The broad application of the VAT split payment in the European Union is likely to be an unattractive policy tool, given significant rise in costs for business and authorities, concludes a study carried out by Deloitte for the European Commission: "Analysis of the impact of the split payment mechanism as an alternative VAT collection method”. "The conclusions of the Deloitte study point out that the decision of the Romanian Parliament to amend the provisions for the VAT split payment mechanism (eliminating the broad application) was beneficial. Collaboration between authorities and the private sector is the key to get balanced regulations with benefits for both parties. In the future we expect a consistent dialogue before laws are published in the Official Gazette, so that further changes generating pressure on taxpayers will not be necessary afterwards," said Vlad Boeriu (photo), Partner Deloitte Romania.
However, the mechanism has characteristics that are very effective in reducing certain types of fraud and therefore it may be suited as a targeted measure with limited scope. In the case of broad application, the costs may outweigh the benefits of a better VAT collection.
The broad application of split VAT in the current VAT regime. Estimated impact for Romania
"In case the mechanism is broadly implemented under the current VAT regime with electronic fund transfers between taxable persons, it will trigger changes in the cash flow both for businesses and public authorities. EU business cash flow would be impacted negatively with at least 16.9 billion euros. The aggregate impact for businesses in Romania would be of 0.7 billion euros. For an average business in Romania, the impact, calculated as percentage of turnover, would rank second in the EU after Malta, and would be triple the EU average. Thus Romanian businesses would have higher costs mainly due to two factors: the duration of VAT reimbursements and the high level of interest," Vlad Boeriu explained.
The study analyzes seven options for application of VAT split payment mechanism both in the current VAT regime and in case it will be changed by introducing the definitive regime based on the destination principle. In both scenarios - the current and the definitive regime - the options cover different types of transactions (between taxable persons - B2B, between taxable persons and consumers - B2C, between taxable persons and government - B2G), as well as different payment methods (electronic fund transfers, cards, cash). 
Main advantages and disadvantages of the mechanism (for all options):
• The main advantage would be the reduction of VAT fraud and evasion. The cost-benefit analysis shows that the VAT gap is expected to reduce aggregately at EU level between 27% and 56%, depending on the option. The most notable reductions under the current regime are found in the proportion of the VAT gap made by missing trader Intra-Community Fraud.
• The main disadvantage would be that broad application of the mechanism is accompanied by high costs for business and public institutions as it would lead to significant changes in cash flow. Thus:
The authorities would have a positive impact on cash flow, between 10.8 bn eur and 25.2 bn eur at EU level if the mechanism was applied in real time on transactions rather than ex post on a periodical basis (monthly, quarterly, as it is in Romania, for example).
Instead, business cash flow would have adversely affected (between 16.9 bn eur and 39 bn eur at aggregate level in the EU, depending on option) in a very significant way impacting directly their working capital.
The most striking impact is the rise of administrative costs to both businesses and public institutions due to increased reporting requirements by at least 70%.
The impact for an individual business are highly dependent on the number of transactions conducted by the individual business and thus varies depending on business size and sector. Administrative costs can be reduced by increasing automation of the system (automated split payment, electronic invoicing, etc.).
Full report may be found here: