as a solution to balance the social contribution system and stressed that the system was abandoned because it was unwieldy and there were no electronic systems. “Fourteen years on, we still do not have electronic systems,” he said, explaining that the taxpayer even today comes with cash and a pile of paperwork to the county capital to pay the taxes.
At the same time, the BNR Governor once again nuanced his position towards the political decision of joining the Euro Area in 2019, stating that he supports the initiative, in order to have a national program that politicians who lack a long-term vision would take into account, not the deadline proposed which is difficult to meet.
Tax evasion of 16 pc of GDP in 2013
On the other hand, Fiscal Council President Ionut Dumitru, present at the event, estimates the tax evasion at 16 percent of GDP in 2013, of which 12.2 percent of GDP solely from dodging the VAT, compared to the 13.8 percent estimate for 2012, while the degree of collection is very low, falling below 60 percent of budget obligations. “The breakup of tax evasion entails zero tolerance towards this scourge. A level of 16 percent of GDP concerns national security, the future of this country. Just like we have a political pact on adopting the Euro, we should have a political pact on combating tax evasion. The restructuring of ANAF is mandatory, we have a program with the World Bank but we are still waiting for results,” Dumitru said. He pointed out that of the tax evasion of RON 72 bn that the Fiscal Council estimates when it comes to VAT approximately RON 10 bn are evaded in the food industry, the latter being first. Moreover, in the meat industry the tax evasion is even higher than in the bread industry, surpassing 80 percent. The tax evasion when it comes to VAT represented 12 percent of GDP, and when it comes to CAS approximately 2 per cent of GDP. Ordered by sectors of the economy, in the agriculture sector the tax evasion is estimated at RON 6.3 bn, and in the energy sector at RON 4.1 bn.
The degree of collecting budget revenues falls below 60 percent and is also caused by excessive red tape, Romania being 146th in a 148-country table that concerns the effect of tax levels on the motivation to work and invest. Dumitru also pointed out that by European standards the budget revenues are very small, namely 32.7 pc of GDP, compared to a European average of 42.7 percent of GDP. He pointed out that since 1990 Romania pushed its budget revenues closer to 35 percent of GDP only in 1999 and 2007, while fiscal revenues surpassed 30 percent of GDP only once.

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