CEE LEGAL MATTERS – A Panic-Stricken Business Sector Under The Assault Of The Antifraud Inspections

CEE LEGAL MATTERS October 2016 issue

Luisiana Dobrinescu, Managing Partner

Ionuț Dobrinescu, Partner, Fiscal Controversy Department

In nine years since Romania joined the European Union, the number of litigations involving failure to pay taxes has more than quadrupled in the country, and now represent about 1/4 (about 150,000) of all pending cases in the Romanian court system.

The tax collection system has become more aggressive as a result of pressure to increase both state budget revenues and the level of voluntary compliance.

Recent statistics released by the Fiscal Administration (on Oct. 5th, 2015) demonstrate an increase of 7.8% (RON 10.6 billion) in total collected revenues in the first 9 months of 2015 compared to the same period in 2014.

Out of the amounts collected, RON 4.75 billion (approximately EUR 1 billion) consists of VAT. The authorities are eager to underline that this difference can only be explained as the direct and exclusive result of the fight against tax evasion, and emphasize the toughening of the criteria for VAT fiscal enrolment, the setup of periodic subsequent review mechanisms of VAT payers, and the simplification of the cancellation procedures of the VAT codes.

The spearhead of the fight against tax evasion was the Fiscal Antifraud Department(DGAF), which was established at the end of 2013.

Throughout 2014 and 2015, the DGAF launched a series of obscure filtering criteria which enabled them to pick up specific targets, to run unannounced inspections, and quickly initiate thousands of fiscal injunctions. No less than 26,214 taxpayers, selected based on a high-fiscal-risk analysis, suffered such inspections in 2015 alone, and EUR 678.83 million was claimed as due to the state budget. Under suspicion of imminent evasion, assets and bank accounts valued at EUR 429.24 million were frozen as part of EUR 635.24 million worth of suspected fraud networks, while an unprecedented EUR 45.58 million of fines were issued.

It is anyone’s guess whether this means that the fiscal administration has become as efficient a collector as it has become an aggressive inspector, or whether the level of voluntary fiscal compliance has subsequently increased as panic has stricken the business sector.

As lawyers with a practice focused on both fiscal consultancy and fiscal litigation, we can only observe that a great majority of DGAF injunctions (over 80%) have not been duly followed by regular inspections, while noting the fundamental distinction that DGAF injunctions are not constitutive of fiscal debts. Consequently, all these measures and amounts imposed by the DGAF cannot be subject to court actions.

It is a relatively simple task to run a systemic algorithm in order to identify suspected targets of tax evasion and inspect them in two or three days, and an entirely different thing to conduct a procedural fiscal inspection materially capable of issuing enforceable decisions.

While the DGAF attempts to establish itself as one of the most important administrative structures in Romania, ordinary tax inspectors are intimidated about performing regular tax inspections after the DGAFs arrival. In such circumstances, the targeted taxpayers economic activities are blocked, while the statistics count the mere estimates and freezing measures claimed under DGAF injunctions as-good-as-money.

DGAF inspections follow an entirely atypical procedure, with no procedural rules regarding its duration, and no right for targeted parties to be defended or even heard. Legal remedies against the freezing measures imposed by the DGAF on bank accounts and on assets are limited to civil appeals in front of first degree courts, regardless of the value (often huge) of the estimates issued. Such ordinary courts are by no means specialized fiscal tribunals, and the judges, in general, are disinclined to handle complex fiscal cases, because of their limited ability to scrutinize and consider. Although the fiscal procedure requires that the risk of evasion be perceivable, most judges simply presume it based on the impressive estimates of fiscal debts and the apparent complexity of the fraud charges.

Unfortunately, the new Fiscal Procedure Code that will come into force on January 1, 2016, does not improve much the legislative climate. More and more taxpayers, without any opportunity to defend themselves in front of a fiscal court, are forced to follow the only solution available at this moment: insolvency.