The impact of VAT on cash flow

Referring to the tax component of VAT, which generates the largest cash flow for some companies, there are certain legislative provisions that companies should take into account in order to manage their cash flow as efficiently as possible.

Where should we look when talking about the VAT position?

Each company should analyse its VAT position from both a VAT collected and a VAT deductible perspective.

Therefore, a company should analyse the situations in which customers are no longer able to pay their invoices (due to bankruptcy or the start of a reorganisation plan), thus being able, under certain conditions, to recover part of the VAT collected, as well as benefit from reduced VAT payments to the state budget. As of 1 January 2019, the recovery of VAT related to unpaid debts can be performed starting with the date of the client's entry into the bankruptcy proceedings or from the date of the implementation by the client of a reorganisation plan confirmed by a court decision.

The adjustment may be made within a maximum of five years from 1 January of the year following the year in which the decision to enter bankruptcy was taken or the court decision confirming the reorganisation plan was handed down.

If the bankruptcy procedures have started before 1 January 2019 and the final and irrevocable court decision to close the procedures provided by the insolvency law was not issued, the adjustment can be performed by 31 December 2023 at the latest.

Since 1 January 2021, new provisions have been introduced in the legislation in favor of companies with claims from individuals. In these situations too, businesses can recover uncollected VAT if certain conditions are met.

Also, another situation that companies should consider carefully is the existence of several taxable persons established in Romania who are closely related organisationally, financially and economically. In this situation, it is important to analyse the cash flows that exist between companies, as well as the monthly VAT position (i.e. VAT payable and/or refundable), in order to determine whether it is beneficial to implement a VAT group.

If it is decided to implement the VAT group, the cumulative VAT balance of all group members is declared, compensating the individual VAT payable balances with the refundable VAT balances of the group members. Thus, the companies that are in VAT-payable positions pay VAT to the other members of the group that are in VAT-refundable positions and no longer pay VAT to the state. The companies that are in VAT refundable positions receive more quickly the VAT amounts from the companies in the group that are in VAT payment positions, saving longer waiting time in case they would have claimed VAT refund from the state budget.

As the VAT group has to be maintained for a minim of two years, to identify the real advantages of applying this tax incentive, the operations of the companies must be analysed at least for the following two years. For example, for companies that are in the investment phase, how much time is estimated until the issuance of invoices and eventually the collection of VAT, for companies in a VAT payable position, whether this situation will be constant, or whether the structure of transactions will change and the company will increase its volume of intra-community sales/exports, which could lead to a considerable decrease of the collected VAT or even to the situation of being in a VAT refundable position.

Concerning the imports of goods into Romania from outside the European Union, based on a certificate of deferment of payment of VAT in customs, companies can benefit from the application of VAT through the reverse charge mechanism. Thus, since VAT is no longer paid in customs at the time of the import of the goods into Romania, the process of recovering VAT from the state is simplified.

Companies that: in the last six months prior to the submission of the application for the issuance of the certificate, had imports of at least RON 50 million (€10.1m), companies that do not have overdue obligations to the state except for those scheduled/rescheduled or suspended, may benefit from the postponement of VAT payment in customs. The same simplification can be applied by companies that obtain an Authorized Economic Operator certificate (AEO) or by companies that hold authorisation for the local clearance procedure.

VAT refund

If the company is constantly in a VAT refundable position (i.e. the deductible VAT from purchases exceeds the amount of VAT collected on sales, or if the company only performs sales without VAT having VAT deduction right for the purchases), it may be appropriate to request the VAT refund from the Romanian authorities.

In this respect, we recommend performing an analysis to identify the most favorable moment to ask for the VAT refund.

In the case of the first VAT refund of the company, most probably the refund will be settled with a prior tax inspection. Thus, it should be analysed if it would be convenient for the company to ask for a VAT refund a certain number of months after its VAT registration. As such, after the first tax inspection, especially if the tax inspection is finalised without major deviations, the company could continue to request the VAT refund on a monthly or quarterly basis, depending on the fiscal period. On this line, it is very likely that the following VAT refunds should be solved with subsequent control and not with a prior tax inspection. This avoids the accumulation of large amounts of VAT over long periods when cash is tied up.

Also, if the company pays VAT from countries other than Romania, without being registered for VAT purposes in those countries, one may want to consider applying for a refund of VAT from those countries situated in the European Union or outside the European Union. Concerning the VAT refunds from non-EU countries, the refund can be requested from a limited number of countries, only from those with which Romania has concluded declarations of reciprocity. 

Such an analysis may be relevant if the amounts to be refunded from the respective countries are material for the company as the process can be quite cumbersome with many additional documents and information requested by the authorities.

In the above two situations, it is advisable to review the documents and the VAT treatment of the transactions, to ensure that everything is in order before requesting the VAT refund. By preparing before the tax inspection starts, the companies ensure the chances of obtaining the VAT refund, also creating the premises for future VAT refunds where the company might be eligible for a VAT refund with subsequent control.

Our team has extensive experience in assisting clients to manage their VAT position. We would be happy to assist you in identifying the best options to manage the cash flow from a VAT perspective and also to implement it.