Indirect Tax News - October 2019

VAT split payment mechanism to become optional

Under the provisions of art. 395 of the VAT Directive, EU Member States may be authorised to introduce special measures that deviate from the provisions of the Directive.

In an effort to reduce fraud, Romania sought to introduce such a special measure in the form of a VAT split payment mechanism and, on 28 November 2017, Romania sent a letter to the European Commission seeking approval. Before receiving a response, Romania implemented the VAT split payment with effect from 1 January 2018. At that point, application of the split payment mechanism was mandatory for taxpayers in the following situations:

  • Where a taxpayer had unpaid VAT liabilities up to certain thresholds (which depended on the type of taxpayer); or
  • Where a taxpayer was subject to insolvency proceedings.

In addition, taxpayers could opt to apply the split payment mechanism. If a taxpayer opted to apply the mechanism, they were entitled to a reduction of 5% on their profit tax (either the corporate income tax or the micro-enterprises income tax).

Under the VAT split payment mechanism, customers purchasing goods or services subject to VAT pay the VAT to a separate VAT bank account of the supplier. This separate account can be used, in principle, only for remitting VAT payments. This causes a major administrative burden for honest companies doing business there.

However, on 8 November 2018 Romania received the Commission’s response to its request for deviation from the Directive. The Commission refused Romania’s request to allow the split payment mechanism.

Given the Commission’s decision, the Romanian authorities have proposed changes to the VAT split payment mechanism. Under the proposals:

  • The VAT split payment mechanism will become exclusively optional;
  • Customers of taxpayers that opt to apply the split VAT will not be obliged to pay the VAT into a separate VAT account. However, if both parties to a transaction have opted to apply the split payment mechanism, then payment of VAT must be made into a separate VAT account;
  • Taxpayers that opt to apply the VAT split mechanism will no longer benefit from a 5% reduction of the corporate income tax/micro-enterprises income tax;
  • Transitional rules will apply to allow taxpayers that were previously subject to the split payment mechanism to transition out of using it, if they wish to discontinue using it.

It should be emphasised that the new provisions of the VAT split payment mechanism are still only proposals, which means the current, mandatory application of the split payment mechanism is still in force.  

About 19,000 companies are currently subject to the VAT split mechanism imposed by the Ministry of Finance in 2018. Of these companies, less than 2% opted to apply the split payment mechanism.

Dan Bărăscu

Vlad Mădăras