Tax & Accounting Blog

Romania Reduces VAT by 4% to 20%

Blog, Indirect Tax, ONESOURCE, VAT Tax Rates September 15, 2015

City workers cross London Bridge during the evening rush-hour in the City of London

Romania’s Parliament overrode a Presidential veto and approved two stage reduction. The standard rate of 24% will decrease to 20% effective 1 January 2016 and the rate will settle to 19% effective 1 January 2017. This would return Romania’s VAT rate to the same rate it was before the start of the fiscal crisis.

In 2010, Romania passed emergency legislation in order to secure an IMF bailout which increased the VAT from 19% to 24%. The second reduction to 19% could always be deferred or eliminated completely depending on tax collections and economic conditions in Romania. For example, Ukraine had passed and implemented a VAT reduction from 20% to 17% but after a change in government the VAT reduction was scrapped completely. Japan’s Consumption Tax increase from 8% to 10% was deferred until 2017 due to a clause which allowed the government to delay the increased based on economic conditions.

Since 2010, the International Monetary Fund (IMF) has noted Romania’s economy progress has been good. However, during the latest update the IMF was concerned about the large reduction in VAT because Romania has the largest VAT Gap in the European Union. The VAT Gap is defined as the the difference between the VAT revenues theoretically established by legislation and actual collections. In 2013, Romania’s VAT Gap was reported at 41% which is down from 50% in 2009, however, the tax authorities changes in collection will take time to implement. The lowest VAT gaps of 4% were recorded in Finland, Netherlands and Sweden.