ANALYSIS The government wants to make it a criminal offence to withhold contributions at source without paying them to the budget. What do tax experts say? ‘Ambiguous and dangerous’ provisions

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The government has proposed to recriminalize the withholding and non-payment of social security contributions and to impose a prison sentence of 1 to 5 years or a fine for employers who use this practice, according to the ordinance put up for public debate on Thursday, the final legislative act being published in the Official Gazette on 18 December. Such an idea was also launched by the PSD in 2017, but the government of the time abandoned it after protests from the business community. This in a context where some of the biggest non-payers of contributions are even state companies.

The ordinance provides for the  following:

“The withholding and non-payment, collection and non-payment, within 60 days of the due date provided by law, of the taxes and/or contributions provided for in the annex to this law shall constitute offenses and shall be punishable by imprisonment for a term of between 1 and 5 years or a fine”. This provision would enter into force from 1 March 2022.

How do tax experts see such a measure and what would be the effects?

“Ambiguous and dangerous” provisions

“A measure that would bring more drawbacks than benefits,” sums up Dan Schwartz, a tax consultant, for Economedia.

“A similar provision appeared before in 2015 and was declared unconstitutional,” he recalls. “The punishment seems disproportionate to the employer’s act, there are other ways to get money to the budget than putting people in jail. In fact, you don’t even get money that way. It’s very likely that the goal of raising more money for the budget will not be achieved,” says Dan Schwartz.

“I don’t think the level of collection will increase by such a measure. Methods that would lead to voluntary compliance are more effective in bringing money to the budget than threats of jail time,” Schwartz says. He also points to the principle of proportionality, which in this case seems to be overlooked (this principle responds to the idea of avoiding disproportionate use of sanctions involving deprivation or restriction of liberty).

Ambiguity is another problem with these proposals. “The taxpayer does not know what he has to do to avoid punishment but will live with the sword over his head. Those of good faith will pay, others will take the risk. The unskilled and the naive will fall for it. This is not how you catch the big criminals and tax evaders, but through serious controls where the tax risk is identified. The penalty is disproportionate. A company may be in a difficult situation at the moment, it has no liquidity, it has been hit by pandemics, receipts fluctuate, budgets are hard to build. If you want to increase budget revenue and combat tax evasion, whoever proposes such measures should think more carefully about how to word the text and be clear and precise. There needs to be a balance between the offense and the punishment,” he adds. In the formula that has been put forward, we are dealing with a dangerous, ambiguous and illegal provision that was already declared unconstitutional a few years ago. “It lacks real operability and effectiveness and shows the lack of vision of those who drafted it,” says the specialist.

Lack of intermediate steps

While the idea of improving tax collection and imposing serious penalties for tax evasion might be a good one, criminal prosecution is far too harsh a measure, in this case, says Mihaela Mitroi, a tax consultant.

“It’s understandable that you want to make sure that taxes are paid, but I think criminal prosecution is a bit much. Perhaps it would be more useful to have some intermediate steps, some less serious penalties before it actually comes to that. I can understand the government’s motivation to introduce harsh penalties, but I think some options could be found, some other variety of penalties first so that those who want to do it and are of good faith are given a chance to get it right. It may be that some companies are temporarily in a financial bind, have a problem. Certainly, those amounts have to be paid, that’s legal and fair – you retain that money – but there could be intermediate penalties. There are also bona fide taxpayers who may find themselves in a bind at the moment,” says Mihaela Mitroi.

“It’s a good thing, however, that ‘non-withholding at source’ has been taken out of the discussion, as keeping such a provision was really very serious,” adds Mitroi.

We note that the initial version was as follows:

“It shall be an offense and punishable by imprisonment for a term of 1 to 5 years or a fine to withhold and not pay, collect and not pay or, as the case may be, not withhold or not collect, within 60 days of the due date prescribed by law, taxes and/or contributions”.

“Non-withholding or non-collection of amounts due as taxes” is not and should never be more than a simple tax dispute, as it can have countless causes, said lawyer Dan Dascălu, in an opinion piece after the release of this version, since amended. According to him, the most important and dangerous of these may be linked to the fact that the payer of the income may have an interpretation of a certain operation recorded in his accounts, which in the end turns out to be contrary to that shared by the tax authority.

The issues related to the criminal sanctioning of the non-payment of withholding tax must be discussed, including with the business community, said Dan Dascălu, partner and tax litigation coordinator at D&B David si Baias, in that opinion article, noting that it is necessary to abandon the legislative measure criminalizing non-payment of withholding tax.

“It seems that it is already becoming a custom that, every 2 years, the punishment of imprisonment for the procedure of withholding tax administration is suddenly reintroduced on the agenda of legislative changes. Thus, in 2017 and 2019 attempts were made to criminalize the non-withholding or non-collection, respectively, withholding or collection, followed by non-payment of taxes and contributions subject to the withholding tax regime, each time the legislative project was abandoned following logical and coherent arguments put forward by the business community in the decision-making transparency procedure. Now, the draft legislation is back in the public eye, after all the time that has elapsed since the last discussion on it, there has been no further analysis and debate to resolve the major problems raised by this aggressive and inappropriate approach to legal tax relations. Suddenly, therefore, on 15 December 2015, the imminent urgency of problems ignored for years requires the adoption of an emergency ordinance published a few hours before its approval, in order to be checked (and) the formality of public consultation”, said Dan Dascălu, partner tax litigation coordinator D&B David și Baias, PwC’s correspondent firm in Romania.

The rattlling of handcuffs in the economy is not going to help”

Tax consultant Gabriel Biriș points out that the idea of recriminalizing “withholding” and non-payment of certain taxes/contributions is an old idea, which also reached his desk in 2016 when he was secretary of state at the Ministry of Finance. “I asked then for a study from which I could conclude whether such a measure was useful. Specifically, I asked to see the evolution of compliance post-decriminalization (by the Constitutional Court of Romania, on the grounds of lack of clarity of the regulation), to see if this (decriminalization) led to a decrease in compliance, i.e. if payments for amounts declared as ‘withheld’ decreased. If this was not the case (my assumption), the re-incrimination did not make sense… I did not receive this information and I did not see it later in the explanatory memorandum to this measure, which makes me believe that it was not necessary,” Biriș writes in a post on his Facebook page.

He also mentions the provision concerning the prison sentence: “the withholding and non-payment, the collection and non-payment within 60 days of the due date provided for by law, of the taxes and contributions provided for in the annex shall constitute offenses and shall be punishable by imprisonment for a term of one to five years or a fine”.

“Let’s imagine that we have a company that pays its employees (net) at the end of the month and submits the 112 return by the 25th of the following month, which is also the payment deadline. Let’s say we’re talking about a company that acts with good intentions (otherwise, why would it declare and not pay its people on the black or grey?), pays its debts, but on the 25th it has no cash because a client (which can also be the State!) has not paid its invoices, and this situation lasts for more than 60 days. Now, we’re not just talking about money (interest, penalties), we’re also talking about years… Obviously, in practice, such a company will probably choose either not to pay other taxes (for which there is no criminal charge), or to delay paying suppliers, or simply to postpone paying salaries, with the risk of employees leaving. What the legislator (the government, in this case) doesn’t understand is that these amounts don’t actually exist in the taxpayer’s account, they have to be produced. And the state does not help the creditor (at all), it protects the debtor… The rattle of handcuffs in the economy cannot help!”, Biriș believes.

“Let’s also say that the vast majority of the sums “withheld” by the employer and not paid to the CAS or CASS (for that matter!) are fixed by state companies or public authorities (municipalities), not by private companies, which is yet another reason to doubt the usefulness/effectiveness of such a measure”, adds Biriș.

He points out that there is only one tax in the list where criminalization is justified: the tax withheld by notaries on the transfer of personal assets, which are effectively withheld by notaries for the purpose of transferring them to the budget. “But even here I’m not aware of any cases of withholding and non-payment… To me, this measure seems to be just a game of ankle games. We pretend we are ‘fighting’ against evasion, but in fact, we are doing nothing. We just pretend we are doing…”, concludes Biriș.

“The introduction of the offense by ordinance is unconstitutional”, says Silvia Uscov, lawyer.

“Many people will give up a business if they risk going to prison, innocent as they are”.

In response to Biriș’s opinion, an entrepreneur tells how he found himself in this situation (temporarily), how he solved it by paying his debts and related penalties, and why such a measure proposed now would only bury businessmen and even jeopardize the recovery of the sums.

“I have found myself in the same situation twice in the last five years. And precisely because I have not been paid in turn. I had a choice between paying taxes or paying employees. If I didn’t pay the employees I could have closed the company. I chose not to pay the taxes and pay the penalties. That no bank would give me a line of credit in that situation right away. In about 3 months I recovered, in one situation I even got my money back from the client. Everyone involved came out okay, including the state, who took more money from me.

I really don’t understand the appetite for a measure that can send thousands of contractors to jail without them committing a “crime” willingly, just forced by circumstance. Circumstances in which they can easily end up, for example, if a crisis appears on the horizon, leading to a financial blockade such as we have had in the economy. If you threaten entrepreneurs with jail in a crisis, are you not deepening the crisis? How many will prefer to kick people out and close their doors rather than risk jail? Not to mention that the measure will most likely only generate a bunch of useless and expensive lawsuits that will establish the cancellation of sentences on the principle of proportionality. But by then the contractor will be trembling with fear. And many will give up a business if it involves the risk of prison, innocent as they are,” Alex Aniței writes on Facebook, in a response to Biriș’s opinion.

Why would such a measure be good? A business organization says “for”

The measure to criminalize the withholding at source of contributions without their further payment to the state budget is welcome, according to a statement issued Tuesday by Romanian Business Leaders (RBL).

“In this regard, the measure recently adopted by Emergency Ordinance 130/2021, criminalizing the withholding of contributions at source without paying them further to the state budget is welcome. We believe that tax evasion is one of the most serious economic crimes Romania is facing and that it prevents the support of a fair economic environment, honest competition, and a sustainable economy”, reads an RBL press release, quoted by

“Measures to help increase tax and contribution collection should continue to be aimed at reducing the VAT collection gap, which is at the highest level in Europe, and improving current tax collection in economic areas prone to evasion should be achieved before any measures to increase taxation are adopted so that fair taxpayers do not pay for the state’s inability to punish the unfair ones,” the release said.

The taxes and contributions for which the non-remittance of tax withholding tax has been re-criminalized:

Tax on dividends paid by a Romanian legal person to a Romanian legal person
Tax on income from self-employed activities under sports contracts
Tax on income from intellectual property rights
Tax on income from wages and salaries
Tax on rental income
Tax on interest income
Tax on taxable income from the liquidation of a legal person or from the reduction of the share capital, according to the law
Tax on income in the form of dividends
Tax on pension income
Tax on income from prizes and gambling
Tax on income from other sources
Tax on income obtained by a natural person from an association with a legal person, taxpayer according to Title II of Law No. 227/2015 as amended and supplemented
Tax on income obtained by a natural person or entity – unincorporated association from an association with a legal person, taxpayer according to Law No. 170/2016 on specific tax, as amended and supplemented
Tax on income obtained by a natural person from an association with a legal person, taxpayer according to Title III of Law No. 227/2015, as amended and supplemented
Social security contribution
Social health insurance contribution
Withholding tax on income obtained in Romania by non-residents or according to double taxation agreements concluded by Romania with other states
Tax due on income from the transfer of real estate from personal assets
Contribution to the Environment Fund.

Sursa foto: Inquam Photos / Cornel Putan

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