Experts grapple with a taxing conundrum

What should the state do when the economic crisis has left its coffers bare? Introducing new taxes and duties is the response of the Romanian authorities. Big Four specialists have analyzed for Business Review the likely outcomes of introducing new taxes such as those mooted for property, wealth and micro-enterprises. They also put forward their own solutions for how to revive the Romanian economy.

 Dana Ciuraru

In the first few weeks of this year, the public debate has focused on the possible introduction of new taxes, on wealth, fast food, and the replacement of the minimum tax with a flat tax.

Cited by the media as the font of these proposed new laws, the Finance Ministry dismissed the speculation and told Business Review that such initiatives come from other sources.

“I have said, ever since the first day when I was appointed finance minister, that the system of taxes and duties will remain unchanged this year, except for the transformation of the minimum tax into a flat tax, for those economic areas with a high potential for tax evasion. All other discussion of a fast food tax, property tax and other issues was not generated by the Finance Ministry, but by MPs and members of the government,” finance minister Sebastian Vladescu told BR.

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Fiscal fixing

Regardless of where these new tax ideas originated, they have become serious possibilities. Business Review asked some prominent tax specialists to mull them over.

According to Mark Gibbins, head of taxation at KPMG in Romania, the idea of taxing property at its market value makes sense, at least in theory, but he believes that in practice it could be difficult to apply.

“Property values have fluctuated wildly over the last few years, rising several times between 2003 and 2008, largely driven by a speculative boom, and then in many cases halving in 2009. It is still too early to say what the true value of property should be, so it would be easier said than done to bring property taxes in line with current market values. In any case, the Fiscal Code already requires properties to have been valued in the last three years,” Gibbins told BR.

Another difficulty the KPMG expert foresees is that many citizens whose house or apartment has risen in value over the last few years still have very low incomes, and the increase in the value of their property has made no difference to their standard of living. Such people could be badly hit by a substantial rise in their property tax.

“A further problem is that property taxes for legal entities in Romania are much higher than in most other countries in the region, which acts as a disincentive to investment. So if property taxes are to be brought into line with market values, local taxes for legal entities should also be reformed, so that Romania’s levels are competitive with those in neighboring countries,” he added.

Turning to the suggested wealth tax, KPMG Romania’s head of taxation says that it is similar to the one levied in France, fashionable in the 1970s, which was found to make little difference to budget revenues, and sometimes even to dent them, because it encouraged tax evasion, or the transfer of assets out of the country.

On the matter of the flat tax modifications, the Ministry of Finance has indeed initiated discussions to replace the minimum tax (payable by all taxpayers, with some exceptions) with a flat tax, which will be paid only by certain taxpayers, such as hotels, travel agencies, gyms, cosmetic centers, etc.

“This flat tax will be paid by those taxpayers that provide direct services to the public, active in economic areas where it is presumed that companies do not issue tax receipts for all transactions,” Rodica Segarceanu, partner at Deloitte tax and head of the international & corporate tax team, told BR.

In recent months there has also been considerable debate about micro-enterprises, following the introduction of the minimum tax last year. In 2010, the turnover tax regime for micro-enterprises is also due to end, with such concerns becoming subject to profit tax at 16 percent said Gibbins.

Some analysts support this measure, arguing that many micro-enterprises are simply structures which have been set up to reduce tax and social contributions (the practice of using micro-enterprises as an alternative to employment contracts is widespread). However, any changes to the regime for micro-enterprises should take into account the needs of those which are genuine and the risk to the economy if significant numbers of small businesses face a much higher tax burden.

Stopping cheats prospering

Tax specialists say that those affected by the introduction of such taxes or duties will be, obviously, taxpayers, estimating that the state budget will win in the short term.

Miruna Enache, tax senior manager with the tax advisory & compliance department at Ernst & Young, told Business Review that the introduction of these new taxes will also damage the fundamental principles of taxation, like the fair taxation principle and the neutrality of fiscal measures.

According to Deloitte specialists, the introduction of the new flat tax could have positive effects for taxpayers who do not fall within the scope of this levy.

“It would eliminate unfair competition, as paying less tax allows some to get away with charging lower prices and so should be clamped down upon. For clarification, this would be possible if all transactions were recorded, as is done by those taxpayers who conduct their business fairly,” said Segarceanu. But the manager does not see the mooted changes as a panacea. “Bottom line, I do not think that the introduction of new taxes will bring the economy on the path of normality. Taking into account the new economic circumstances, key measures should be introducing facilities, staging, and the reductions of penalties, reducing from 0.1 percent to 0.02 percent the penalty per day of delay, according to bank interest rates.”

Taxation experts propose measures to revive economy

Mark Gibbins emphasizes that all tax measures should be considered not only in terms of their impact on state coffers, but also their effect on the economy.

He cautions that raising taxes might seem appealing as a way to reduce the budget deficit, but in practice it could be counter-productive, because it could reduce individual spending, hurt businesses and deepen the recession, with a corresponding negative impact on budget revenue.

But one step the government should definitely take is to make tax collection more efficient. There is a large underground economy, and the tax authorities should take active measures to combat fiscal evasion.

Predictability of legislation is also important. In recent years, Romania’s tax legislation has been changed frequently, often at very short notice.

In theory, according to Article 4 of the Fiscal Code, changes should be made only by a law (and not other forms of legislation), should take effect only from 1 January of the following year and “as a rule” be announced six months before taking effect.

In practice these provisions are routinely disregarded, with many changes being made by Government Emergency Ordinance, in the middle of the tax year, with little warning.

This lack of predictability is bad for business, because it makes forward planning difficult. Being able to plan ahead is even more critical during a recession, when money is tight. A real effort by the government to promote stable and consistent fiscal legislation could provide a boost to the economy.

In addition, the government could help the recovery by issuing a coherent package, based on certain industries which it wants to promote.

The Ernst & Young senior tax manager goes even further, proposing some practical measures such as tax exemption for sums held by taxpayers in accounts abroad and used for economic activities in Romania (encouraging the flow of liquidity to the country), a VAT increase, or reducing payroll taxes and social contributions of employees.

It may matter less who came up with these suggestions than who makes the first step towards actually helping the economy return to normality.

dana.ciuraru@business-review.ro