Planned Romanian household tax system could prove risky, say PwC Romania experts

The plans of the Romanian government to change from scratch the taxation system for individuals through the household tax entails several risks, according to experts at professional services firm PwC Romania.

Mihaela Mitroi, tax and legal services leader at PwC Romania, says that all members of the European Union use the withholding system by the employers and the same happens for the revenues from salaries and pensions in the United States of America.

“The transition from the withholding system to a yearly declaration of revenues implies a profound change of mindset and tax procedures, both for tax payers, who will have to calculate all year round just how much of their revenues they can spend and how much should save in order to pay the yearly income tax, but also for the tax authorities, that will have to make a huge administrative effort in order to cope with the increased volume of information that the new system brings”, added Mitroi.

According to PwC, the concept of family unit for tax purposes, which was announced by the government, does not exist in 18 member states. In the countries that regulate this concept, the tax payers have to option to register for tax purposes as an individual or as a family. The same mechanism is used in the United States of America.

“The transition to the new taxation system will entail some major challenges in terms of tax procedure, starting with the necessity to clearly define the notion of the household, which is not existent in the current civil legislation in Romania, as well as establishing its judicial status. Also, it will have to be clarified how will work the proposed system of hiring several thousand tax consultants, paid by the state, but theoretically serving the interests of the tax payers, taking into consideration the inherent conflict of interests that may arise, including in what it means the fiscal responsibility between these two categories. Finally, we need to see how does the state intend to check the functioning of the new system, that involves the registration of a significantly larger number of tax subjects, which should be put normally under tax inspection, taking into account the limited administrative capabilities of the Romanian tax authorities”, stated Dan Dascalu, partner at law firm D&B David si Baias.

The government wants the household tax system to become operational next year so that the first revenue statement can be submitted to the tax authorities in 2019. Authorities say they want tax consultants to act like family doctors for each household. It is not clear at this moment how the 30,000 consultants required for this system will be found.

Coalitia pentru Dezvoltarea Romaniei, the association comprising the main business organizatiosn in Romania, has warned that the houshold tax system will trigger a drop in revenues to the state budget.

Meanwhile, PwC experts suggested that the government could encourage voluntary tax compliance in other to increase budget revenues.

“Starting this fall, the common reporting standard will be implemented, which means basically the start of the automatic tax and financial information sharing between several countries from around the world, including Romania. In this context, it would be best if Romania takes into consideration the introduction of a voluntary tax compliance program, that would encourage tax payers to declare transparently their assets held abroad,” said Mitroi.