Academic journal article Global Economic Observer

Impact of VAT on the Profitability and the Cash Flow of Romanian Small and Medium Enterprises

Academic journal article Global Economic Observer

Impact of VAT on the Profitability and the Cash Flow of Romanian Small and Medium Enterprises

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. Introduction

Modern taxation systems impose a heavy burden on taxpayers, particularly on small business taxpayers. That burden consists of three elements (Babone et al, 2012):

- In the first place there are taxes themselves;

- Secondly, there are the efficiency costs, involving tax-induced market distortions;

- Finally, there are the operating costs of the tax system: the costs to the government (ultimately borne by taxpayers) of administering and collecting the taxes and the costs expended by taxpayers in complying with their tax obligations.

Companies must optimize the relationship to taxation from a financial and economic point of view. This behaviour is possible when taxation offers business the opportunity to increase its profitability and liquidity when they exercise their tax options.

The enterprise' tax management objectives shall ensure tax security and effectiveness.

Tax security is obtained by complying tax obligations. In this way the companies avoid any penalty taxes and proceed to a better allocation of its financial resources.

Tax effectiveness involves minimizing taxes in observance of the tax law. This can be obtained either directly or indirectly. Direct effectiveness can be achieved through tax law winch includes measures of incitement for tax purposes. An example of this is the company option to be liable for VAT even if its turnover allow it to qualify for a small businesses scheme (which means exemption from VAT).

The aim of this work is to analyse the impact of company management options of VAT on profitability and cash flow.

Obtaining tax advantages requires a good knowledge of tax legislation. This is why in the first chapter of this work we will identify the main characteristics of Romanian VAT system and we will go into detail on two special schemes of VAT: the small companies' scheme and the cash accounting scheme, winch have a significant impact on the cost related to VAT.

The costs of complying with VAT regulations are separated into administrative costs, direct costs and costs related to the cash flow management. We will examine these costs in the second chapter.

At the end of our work we will try to identify for the managers of small companies some tools designed to improve cash flow, simplify accounting requirements and thus, reduce administrative burdens of VAT.

2. Key features of Romanian VAT system

2.1 Transactions within the scope of VAT

Supplies of goods or services, which have the place of supply in Romania, are subject to Romanian VAT, where made by a taxable person in the course of a business earned on by said person.

The transactions which fulfil the following conditions are subject to Romanian VAT:

- They represent a supply of goods/services in return for consideration or an operation treated as such.

- The deemed place of supply is in Romania.

- They are performed by taxable entities.

- They result from economic activities.

From the VAT point of view, persons may be classified as follows:

The persons of the Group of the 3 entities are not required to register for VAT purposes at the beginning of activity, but are required to register if their intra-Community acquisitions exceed EUR 10,000 /year.

Within the scope of the VAT enters various categories of transactions, such as (Grigore & Guräu, 2009):

1) Taxable transactions

- the supply of goods for consideration within the territory of a Member State by a taxable person acting as such;

- the supply of services for consideration within the territory of a Member State by a taxable person acting as such;

- the intra-Community acquisition of goods for consideration within the territory of a Member State by a taxable person acting as such;

- the acquisition of general business to business services taxable in Romania, from EU and nonEU suppliers;

- the importation of goods into Romania. …

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