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Taxation in Romania compared to other European tax systems

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Taxation in Europe - Yearbook 2013

Romania

Political instability and its corresponding ?scal uncertainty characterized the 2012 election year (local in June, legislative in December). A cabinet resigned, another was dismissed by the Parliament after few months, a new cabinet took over and was replaced after the legislative elections, but it kept the same Prime- Minister. A referendum for the resignation of the President had highly controversial results (87% in favor, but with no consequences because of insuf?cient participation). The Constitutional Court took almost two months to decide the referendum’s (lack of) effect. Meanwhile, the incumbent president was suspended and replaced by an interim president, who actually was his main opponent and among the initiators of the referendum.

Proposals to increase, maintain and reduce the main tax rates were issued simultaneously or in an erratic succession by representatives of the same political force. Proposals to suppress old taxes and/or introduce new ones were issued and withdrawn frequently. However, miraculously, the main tax rates remained the same (PIT 16%, CIT 16%, VAT 24%, as well as social security contributions).

Uncertainty affected also the next year. For example, at the end of 2012, the future of the ?at tax was still unknown, as well as the level or the very existence of other taxes.

1- Personal Income Tax

The Romanian ?at tax survived its eighth year, despite various frontal or stsubversive attacks. Since the 21 May 2012, the government has been controlled by the Social-Liberal Union (SLU). This is a political alliance between the Social- Democratic Party (SDP) and the National-Liberal Party (NLP) who won local (41%) and legislative elections (2/3 majority in both Chambers). One point of SLU’s election platform was, according to one of its representatives, “keeping the 16% ?at tax rate but with the introduction of two additional brackets” (8% and 12%) for lower incomes (corresponding to approximately the minimum wage and, respectively, the average wage). This obvious contradiction was ampli?ed in June 2012 by the proposal (made by a SLU co-chairman) to introduce a “supplemental 16% ?at tax” for public employees, which would be applied to incomes over €1,000. It seems that they are so attached to the 16% ?at tax that they want to apply it twice.

Neither one of these proposals was enforced in 2012 or in the ?rst quarter of 2013, but the cycle of launch- withdraw- re- launch increases ?scal uncertainty concerning one of the main taxes. Despite its potential un-constitutionality, the proposal of a supplemental solidarity tax paid by public employees was renewed in April 2013 by the Prime-Minister (president of SDP and SLU co-chairman), but with a lower level (10%) and with a speci?c destination (pensions for the military). Contrary to the summer of 2012, this proposal was vocally opposed by the other SLU co-chairman (president of NLP, Senate president) and by some trade unions leaders from both public and private sectors. There is absolutely no way to predict if this tax will be enforced next month, next year or if it will just keep haunting the Romanian business environment.

The opposition, mainly the Democrat-Liberal Party (DLP), is “under re- construction” after the election debacle. The DLP supports a 12% ?at tax, but its political weight being at a slightly higher level, we can identify at least one ?scal certainty in Romania: this measure will not be enforced during the next three years.

As a result, in 2012 and ?rst quarter 2013, there have been no signi?cant changes, either in the tax base or in ?scal deductions (detailed in previos editions of this Yearbook).

2- Corporate Income Tax

A remarkable achievement of the ?scal authorities is the stability of the 16% corporate income tax rate since its introduction in 2005. It seems that there is an implicit consensus among relevant political concerning this topic. As mentioned in previous editions of this report, this rate concerns only undistributed pro?ts. Dividends distributed to individual stockholders are considered part of their personal income and subject to an additional 16% withholding personal income tax. Under certain conditions, dividends paid to another EU company are exempted from this additional taxation.

The tax base was increased “temporarily” in 2010 by restricting the deductibility of some expenses, like those for motorized vehicles. These restrictions were maintained in 2011 and extended in 2012 to other categories of vehicles and related expenses, previously exempted. They were still in force during the ?rst quarter of 2013. Ceilings on deductible depreciations for most motor vehicles sthave been in force since February 1 , 2013.

Countless other dispositions were introduced in order to cap and/or to reduce the deductibility of certain expenses (e.g., employees’ per diem for business trips that are 2.5 times higher than the legal limit, interest expenses over certain rates etc.).

A source of confusion is that deductibility rules for corporate income tax are not completely “harmonized” with those concerning the VAT.

Among the good news, we can mention the increase in the deductibility threshold of R&D expenses (starting with 2013) from 20% to 50%.

Since 2001, microenterprises (companies with fewer than nine employees and turnover of less than €100,000) had the option to choose between the general rule of 16% corporate income tax and a tax on turnover, which ?uctuated over the years between 1.5 and 3%, its current level. This incentive was suppressed in 2010 (when all companies were subject to corporate income tax) and then reintroduced for 2011 and 2012. In 2013 the nine-employee ceiling has been phased out but the turnover ceiling has been reduced from €100,000 to €65,000 and almost all microenterprises became subject to a 3% corporate turnover tax (but not to CIT). The exceptions are microenterprises involved in banking, ?nance, insurance, reinsurance, stock market, gambling, consultancy and those state-owned.

Brie?y, after being forbidden in 2010, this ?scal incentive became mandatory in 2013

A source of ?scal uncertainty in 2012 and 2013 was and is still represented by the authorities’ intention to reintroduce “an improved version” of the minimum corporate income tax. Its application in 2009 and 2010 regardless of company pro?tability is considered responsible for the closure of 100,000-200,000 companies (see Taxation in Europe 2010, Romania). Details concerning the “improved version” are scarce and inconsistent, but according to some of?cials, it will probably be applied only to some sectors, more prone to ?scal evasion (tourism, restaurants, beauty centers etc.). Its formula will be complex enough to take into account the real (or the average?) company pro?tability, depending on sector, location, commercial goodwill and seasonality. This topic was not included either in the SLU election platform, or in its December 2012 government program. As of April 2013, there is no law project on this measure, which is stsupposed to be implemented starting July 1 2013.

Capital gains are taxed at 16%. There is still no consolidation or group taxation in Romania. A holding regulation proposal was submitted to the Parliament in 2009. As of May 2012, the holding law project was still “on hold” and another year later it has not been yet voted by the newly elected Parliament.

3- Value Added Tax

After a sharp increase in 2010 from 19% to 24%, ?scal authorities decided to maintain unchanged the standard rate, close to the maximum level allowed by European regulations. The lower-level rates applicable to a short list of products stayed the same (at 9% or 5%, depending on the case). There are constant calls to enlarge this list and/or to further reduce the lower rates, but without any effect in 2012 or ?rst quarter 2013.

One of the best ?scal news was the increase of the threshold from which companies and authorized individuals are required to register for VAT, from €35,000 to €65,000. This 85% increase is actually less impressive than it appears because it must be converted in Lei at the exchange rate at the accession moment (3.3817 RON/EUR). Therefore, €65,000 “accession Euros” represent only about €50,000 at the average 2012 exchange rate of 4.4560 RON/EUR, but it is still a signi?cant 40% increase from the original level.

Since July 1 2012, the VAT deduction has been subject to new restrictions for vehicles (and related expenses) that are not used exclusively for business purposes.

A permanent presence in public debate is the proposal to apply a reduced rate (9%) for basic products like bread. The arguments of its proponents that it will increase social protection, via lower prices and that it will decrease tax evasion or, at least, attenuate its distortions have not yet convinced the government to enforce its election promises.

A major change in VAT took place in 2013, when, under certain conditions, some businesses could opt to, or actually, were forced to adopt the application of the VAT at payment. The measure was presented as a ?scal incentive for small and medium enterprises by postponing their ?scal obligations from the moment of invoicing to that of cash receipt. However, because the invoice-based VAT general rule is still in force, the administrative burden could surpass the gains from this incentive (companies need to update their accounting software and keep two VAT registers). Moreover, this incentive offered to SMEs is actually supported by the larger ?rms, who would prefer to avoid them as subcontractors. This potential adverse effect had been signaled by some analysts and seems to be con?rmed in the ?rst months of enforcement. This measure could be better understood as a tool against (intra-communitary) VAT fraud. Because of its limited and mixed results, the payment-based VAT system could be made optional, but there h
ave been no changes as of April 2013.

4- Excises

Excise levels are set in Euros but their payment is made in Lei, at the exchange rate calculated by the European Central Bank in the ?rst business day of October 2011. Based on this reference, the Leu depreciated slightly against the Euro (0.8%), but excise level increased at higher rates. For example, cigarette excises stincreased with 3.38% in Euros, starting with July, 1 . For 2013, excises are calculated with a Leu 5.2% weaker relative to the Euro.

Starting with 2013 until 2017, excise level for cigarettes will be increased on April st st1 each year, compared to July 1 until now. “Harmonized excises” on energy, tobacco and alcohol are still lower than EU minimum levels, but the difference is supposed to be reduced in future years, according to Romania-EU accession treaty. According to the most recent schedule available, the last increase will take place in 2018.

Concerning “un-harmonized excises”, Romania is among the few European countries that maintain excises on coffee (since 1998) despite the fact that they were supposed to be abolished in 2010.

In 2013, new excises were introduced for beer.

5- Social Security Contributions

Romanian legislation maintains the conventional but ?awed distinction between employer and employee social security contribution. Table X outlines the recent evolution of social security contribution rates. Business associations, trade unions and some opposition parties ask for their reduction. According to government of?cials, a reduction in social security contributions is desirable but contingent upon economic growth. Despite this national consensus, no signi?cant changes took place in 2012 nor are there any expected for 2013. The main reasons are the country’s demography and structural de?cit of the public pension system (dependency ratio around 1).

The tax base for social security contributions is the gross wage and all “dependent work”-related income, which means all income earned under what the ?scal code considers employee-employer contracts. The purpose of this provision is to close previous loopholes used to avoid social security contributions.

Social security contributions are capped at a level equal to ?ve times the average gross salary. In 2012, for ?scal purposes, the average gross salary was 2,117 Lei, about €480 per month. Therefore, for gross salaries above €2400/month, social contributions are regressive.

For 2012, the contribution to the second pillar (private system, based on capitalization) was 3% in January-February and 3.5% in March-December. It increased to 4% in 2013. Contributions to the ?rst pillar (public, pay-as-you-go system) decreased accordingly, as the total employee pension contribution represents 10.5% of gross salary. (See Taxation in Europe 2009 for more details concerning pension reform and contributions.)

6- Local Taxes

Transfers from the state budget represent the main source of income for local budgets. They are calculated as a percentage of VAT, corporate and personal income tax collected from taxpayers at the local level. These “entitlements” established by law can be supplemented with additional transfers. The criteria are supposed to achieve redistribution toward poorer municipalities/counties and/or to follow the national strategy for development. However, all governments have been accused of helping especially municipalities run by mayors from their political party. Taxes on real estate (land and buildings) and motor vehicles are another ?nancing source for local budgets.

On 27 of December 2012, the government implemented a new level of local taxes for 2013, indexing them to the in?ation rate, as is supposed to be done every three years. The cumulated in?ation rate and, therefore, the increase of local taxes was 16%.

Local authorities were left to decide whether or not to increase local taxes, but the Prime-Minister warned those tempted to leave them unchanged that this will jeopardize their allocations from the central government.

In January 2013, the government submitted to public debate many amendments of the ?scal code. The proposals concerned microenterprise taxation, depreciation rules, the tax on agricultural income, rules for the payment-based VAT system etc.

Quasi-Taxes And Other Administrative Fiscal Burdens

Since September 2012, the application of a stamp and signature by the tax authority is no longer required to validate a ?scal document. This looks like a small step, but it could be the early sign of a paradigm shift in Romanian bureaucratic philosophy, from paper to digital world.

Many “anti-abuse” measures were introduced in the ?scal code (with immediate effect), like the new concept of “arti?cial transactions”. This explicitly allows ?scal authorities to apply a tax treatment according to what they consider the “real” purpose of any operation, even for transactions covered by conventions concerning the avoidance of double taxation. The practical consequence of such measures will be higher potential of arbitrary and uncertainty.

In March 2013, in the general anti-tax-heaven ambiance, the government set a 50% withholding tax on income (dividends, interests, royalties, services provided in Romania or abroad) paid after February 2013 in a country with which Romania had not signed an agreement concerning the exchange of ?scal information. This represents a signi?cant increase compared to the previous level (16%) of the withholding tax.

Another change that took place during the ?scal year (January 2013, effective in February) will have a major impact on non-residents. They will have to include in their income earned in Romania the income from services rendered outside Romania, with the exception of international transport and ancillary services.

The number of ?scal changes represents a problem in itself. Their speed only ampli?es the issue at levels unmanageable even for ?scal authorities. For example, in January 2013, within less than 48 hours, a project to amend the ?scal code was submitted to public debate, discussed with the Group of Social Dialogue, debated in the mass media and implemented by government ordinance. It took the government almost two months to take into account taxpayers and experts’ reactions and to publish the details concerning the enforcement of these changes that affected the taxation of microenterprises and non-residents.

The imbalance between the state and the taxpayer persists and takes many forms: how their mutual obligations are handled by ?scal regulation, the level of penalties, the ease of their enforcement etc. The taxpayers’ access to justice is limited because it must be preceded by a response from ?scal authorities that can be delayed for six months. In contrast, a ?scal ?ne is due immediately. Part of the ?ne represents a “bonus”, a supplemental income for ?scal employees who have ?nancial responsibility if the decision is invalidated in court.

There is an apparent consensus among the authorities, all political forces, mainstream analysts and journalists, tax, accounting and audit professionals and even business association representatives that two of Romania’s main problems are a low weight of taxes in the GDP and a high level of tax evasion. It is signi?cant that the economic and mainstream press refers to the T/GDP indicator as “budgetary income ratio” rather than “?scal pressure ratio”. More signi?cantly, political forces (DLP, self identi?ed as center-right) that explicitly defend the ?at tax and even its reduction at 12% are partisans of an “increase in budgetary revenues from 35.5% in 2013 to 37.5% in 2015” (Anghel, 2012), a little bit higher (36% in 2016) than the objective set by a ?nance secretary of state in a center-left government (Bostan, 2012).

After the elections, SLU, the winning coalition, announced its government program for 2013-2016, but without speci?c intermediary deadlines. The most important ?scal measures are: keeping the 16% tax and the introduction of two lower brackets (12% and 8%) and different deductions; the reduction of employer social security contributions by 5% and an additional 1% deduction, valid one year, for jobs created and maintained one year; a VAT reduction (from 24% to 19%, and to 9% for agricultural products); a reduction in half of the number of quasi-taxes; increased deductions for R&D spending; and tax exemptions for investments in the tourism sector etc.

Taxation of agricultural income was considered unsatisfactory by ?scal authorities but any signi?cant measure was carefully avoided in the 2012 election year, in a country with about 40% rural population. However, in January 2013, the government clari?ed its intention to change the tax base, replacing the (under-) reported agricultural income with agricultural assets like land, animals etc. The argument is that the number of farmers who bene?t of agricultural subsidies (670,000) is about ten times higher than the number of those who pay any tax on income. Small farmers (those who have less than 2 hectares of land or 500 square meters of greenhouses, 3 cows, 6 pigs, 10 sheep, 100 chickens etc.) are stexempted. Of course, this ?scal change was made effective on February 1 , 2013 – after the elections were over.

A new tax on vehicles, the so-called “environment stamp”, represents a reincarnation of a tax introduced in 2007, mostly for protectionist purposes and as a result contested successfully at EU level and revised many times. A detailed analysis of this new version shows that its green camou?age is worse than previous versions (30-40 year-old cars are more heavily taxed than 3-4 year-old cars that pollute much less). Its protectionist intentions are not too obvious (not only imported second-hand cars are taxed, like in an earlier version, but also new cars). However, it is interesting to notice a strange coincidence: taxes are much higher for the imported second-hand cars that could be an alternative for “our” Dacia Logan.

Romanian taxpayers, especially businesses and individual entrepreneurs, bear a high administrative burden. In 2012, Monitorul O?cial (the of?cial gazette) had 898 issues, 40 less than the previous year. The instability, ambiguity and inconsistencies generate incalculable costs.

> Fiscal instability. At the very end of 2010, the government modi?ed more than 100 articles of the ?scal code. The complementary regulation (“norme de aplicare”) was drafted and published only mid-February 2011. In 2011, the ?scal code was amended ?ve times. This represents an obvious improvement compared to 14 modi?cations in 2010. The ?gures refer to the number of laws and government ordinances that amended the ?scal code. If we take into account other relevant pieces of regulation, the improvement is less impressive: 26 changes in 2011, compared to 27 in 2010. Of course, all these modi?cations ignored the spirit of Article 4 of the ?scal code, which stipulates that changes are made “usually” only by law (and not by government ordinance) and at least six months before their enforcement.

> Fiscal ambiguity. Regulations are not always formulated in a way that protects taxpayers against authorities’ arbitrary decisions;

> Compliance costs: high frequency of required reporting and payments, despite the elimination or consolidation of certain taxes and forms. Progress made in e-governance has not yet eliminated the direct (physical) interaction with the authorities.

Radu NECHITA, PhD
Faculty of European Studies
University “Babes-Bolyai”, Cluj-Napoca, Romania

Selected References

Anghel I. (2012), „Noua reteta ?scala a lui Videanu: autorii cotei unice de 16% spun ca si-a epuizat potentialul si este nevoie de alta de 12%”, Ziarul Financiar, 7 Nov., http://www.zf.ro/politica/noua-rete ... spun-ca-si-a-epuizat-potentialul-si-este-nevoie-de-alta-de-12-10279573
Bostan R. (2012), „Liviu Voinea, secretar de stat la Finante: Ne propunem ca in 2016 Romania sa ajunga la 36% venituri bugetare in PIB”, Ziarul Financiar, 27 Nov., http://www.zf.ro/eveniment/liviu-vo ... 2016-romania-sa-ajunga-la-36-venituri-bugetare-in-pib-10353676
Law 19/2000 on public pensions system and other social security rights, Monitorul O?cial, stNo 140, April 1 , (With all its modi?cations).
Law 346/2002 on labor accidents and professional diseases insurances, Monitorul O?cial, thNo 454, June 27 , (With all its modi?cations).
Law 399/2006 on the approval of the Emergency Ordinance 158/2005 concerning sick thleave and health insurance indemnities, Monitorul O?cial, No 372, April 28 , (With all its modi?cations).
Law 53/2003 on the Labor Code, Monitorul O?cial, No 72, February 5 , (With all its modi?cations).
Law 571/2003 on the Fiscal Code, Monitorul O?cial, No 927, December 23 , (With all its modi?cations).
Law 76/2002 on unemployment insurance, Monitorul O?cial, No 103, February 6 , (With all its modi?cations).
Law 95/2006 on the reform of healthcare, Monitorul O?cial, No 372, April 28 , (With all its modi?cations).

This is part of :

Taxation in Europe - Yearbook 2013
The yearly report on the evolution of European tax systems

A short presentation of IREF ’Yearbook on Taxation in Europe’ Series
Among the many ways to understand the climate of opinion and the culture of a country, looking at its fiscal system is one of the most rewarding. Sure, fiscal systems almost always rhyme with complexity; each system bearing the (...)


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Forum posts (1)

An articulated view of Romanian situation

24 December 2015, 19:02 by Zorgan

In other words Romania is a crazy country lead by illiterate people more or less. This country has obviously no clear direction and beside the chaos, king is corruption, nepotism, favoritism, and being "connected". Anyway thanks for a well written article Mr. Nechita. Is anyone actually reading it beside a few ones? I doubt it.

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