One of the things that membership of the European Union entails is dealing with Value Added Tax (VAT). We, like all lawyers in Romania, are often asked about VAT and its impact and implications on business. One must always remember that VAT is a European Union community tax and is not therefore well known outside Europe. Ask a US citizen or company and see what is their response?
Romanian lawyers, like lawyers around the world, are in two minds about tax and law. In 1965 lawyers in the United Kingdom gave up on tax and allowed the accountants to take over. Now lawyers are fighting back, but it may be too late for some of them. International law firms whether based in Romania or not however have to deal with cross border tax and VAT issues.
Some Romanian law firms have countered this by focusing solely on Romanian taxation issues but his does not in my view work. To give rounded advice, it is important that lawyers are aware of general issues in relation to Romanian tax. They should though draw the client’s attention to the main issues and decide with the client the best way to resolve such issues. They should consult a specialist and obtain specialist advice when necessary.
One area in relation to VAT which often comes up is the question of VAT refund. Many Romanians including lawyers do not understand that the charging and collection of VAT is a device by the Government (of all EU countries) to use business as unpaid tax collectors. The failure to account for VAT collected can lead to a criminal charge as the tax is not collected for the benefit of client but for the Government. So our advice is always pay on time the VAT you have properly collected to the Romanian Government.
Another area which is complex and needs to be carefully managed and handled is the question of reclaiming VAT from the Romanian authorities. I do not propose to go into the merits or otherwise of the Romanian authorities attitude in repaying tax, but the authorities will try to ensure within the law that as little tax as possible is payable under any reclaim.
This means that they are very strict on their interpretation of the Romanian Tax Law and the Norms issued under it as well as the guidance issued by the Romanian authorities. Anyone who intends to reclaim the VAT has to consider this.
Most importantly though it is necessary for any reclaim process to be properly and carefully managed. The documentation submitted to the Ministry of Finance should be in order, if not this will make the reclaim harder. All documentation and company personnel should be available and accessible so as to answer any questions the inspectors may raise. Contracts should be carefully documented and recorded and where necessary translated into Romanian. The Romanian authorities will not read foreign language documents. Even if a translation is prepared it should be carefully checked to ensure that not only is the translation accurate but also the meaning of the document is clear.
In some cases the authorities will, if they are suspicious, check the company who has issued the invoice on which the VAT reclaim is based. If that company have not put in their returns correctly or recorded the matter in a transparent way this can also lead to further issues. Although one can always ask for a re-hearing of the claim and then appeal any decision this takes up management time and will cost money.
Recently we have been involved in a case concerning a sub-contractor where the authorities erroneously claimed that the use of a sub-contractor and the sub-contractor re-invoicing at a higher price was an attempt by our client to obtain a tax advantage. They ignored the commercial reality of the case. They ignored the fact that the contractor employed by our client had habitually used sub-contractors in the past.
If you are considering the question of a VAT reclaim our advice is to make sure that everything is in order. Some clients are more concerned with pushing for the reclaim for obvious cash flow advantages but this sometimes can be a case of more haste less speed.
Clients need to work with their accounts departments and advisors and remember that initially the questions will be financial and commercial. Only in the event of a dispute will lawyers need to be involved. The lawyers should be aware of the claim but need not be involved in hands on management. A properly managed company will be aware of these things and if done properly the VAT refund claim and audit will take place quickly and efficiently.
If the claim is correct the monies will be refunded quickly as the Romanian Government has pledged itself to deal with all such matters in a transparent and even manner as required by Romania’s membership of the EU.
Are you looking for a lawyer?