Photographer: Bartek Sadowski/Bloomberg

Let Crime Pay: EU's Top Tax Dodgers Help Fund Splurges Out East

You know you have an issue with tax collection when the person tasked with boosting it is fired for fraud.

But where some see a problem, others spot opportunity, and governments in eastern Europe have identified unpaid taxes as a means of swelling their coffers. Romania, whose tax chief was dispatched last month over alleged misallocation of European Union funds, has the bloc’s lowest ratio of tax collection to gross domestic product. Poland and Hungary aren’t far behind. Efforts to close the gap in all three are coinciding with looser fiscal policy.

“There’s an effort to boost revenue across the region and we’re seeing positive signs,” said Roxana Hulea, a London-based strategist at Societe Generale SA. “But most of the results of these efforts are already in hock to spending promises.”

Value-added tax fraud in Romanian has prompted a crackdown on flower vendors, beauty salons and one of the country’s richest men, who was forced to repay 2.5 million lei ($623,000). Hungary is connecting cash registers directly to tax collectors and electronically monitoring goods movements. Poland is tackling transfer pricing among foreign companies’ local subsidiaries.

“We have to improve tax revenue collection in Poland to fill in the revenue gap,” Polish Finance Minister Pawel Szalamacha said last month in an interview. “That’s what we need to address head on by legislation and better enforcement.”

The efforts are bearing fruit: budget revenue has risen in all three countries. The boost is much needed as their governments implement policies ranging from tax cuts to more generous child benefits. Budget deficits in Poland and Romania will reach the EU cap of 3 percent of GDP by the end of next year, economist forecasts compiled by Bloomberg show.

Up against the fiscal limit, tax collection will remain a priority for Romania, whose government sees it leapfrogging at least three nations in the EU’s ranking when the bloc releases figures for last year.

“Despite remarkable progress by the tax agency last year, Romania still has very high tax evasion for VAT,” Deputy Finance Minister Gabriel Biris said this month. “When the European Commission publishes 2015 data, we’ll probably leave the shameful bottom position.”

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