HOrrible, REgrettable, CAtastrophic new VAT for HORECA

In a press conference on June 23rd, the Minister of Finance, Natalia Gavriliță has announced a series of changes to the fiscal policy of Moldova, including, but not limited to the annulment of the 10% VAT for the HORECA enterprises and setting it to the general 20% VAT level.

This comes as almost no surprise as the Government is scrambling to reduce the budget deficit and respect the harsh terms imposed by the IMF mission that will return to Moldova in September with an evaluation mission.

Unexpectedly, though, this announced measure has put a dent in between the governing coalition members. President Dodon has declared that he does not support this initiative. He has stated that VAT should stay the same as an opportunity and a stimulus for this segment of business to renounce shadow practices and pay taxes.

This public debate, however positive, shows that significant initiatives are not discussed within the coalition before their public announcement and may be dictated from the outside more than generated in a thoughtful public policy process.

We cannot stress enough how important it is for this Government to show transparency and maximum openness in decision-making as their declared goals are deoligarchization and a transfer to a more 'European'-style governance. At the same time, some cardinal changes for a big industry were virtually not consulted with the stakeholders, as well as the experts' community or in a broader civil society framework.

We would kindly remind the Government that Decision NO. 33 of 11.01.2007 on drafting rules and unified requirements for policy documents is still in force, and it should follow its regulations if it is to be considered a stable and predictable partner by any industry or private actors.

If we are to analyse the reasoning behind going back to the 20% VAT for the HORECA industry, unfortunately, it seems mostly political. The decision to stimulate the sector was announced almost to a day one year ago, entering in force on October, 1st, 2018 and the period span for an informed decision on the issue would be at least 3 fiscal years to see the trends of renouncing the grey or black market practices and start a healthy tax relationship with the state.

The biggest mishap of this decision though, in our humble opinion, is that there are no signs of strengthening the capacities of the Fiscal Service and a sound anti-corruption policy within the Agency. This disconnect will create a more disadvantageous situation for those private actors who choose to lawfully pay their taxes and not elude them by any means. The illicit tax evasion schemes in Moldova are mostly crude and involve corruption elements within the Fiscal Service. They will continue and provide continued shielding for the bad faith actors on the market.

Unsurprisingly, the National Association of Restaurants and Entertainment Facilities (MĂR) opposes this initiative. The President of the Association, Aneta Zasavitchi, has affirmed that the decision to increase VAT will bring adverse effects to economic activity, taken as a whole with promised increases in electricity and gas tariffs.

Mila Malairau, the executive director of AmCham Moldova, has also stated in a post on social media that the way businesses (and citizens) have been told about the fiscal policy measures is humiliating and embarrassing. Announced in a press conference, the tax measures (not fiscal policy proposals) will be voted in a week by the Government. Without intent to verify the stakeholders' opinion and to estimate the actual impact on the affected parties, the decision was taken "definitively and irrevocably".

Ion Chicu, the former Minister of Finance and an adviser to President Dodon has had one of the most insightful takes on the issue. He said that it is a shame to apply a 20% VAT rate for this sector when in Romania it is 5%. The current mission of the IMF does not welcome actions that increase the country's financial independence and the increase in the VAT rate will not bring extra money to the budget.

As a final remark, we would say that it is at least ironic that on the Ministry of Finance website, the 2019 budget infographic still claims that its main innovation is the lowered HORECA VAT level.

The Milton Friedman Institute strongly supports the position that this decision needs broad consultations and careful consideration from both the Government and the President.