Romania obtains European Commission approval to replace PNRR milestone on reducing the VAT gap

Romania has obtained the European Commission's approval to replace the National Recovery and Resilience Plan (PNRR) milestone on reducing the VAT gap, thereby avoiding a potential loss of up to one billion euros in grants in 2026, the Ministry of Finance announced in a press release.Following negotiations held by Finance Minister Alexandru Nazare with European Commission representatives, the milestone on reducing the VAT gap will be replaced by a new one focusing on structural and legislative measures to strengthen the institutional capacity of the National Agency for Fiscal Administration (ANAF) and improve legislation to better support tax authorities in collection and taxpayer management."This is an important result for Romania: not only have we avoided losing a significant amount of PNRR grant funding, but we have also strengthened our credibility before the European Commission. ANAF's reform will continue, with a focus on concrete measures that will bring sustainable results in revenue collection and will reduce the VAT gap within a realistic timeframe. It is a gradual but irreversible process - and one that will see ANAF become, within the next two years, a fully digital institution with an internal culture based on performance rather than seniority. Romania needs a modern, predictable and transparent tax administration. That is exactly what we are building every day, without losing sight of the fact that behind the figures are people - civil servants who must be motivated, and taxpayers who deserve respect," Minister Nazare was quoted as saying in the release.In the context of discussions between the Ministry of Finance and the European Commission on the implementation of reforms under the PNRR, an analysis carried out at the start of negotiations showed that although Romania had made progress in digitalising tax administration, the actual impact on the VAT gap between 2021 and 2024 was insufficient to fully meet the target set in the original PNRR.According to the ministry, the talks with the Commission focused on replacing an unmet milestone with a realistic one, aimed at addressing the underlying issues and achieving the target initially set in 2021. Moreover, had the milestone not been fulfilled, Romania risked losing between 800 million and one billion euros from the grant component of the PNRR in 2026.Replacing the initial target with one based on structural measures gives Romania the opportunity to strengthen the institutional capacity of ANAF and the Romanian Customs Authority (AVR) in the long term, while also avoiding the loss of significant non-reimbursable funds, the release said. This represents a guarantee that fiscal reforms will continue within a sustainable framework agreed with the European Commission, with direct effects on budgetary stability and Romania's credibility in its relationship with European partners.The ministry underlined that the milestone is a key commitment in the ANAF reform, aiming to increase VAT collection, with a major impact on the state budget.The new milestone focuses on: the institutional reorganisation of ANAF, through restructuring key departments and introducing performance indicators linked to collection rates; improving insolvency legislation to enhance ANAF's capacity to recover receivables; modernising IT systems and interconnecting databases to enable better analysis and fiscal control; improving procedures and ANAF's capacity to manage transfer pricing inspections; legislative adjustments to increase the efficiency of combating tax evasion; and boosting ANAF's transparency by publishing regular reports on the structure of the VAT gap and on the activity of its departments.The ministry also noted that through this agreement, Romania reaffirms its firm commitment to modernising tax administration and ensuring the sustainable consolidation of public finances.According to an analysis by Daniel Anghel, Country Managing Partner of PwC Romania, published in July this year, Romania's VAT collection gap stands at 36%, compared to the EU average of 5.4%. Countries in the region have managed to reduce their VAT gap through a mix of reforms and tax administration digitalisation.