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Interview

​MOLDOVA NEEDS RADICAL TAX REFORM

30 may, 2016
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Exclusive interview of former head of the National Tax Inspectorate (NTI) Ion Prisacaru to Infotag correspondent Vladimir Sidorenco

Part 1. Tax Innovation – how to administrate it?

Q: Mr. Prisacaru, what is your opinion about fiscal policy projects and the state budget 2016?

A: There is no sense to discuss fiscal policy, because from year to year it undergoes just insignificant changes. They are like cosmetic repairs of a building, which needs capital reconstruction.

Q: Is the tax on luxury not an innovation?

A: Yes, it is, but authors of the draft did not take into account how much will it cost to administrate this tax. Before introducing it, we should have a corresponding basis of dwelling assessment. As of today, we do not have such, thus the government has to urgently update the assessment basis, which has long became out of date.

To get such a basis, it is necessary to spend considerable budget resources. I say it competently, as I am head of the company Ecofin-Cosult-Evaluare, which has long been engaged in assessing different property. For example, the average cost of assessing a three-room apartment in Chisinau is of 350 lei, as well as the assessment of houses (with area of 180 square meters), located in rural area. Meanwhile, the expenditures part of the draft budget 2016 does not imply this money.

Q: Can the state oblige owners of dwellings to make assessment at their own expense in the shortest term?

A: No, it cannot. First of all, it is impossible to do this in shortest possible period of time. There is too much work to be done. Secondly, it has not been identified who will do this: independent experts or cadastre employees. Thirdly, it is constitutionally unacceptable that the payment of taxes by physical persons to be accompanied by other expenditures. If the state wants to levy this type of tax, it should ensure the formation of the necessary basis for its calculation, providing to the society the mechanism of its administration. Due to the above mentioned, the tax on luxury may get abortive.

Q: If there is no established procedure of taxable objects’ price assessing, how is the tax on immoveable property being calculated for physical persons?

A: It is being done on the basis of the outdated database, which, contrary to the acting legislation norms, has not been updated for long time. Calculation of this tax on its basis is illegal. While n the post of NTI head, I have repeatedly officially informed the Finance Ministry’s leadership about this fact.

Q: And this is all you have done?

A: What else was I supposed to do? The NTI does not have the right to administrate the tax on physical persons’ property. For this purpose, each primaria [local government authority] has special tax collectors, who are not a part of the NTI personnel. Thus, I was informing the Ministry’s leadership about the existing problems, as it is their responsibility to develop and promote the tax policy.

However, I cited the example of the tax on luxury in another connection: if the government may find some financial reserves, is it not wiser to direct these for developing new automated instruments for administrating the already existing taxes, which summarily have a greater share in budget revenues and where there are considerable reserves on their payment? Because if in West-European and North-American states the tax evasion accounts for about 10%, in Moldova this share exceeds 45%, according to international experts.

The extensive tax policy, unlike the intensive one, is already a matter of past, while the implementation of these instruments would contribute to extension of the taxable basis of all the taxes and raising the efficiency of tax administration in general, first of all the VAT. In its turn, this would lead to growth of tax revenues to the National public budget from the currently applicable taxes.

As for the assessment of the quality of draft state budget 2016, it is difficult to say something, as the biggest part of the budget deficit is planned to be covered at the expense of foreign development partners’ assistance. However it is not known yet how big will it be. We shall wait for the report of the International Monetary Fund mission, which came to Moldova, though only with a familiarization visit.

Besides, the law on state budget, just as in previous years, is being used for approving separate norms of tax policy, which is unacceptable. A clear example of this is the approval of private tax elements (object, subject, payment time frames, benefits), though the law on budget should include only the sources of revenues and their distribution, while tax nuances should be stipulated in the Tax Code.

A similar situation is in the state social insurance find. Though, the situation there is more difficult, as there is no legislative act that would regulate the order of deductions to the social fund. Neither is it expected that such a document will be adopted in the nearest time.

Q: Is the situation so bad?

A: Unfortunately. But this lasts for already tens of years. I think that today it is the favorable moment that the Government members to take the responsibility on adopting necessary unpopular state steps for removing these gaps and conducting cardinal tax reforms. First of all, the revision of the structure of currently applied taxes and the provided tax benefits, as well as completion of the announced tax service reform.

PART 2: THE NUMBER OF TAXES, FEES AND PAYMENTS SHOULD BE REDUCED

Q: How many taxes are there in the list of obligatory payments today?

A: If we analyze the budget classification, we can see that the number of different taxes, fees and other revenue payments exceed one hundred. Many of them are applied illegally, as there is no corresponding legal basis. To give them a legislative influence, they are being approved through annual laws on state budget or through branch legislative acts, but are not included in the Tax Code.

Though the list of the current payments is considerable, their total sum can hardly exceed tens of thousands of lei, while their administration is more costly. That means it is a fritterware. As for the tax administration, I think commentaries are superfluous. Perhaps, Moldova is the single country which has such an inefficient and outdated structure.

Q: What are the costs on its administration made of?

A: These are expenditures on developing software for tax administration, elaborating of forms of declarations, salaries to employees, involved in accounting and administration of payments and receiving the reports. I would add that the overwhelming majority of fees and payments are included in enterprise expenditures, thus reducing the taxable basis for calculating the income tax.

It has long been calculated that the lion’s share of all the revenues to the public budget, over 90% accounts for only nine major taxes and payments. At the same time, the number of local fees should also be revised downward.

One more problem, which demands solution, is the attribution of the status of taxes to mandatory payments (assignment to the social fund and the health insurance fund). They should not just be renamed, but to develop and approve corresponding normative acts, which contain tax policy aspects, as well as their administration. They are necessary at least for economic agents to be able to plan their activity for a perspective, on the basis of their methodological provisions, but not on the basis of annual budgets. Business people do not know which will be the rates of fees for this year, as corresponding budgets have not been adopted yet, while the planning of enterprises’ activity should be conducted for at least several years ahead.

Q: They may take as basis the last year laws, as it is provided in the Article #131 of the Moldovan Constitution.

A: They cannot take as basis this article in all the aspects, This is, for example, due to the fact that the cited article does not mention the phrase “health insurance”. Consequently, the 2015 law on health insurance must not be used, as this is unconstitutional. Where is the guarantee that the Constitutional Court will not focus on such an obvious ignoring of the Main Law?

In order to avoid illegal actions in future, we have to adopt new legislative acts, which regulate the state policy in these budget segments. While given the fact that the control on counting and timely payment of charges to the social fund and the health insurance fund is the responsibility of the Tax Service, it would be wiser to make so that they to become a part of the Tax Code. This would clarify things for foreign investors, who do not understand why certain mandatory payments, not being taxes, are calculated as tax burden?

Moldova also needs decentralization reform of the financial system. However, the decentralization should not be regarded as creation of new administrative structures at the local level. In other words, this does not mean fragmentation of tax administration, containing, in parallel the State Tax Service at the central level and additional structures (local taxes collectors) – at the local level. From my point of view, the financial system decentralization on contrary means the reduction in number of centralized public authorities and renouncing the creation of new offices in raions. Today, for example, the payments to the social fund are being administrated by two state structures: the National Social Insurance Fund (CNAS) and the Tax Service. Thus, everything should be made crystal clear in the new law on social taxes in order to avoid the doubling of functions,.

If the Tax Service is able to ensure the charging into the state budget, in territorial formations’ budgets – social and health insurance funds, it may administrate as well the charges at the level of primaria, through the existing structures, efficiently using the information system of the Tax Service. Today, if necessary, one can receive report about the sum of the arrived taxes and fees in any primaria [local government authority] of a village of a municipality, in any Chisinau sector administration. What I want to say is that there are real prerequisites in the country that the administration of taxes and fees, which arrive to different level budgets, to be administrated by a single state body.

Unfortunately, currently both in rural and in urban areas the collection of only two types of taxes – the land tax and the property tax, are being administrated by a great number of tax collectors, who are working primitively, continuing to manually keep record cards of tax payments, as there is no automated basis. At the same time, territorial tax bodies are attracted for compulsory alienation of property on account of tax nonpayment, as well as for methodological explanations.

Current Tax Service informational possibilities allow reducing the tax collectors staff. This may become a real financial contribution in the estimated reform of the public agencies administration. At the expense of the released funds, the State Service may be strengthened in the field of human resources, material, and technical aspects and the salary. The latter aspect is especially relevant. The State Tax Service is the single agency on whose financial activity the financial state of the country, ministries and other budget financial institutions depends. Thus, it is necessary to urgently take decision on conducting attestation of employees, who are working in the Service, establishing a worthy remuneration level. Thus, we will get real opportunities to invite to the tax body the qualified specialists and, first of all, accountants, who are able to raise the efficiency of Tax Service’s activity, ensuring thus more revenues to the budget.

PART 3. HOW CAN THE FINANCE MINISTRY CLOSE THE LEGISLATIVE EMBRASURE?

Q: You say that the State Tax Service is the single agency which the Moldova’s financial prosperity depends on. Is the Customs Service not filling the state treasury in a greater summarily volume by means of its activity?

A: The 2015 statistical data show that revenues from taxes, duties, fees, administrated by these two services are almost equal.

Q: If investing in the Customs Service considerable state funds, it can also give good interest results in budget payments.

A: Maybe. But the Customs Service has today a different material technical basis, working conditions, level of payment. The rate of customs workers’ salaries is higher than tax inspectors’ payments. They have a special fund for stimulating and encouraging work efficiency, to which 10% of fine sanctions, submitted by the service, are going. The Tax Service does not have such a fund.

Q: How are the today’s conditions of tax administration for the Service?

A: These are difficult. Back 20 years ago, at the demand of foreign experts, the Parliament established through Articles #1 and #2 of the Tax Code that only this code regulates common principles of taxation in Moldova and that the tax system is a totality of taxes and duties, provided by the Tax Code. However, this is theory. While in practice this provision is often being violated, even at the legislative level.

According to the Tax Code, it has the right to establish the issues of tax policy and administration of taxes and duties (objects, subjects of taxation, sources, rates, facilities). However, often certain taxes, facilities or tax exemptions are being established through branch laws or through laws on enacting one or another Tax Code section.

Q: How can it be counteracted?

A: To secure through Moldovan Constitution the provision that tax relations are being regulated exclusively by Tax Code norms. So far, we have to take a political decision on elaboration and adoption of a new Tax Code. This should be a single document, which will comprehensively cover different aspects of both the tax policy and the tax administration. By the way, a part of credit, which is expected to be allocated by the World Bank (WB), should be directed to development of a new version of tax code, which would include all the currently acting subordinate legislative acts, instructions and methodological instructions.

Q: Who can and must head the work on new Code elaboration?

A: For its development, corresponding resources should be provided in the state budget, maybe even from the very WB credit. Then, a transparent tender should be conducted, whose winner is obliged to have in the working group both experienced specialists-theoreticians and practices, better Moldovans. The Code provisions should be stated not in rhetorical official expressions, but in clear and understandable words.

There is a good practice in this field. The Parliament adopted in the first reading the draft new Building Code, which according to its authors is necessary for concentrating all the current building norms and rules in one legislative act. This is good, but it is unclear why the Tax Code provisions are torn away to different branch normative acts? Why, for example, the Agriculture Ministry is allowed to regulate the taxation procedure through branch laws?

I think it would be funny if the Finance Ministry through its provisions will start regulating the state policy in communication or agriculture, for example. I understand that if this happens, it will cause laugh. Then why, when the branch law established the taxation procedure, this encounters not irony, but legislative understanding? It is absurd!

Q: So, to whom claims about the absurd should be presented?

A: First of all, to the Finance Ministry, which is responsible for implementing tax policy, thus it should not allow that other branch agencies to regulate it through their acts.

Q: Does it mean that the Finance Ministry should act like a hero and close the legislative embrasure?

A: I do not urge doing this; I just propose to toughly put this question at the Government meeting.

Q: How the minister, who asked a question but did not receive answer, should act?

A: First of all, the issue of such level cannot remain unanswered. Secondly, if the minister was not heard, he has to address the question repatedly. Thirdly, the awkward intervention in the tax policy should be prevented at the stages of draft consideration, before reaching the Government’s level. Why annual laws on state budget or packages of bills on fiscal policy do not stipulate which instruments should surgeons use during surgeries? Because it is absurdly! Or is it normal that doctors or agrarians to intervene in the tax policy sphere?

Q: Even so?

A: Yes. For example, several years ago, at approving the provisions on family doctor center activity, a decision was taken that pharmacies will be open within these. Moreover, this was done without receiving corresponding licenses, without installing cash registers. Besides the fact that this provided favorable conditions for unfair competitiveness development, it was simply illegal. The Tax Service identified these violations and at its suggestion these were removed. However, many people knew about these deviations, while Finance Ministry’s initial comments were not taken into account. Now, these pharmacies are not only under the tax inspectors’ supervision, but also under corresponding control of state pharmaceutical body.

In order to bring the Moldovan economy up from its knees, a lot should be done, including considerable foreign investments. But external investors will not come to Moldova if the supreme legislative and executive power branches will keep conducting unclear or selective tax policy. It is impossible to do business if, for example, the law adopted in the middle of the year implies that the raised tax rates are introduced from January 1.

Not all the experts while studying the draft budget 2016 noticed the modest inscription in the draft on amending legislative acts [which is attached to the draft budget 2016]. It is their fault! This inscription says that the acting Tax Service provision, which implies introduction of new raised tax rates, should be derogated half-a-year after their publication in the Monitorul Oficial governmental bulletin. That is, the new tax rates will enter into force immediately after publication of the laws on tax policy and the 2016 budget.

I have already received calls from several representatives of large foreign business enterprises in Moldova, who asked for explanation how can a ordinary law suspend the action of the organic law [which is higher in hierarchy], without suspending the action of the Tax Code Article #7. In their opinion this is nonsense!

Q: What did you say to them?

A: No comments.

Q: Thank you for the interview, Mr. Prisacaru.

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