05BUCHAREST1035 / 2005-04-28 09:22:00
Embassy Bucharest
                UNCLAS SECTION 01 OF 03 BUCHAREST 001035 
 
SIPDIS 
 
STATE FOR EUR/NCE - WSILKWORTH, EB/IFD, D STAFF - WILSON 
STATE PASS USTR 
USTR FOR LERRION 
TREASURY FOR STUART 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/CEEB/BURGESS/KIMBALL 
STATE PASS USAID 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, ETRD, EIND, EFIN, RO 
SUBJECT: TAX REVENUES IN ROMANIA SHOW IMPRESSIVE GROWTH IN 
FIRST QUARTER OF 2005 
 
REF: BUCHAREST 000130 
 
SENSITIVE BUT UNCLASSIFIED 
 
SUMMARY 
------- 
1. (SBU) Romania's budget revenues soared in the first three 
months of 2005.  Embassy attributes this to a variety of 
factors, including unexpectedly high GDP growth in 2004, 
wider general tax compliance (perhaps linked to the new flat 
tax) and the threat of increased tax collection enforcement. 
However, corrupt mid-level managers continue to compromise 
tax collection efforts within the fiscal authority.   End 
Summary 
 
Higher Tax Revenues. 
-------------------- 
2. (U) According to preliminary data released in early April 
by the Ministry of Finance (MOF), first quarter consolidated 
budget revenues grew to nearly Romanian Lei (ROL) 177.9 
trillion, or approximately $6.3 billion up from nearly ROL 
153.2 trillion, the equivalent of $4.7 billion, during the 
same period in 2004.  The MOF stated that revenues increased 
more than ROL 8.38 trillion in January, ROL 5.39 trillion in 
February, and ROL 10.94 trillion in the first 23 days of 
March 2005 when compared with the same period in 2004.  The 
aggregate three-month increase over the same period in 2004 
amounted to ROL 24.7 trillion, the equivalent of $1.5 
billion.  The MOF believes in the sustainability of these 
trends, and points to the elimination of tax relief and tax 
rescheduling options as one reason for optimism.  The GOR 
also claims to see an overall widening of the tax base due 
to a mix of economic growth and conversion of grey market 
revenue to the legitimate economy. 
 
.Above Budget Forecasts 
----------------------- 
3. (U) These higher revenues came in above the previous 
government's planning targets for 1Q 2005, in spite of the 
flat tax.  Forecasts made in 2004 predicted consolidated 
budget revenues for the first quarter 2.6 percent lower than 
actual results.  Corporate profit tax collection was up 13.9 
percent from projected, although the lower tax on personal 
income resulted in numbers 7.1 percent lower than initially 
expected.  The increase in revenues from corporations was 
likely due both to greater enforcement and unexpectedly high 
growth.  Other areas that benefited from tighter policing 
include customs, with revenues up 16.1 percent from 
projected, and VAT collections, up 5.0 percent.  Revenues 
from excise taxes were lower than planned, mainly due to the 
GOR's January 1 elimination of excises on certain categories 
of electronic goods, such as digital cameras.  This decision 
was later repealed in March after conversations with the 
IMF.  Municipal contributions to the GOR budget also 
exceeded projections by 9.4 percent. 
 
4. (U) The previous government based its 2005 tax revenue 
projections on an estimated GDP growth rate of 5.3%. 
However, the Ministry of Finance has not yet calculated 
growth for the first quarter to determine how it compares 
with projected.  Without this statistic, it is not possible 
to determine to what extent increased tax revenue is a 
result of unexpectedly fast economic growth versus greater 
tax collection efforts. 
 
Flat Tax Starting to Show its Effects? 
-------------------------------------- 
5. (U) Another factor contributing to increased tax revenues 
may be the "flat tax" that is now in effect.  On December 
29, 2004, the new Romanian coalition government passed an 
emergency ordinance fulfilling its campaign promise to 
implement flat personal and corporate tax rates effective 
January 1, 2005.  The new government hailed this 16 percent 
tax as a method of attracting foreign investment, boosting 
job growth and remaining competitive as Romania approaches 
EU membership in 2007.  Excluding Georgia (12 percent), the 
flat tax on corporate profits is the region's lowest. 
 
6. (U) According to common economic wisdom, the imposition 
of a flat tax should cause a dip in income tax revenues for 
a time before showing a rise.  The data from the first 
quarter of 2005 show glimmers of this.  For example, an 
expected decrease in revenues from individual tax payers was 
evident, but much less severe than many analysts predicted, 
considering the ten percentage-point average drop in 
personal tax rates due to the flat tax.  The possibility, 
however, that 2004 taxes (at the higher tax rates) were 
being paid into the GOR's coffers in 2005 make the picture 
too uncertain to make any explicit linkages to the flat tax 
at this point. 
 
Government Clamp-Down on Tax Dodgers 
------------------------------------ 
7. (U) A third element in increased 2005 revenues is 
probably the "fear factor."  President Basescu has made the 
fight against corruption a matter of national security and 
the GOR has initiated a flurry of investigations against 
high-profile "businessmen."  Pragmatism also drives the anti- 
corruption strategy, since the GOR is faced with increased 
spending requirements in preparation for EU membership in 
2007 and lower tax rates must necessarily go hand-in-hand 
with increased tax enforcement. 
 
8. (U) To this end, on April 7, the GOR approved a draft law 
making tax evasion equivalent to a felony crime.  This 
legislation, now being debated by the Senate Budget and 
Legal Commissions, imposes jail sentences for tax evaders on 
a clear sliding scale, leaving little room for creative 
court interpretation.  Penalties increase based upon the 
amount owed.  Three to ten years of prison is prescribed for 
those owing at least EURO 10,000; four to 12 years for those 
owing at least 100,000 Euros; five to 16 years for those 
owning at least 500,000; between 10 and 20 years for those 
at least EURO 1 million; and 3 to 15 years for those making 
illegal VAT reimbursements.  Persons barring fiscal 
authorities from inspecting corporate property would be 
punished though jail terms ranging from six months to three 
years. 
 
9. (U) When the Senate Commissions complete their debates, 
the draft law will arrive in the two houses of Parliament 
for further debates and revisions.  Once the law is passed, 
it would normally come into force within thirty days, unless 
the Parliament decides upon a longer transition period. 
 
U.S. Department of the Treasury Advisors Propose Changes 
--------------------------------------------- ----------- 
10. (SBU) Romania welcomes USG ideas on how to move from the 
theory of tax collection to practical methods of 
enforcement.  Members of the U.S. Department of the 
Treasury's Office of Technical Assistance from March 28 to 
April 8, traveled to Bucharest to review the MOF's methods 
of collecting tax revenues.  The team identified ways to 
increase tax receipts quickly by improving the collection 
process.  Suggestions included sending letters to delinquent 
tax payers threatening seizure of property for nonpayment, 
focusing GOR resources on the highest monetary value cases, 
expanding the use of installment agreements and ceasing to 
waste efforts on unsalvageable cases.  More ambitious ideas 
include legislative changes to limit taxpayer ability to 
contest minor government errors and the augmentation of MOF 
authority to seize assets and proceed against managers 
responsible for non-payment of taxes of a legal entity. 
 
11. (SBU) MOF Secretary of State Sebastian Bodu who heads up 
the Agency for Fiscal Administration (AFA) concluded that 
the GOR could implement some of the recommendations, 
although he rejects installment payments in a nod to the 
IMF's more conservative fiscal policies.  Mr. Bodu is most 
concerned, however, about the corrupt mid-level managers 
that persist throughout the fiscal administration agency, 
and is frustrated with his inability to clean house due to 
restrictions on firing civil servants.  He hopes to create 
an internal investigation unit, partially composed of law 
enforcement officers, in an attempt to examine reports of 
employee malfeasance.  If created, this unit would have the 
authority to arrest those suspected of corruption. 
 
Comment 
------- 
12. (SBU) Post is encouraged by the preliminary three-month 
tax collection data, although a longer time horizon is 
necessary to formulate a solid opinion on sustainability and 
the true full effect of the imposition of the flat tax.  In 
addition, the GOR made amendments to the fiscal code in 
March which raised taxes on banking interest, capital gains, 
and real estate gains beginning in the second quarter.  A 
number of excise taxes also increased on April first.  Thus, 
three to six months of additional data are needed to come to 
meaningful conclusion.  Nonetheless, Post is cautiously 
optimistic that revenues will continue to climb since 
Romania seems to be in a solid growth mode. 
 
13. (SBU) An even larger problem looming for the GOR, 
however, is the continuation of a high level of mid-manager 
corruption within the AFA.  This will continue to impede tax 
collection efforts until Mr. Bodu is given the necessary 
tools for reform.  Post recently held an interagency brain 
storming session to identify ways to assist the AFA and 
offer training and suggestions; several ideas were proposed 
and their feasibility is currently being investigated. 
 
Delare 

            
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