Romania joins Poland in the EU awkward squad

By bne IntelliNews February 8, 2007

Adina Postelnicu in London -

It didn’t take long, but just a month after Romania's questionable entry into the EU, the government is embroiled in a tussle with the EU executive.

A new car registration tax, the issue at the core of the debate between the Romanian Ministry of Finance and the European Commission, may not be as thorny as Poland's run-ins over EU-Russia relations and competition policy. But observers says it's nevertheless further proof that absorbing new members is never a smooth process and adds grist to the mill of those who complain of enlargement fatigue.

The car registration tax, introduced on January 1 this year as a part of a new tax code, is seen as a breach of EU law because it applies differently to imported or locally produced, new and used cars.

Headed for Romania

The tax varies from a couple of hundred euros for new cars to a couple of thousand for imported second-hand cars. As a result, it is seen as encouraging the import of new cars, and the selling of those already existing in the local market. The government argues that such a tax is good for the environment because it will prevents the Romanian market from being flooded with old, second-hand automobiles coming from abroad. The Commission, needless to say, disagrees.

Sources close to the government told bne that EU experts are expected to arrive in Bucharest to discuss the matter in the next couple of weeks.

Ahead of this visit, three different European officials have warned the Romania government to either change the tax or drop it altogether.

The European commissioner for taxation and customs, Laszlo Kovacs, has asked Minister of Finance Sebastian Vladescu, with whom he met recently in Brussels, to lower the tax.

Then Onno Simons, charge d'affaires at the European Commission in Bucharest, rejected the government's arguments about the environment, telling the local media that Romania "will not become Europe's rubbish bin" for second-hand cars. Simons underlined that the free circulation of goods is one of the fundamental principles of the EU's internal market and there can't be discrimination between second-hand cars and new imported ones.

However, the government has the full support of local producers. François Fourmont, managing director of Dacia, the largest car-maker in Romania owned by France's Renault, has threatened there might be big layoffs if the tax is repealed. His argument: a drop in sales due to higher competition from imported old cars.

Painful realities

Fair competition has always been a weakness of Romania's economy. Without specifically pointing to the problem of the car tax, a European Commission representative in Romania, Donato Chiarini, described Romania's problems with its competition policies as a "painful reality," reminding the government that such policies could have activated the safeguard clauses in Romania's accession treaty.

Such a view is echoed by other observers, who feel that the issue will merely confirm the worst suspicions of those who feel that Romania and Bulgaria were admitted to the club too soon and the enlargement process should be put on hold.

"When you get into the [EU] club, it's very difficult to give up the protectionist tendencies, especially in an economy that suffers from a deficit of competitiveness," said Florin Petria, editor-in-chief of Piata Financiara, a respected monthly financial magazine. "The expectations have been fullfilled - the two countries [Romania and Bulgaria] that were not at a certain level of preparedness have started to have problems already."

Despite the EU officials' criticism, there is no clear sign the Ministry of Finance is ready to back down over the tax. "There is no official document from the EU asking us to do anything with the tax; there are only opinions about it [from the EU officials]," Stelian Negrea, a spokesman for the Ministry of Finance, told bne.

Last week, Minister of Finance Vladescu made it clear to the local media that the "chances of changing the tax are zero." However, he appeared to soften his stance a few days later by saying that "a couple of scenarios" regarding the tax will be sent to the government and acknowledged that there is "a zone where the car tax could come into contradiction with the EU legislation."

He also admitted that the real problem with the EU would not be the tax itself, but its compliance with the Accession Treaty.

The fight with the Commission over the car tax comes at an awkward time for the Ministry of Finance, which is also having to deal with a grievance by 100 investors at the Romanian Stock Exchange.

These investors have accused Vladescu of going against the country's constitution by issuing rules for taxing capital-gains income. The main complaint is over a provision in the law that allows too big of a time lag between when investors pay the estimated tax on capital gains and when they get back the money they weren't supposed to pay. They argue they don't want to extend credit to the government for such a long time. After negotiations, a Ministry of Finance spokesman said that a solution has been found and the initial time gap will be reduced from five months to one.

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