In a distant corner of Eastern Europe, Moldova’s economy is struggling amidst Europe’s recent recession. The economy grew at a rate of just 0.5% in 2012 and The Economist predicts that the economy will grow at an annualized rate of 3.3% between 2013 and 2017.
Such a growth rate is not sufficient to lift Europe’s poorest country, in terms of price-adjusted GDP per capita, out of poverty. The government’s regulatory policies are oriented towards attracting foreign investment and appeasing European donors instead of promoting local business development and capacity building.
Although for this reason Moldova has shot up the World Bank’s “Doing Business” rankings, the business community complains that the business environment is worsening. Moldova’s business community needs tax and customs reforms for the country to prosper. The fragmentation of the business community has stymied previous appeals to the government, which has accused the business community of incompetence.
CIPE and its Moldovan partner, the Institute for Development and Social Initiatives, a leading think tank, are striving to foster public-private dialogue to improve the business environment by strengthening the institutions of the Moldovan business community. Through the National Business Agenda mechanism, business associations from around Moldova have formed a national coalition to advocate for vital reforms to the tax code and customs regulations. One crucial reform they are advocating for is establishing the presumption of innocence in tax disputes — which could have important effects on the ability of Moldovan businesses to grow and prosper.
At present, the Moldovan tax administration assumes that a firm is guilty of violating the tax code. The firm must prove that they have not committed a violation in order to escape sanctions. This regressive policy exacerbates perverse incentives in the fiscal system to harm local businesses and their ability to invest. Because the government budgets for revenues from fines and pecuniary sanctions, tax inspectors pursue sanctions very aggressively. The presumption of guilt in tax administration and rampant judicial corruption eliminate the ability of firms to avoid this arbitrary taxation. These onerous and often unwarranted tax penalties hinder firms’ ability to invest and build much-needed local capacity. Implementing the presumption of innocence is thus crucial to promoting prosperity in Moldova.
In 2009, implementing the presumption of innocence was one of the National Business Agenda’s four primary objectives. The 2010 National Business Agenda also repeated this call, emphasizing the importance of this specific reform. By 2012, the situation actually worsened. Nevertheless, local businesses continued to press for this reform in the 2012-2013 National Business Agenda.
On December 13th 2012, tangible progress finally emerged in the form of proposed legislation in the Moldovan Parliament. The proposed law allows firms to request advisory opinions from the tax and customs administration and compels the tax and customs administrations to issue written advisory opinions that have the force of a contract. The legislation will help clear up uncertainty about tax penalties and prevent unwarranted penalties before they occur. The reform is just a first step towards implementing the presumption of innocence and eliminating unwarranted penalties, but a meaningful one that demonstrates the strength of the National Business Agenda. Although implementing the presumption of innocence in tax administration is no panacea for Moldova’s problems, continued reform would certainly improve the business environment and the ability of Moldova’s local business community to invest in their nation’s future.
Nathaniel Oppenheimer is an intern working on Eurasia and Eastern Europe programs at CIPE.