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VAT split system – mandatory from 2018 only for companies with delays related to paying VAT and companies under insolvency proceedings

The mechanism of VAT split payment, will be applied from January 1, 2018 only by the companies with debts related to VAT and the companies under insolvency proceedings, according to the law issued for the approval of the VAT split.  The restriction for the application of the system has been approved by the Parliament and needs only the promulgation through a Presidential decree to enter into force.

The law approving the Government Ordinance no. 23/2017 regarding the VAT split payment was adopted Wednesday, 13^th of December 2017, by the Deputy Chamber and will arrive for promulgation to the President.

In the approved format, the VAT split payment system will be mandatory only for the firms which have debts related to VAT (over a specific ceiling) and the companies under insolvency. For the other companies, the VAT split mechanism, which involves holding a special bank account for VAT, used only for payments and collections of VAT, will be only optional.

Practically, according to the document, there will be obliged to apply the VAT split system, the companies which:

• at the December 31^st 2017 have debts related to VAT higher than 15.000 lei, in the case of big entities, 10.000 lei, in the case of middle entities and 5.000 lei for small entities and individuals, if those aren’t paid until January 31^st 2018;
• starting with January 1^st 2018, have debts related to VAT older than 60 working days from the due date, which exceeded the ceilings mentioned above;
• are subject of the insolvency law.

Pay attention! If the company will have, at December 31^st 2017, debts related to VAT more than the ceilings mentioned above and will not pay them by the end of January 2018, then it will apply the VAT split system starting with 1^st March 2018.

The other entities which will register VAT debts starting with January 1^st 2018, will be registered in the system starting with the 1^st of the second month following the month when the 60 working days from the due date are fulfilled. For instance, if January 2018 VAT which has the due date on February the 26^th of 2018 is not paid until May 18^th 2018 and the unpaid amount exceeds the ceiling mentioned above, the entity will be required to apply the VAT split mechanism starting with July 1^st, 2018, even if the outstanding VAT is paid in the period May 19^th – June 30^th 2018.

Once the entities entered into VAT split system, the companies with delays related to VAT payments could get out from the system after at least 6 months without debts. In the same time, the insolvency companies could get out from system only if they are no more subject of insolvency law.

As for the taxpayers who will voluntarily apply the system without having such an obligation, they will be able to get out from the system at the end of the fiscal year, but no sooner than one year after enrollment.

In the final form of the document, it has been established that entities which are not registered for VAT purposes are not required to make the split at the VAT payment, when entering into commercial relation with taxpayers enrolled in the Registry of contributors which apply VAT split. Also, non-residents do not have this obligation, if they are not registered for VAT purposes in Romania.

When an invoice is partially paid and has several VAT quotas and/or more tax regimes, the allocation of the amounts paid is done in descending order of VAT quotas. By exception, if the contract/customer mentions that the amount is allocated to a certain part of the invoice, the beneficiary will allocate for this purpose the amount paid.

There is no obligation to apply the split payment of VAT, even if the supplier applies this system when:

• the payment is not done directly by the beneficiary to the supplier/provider (for instance, when there are done payments in the name and on behalf of the beneficiary);
• the payment is done in kind;
• the payment is done by compensation;
• the payment is done by card or by cash substitute;
• the payment is done by an escrow account;
• financing granted by credit institutions and non-banking financial institutions by taking over the receivables (e.g. factoring contracts).

Taxable persons who will fall under the scope of the system will be obliged to transfer into their VAT account within 30 working days (instead of 7 days, as established initially) from the date of collection of the value of deliveries of goods/services:

• VAT related to card collection;
• VAT that was not paid to the VAT account by other entities which do not apply the VAT split system and, optionally, VAT that was not paid to the VAT account by entities which had that obligation;
• VAT related to payment instruments issued before the date on which the supplier/provider applies the VAT split system and collected after that date.
• The difference between VAT on cash receipts and VAT on cash payments made in one day.

Regarding the execution of the VAT account, this will be used only for the payment of VAT due to the state budget, as well as on the basis of certain enforcement titles, for the VAT related to acquisitions of goods and/or services (but not for the payment of other budgetary obligations outstanding in the tax records, as initially was established through the Government Ordinance No 23/2017).

According to the latest changes, the transfer of amounts from the VAT account to other accounts should not be done with the approval of NAFA. However, if from the VAT account there are operated payments other than those provided by the law, the entity risks a penalty of 50% from the amount of VAT paid erroneously.

The entities that are registered for VAT purposes have the obligation to split the payment of VAT if the supplier is registered in the system. If the payment was done to the current account of the supplier and it is not corrected within 7 working days, the beneficiary will pay a penalty of 0.06% per day from the amount paid erroneously, starting with the payment day and until the correction date, by paying to the supplier’s VAT account or by having the proof that the supplier has done the transfer of the amount to his VAT account.

According to the normative document, the companies registered for VAT purposes which opt for the VAT split system between October 1^st and December 31^st 2017 benefit of the following facilities:

• 5% decrease from corporate tax/income tax on microenterprises of the IV quarter of 2017;
• cancellation of late payment penalties related to the main VAT liabilities, outstanding at September 30, 2017.

Onward, companies that opt to apply the VAT split system after January 1^st 2018 will benefit from a 5% decrease of corporate tax/ income tax on microenterprises for the period for which they apply it. The same facility will be applied from early next year also for those who opted for the application of the VAT split payment mechanism in 2017.

In conclusion, if the President agrees with all the provisions, approved by the Parliament, it is expected that the law for the approval of the VAT split mechanism will appear in the Official Gazette by the end of the year so that it can be applied from January 2018.