Although small companies bore the brunt of the crisis, the government has imposed a mandatory tax rate on them to increase collection, and experts fear some will not survive. The authorities have also kicked off a larger fiscal reformation, aiming to rewrite the Fiscal Code and modernize the tax collection agency ANAF. Experts quizzed by BR mulled over the increase in the minimum wage and a potential reduction of social contributions and predicted the potential effect of these measures on businesses.
By Ovidiu Posirca
More small firms to pay taxes
In February, the taxation threshold for micro-enterprises was lowered, meaning that small firms with a turnover of up to EUR 65,000 were made subject to a 3 percent tax, while the employees limit was dropped. In the past, these firms could either pay a 16 percent profit tax – if they had a profit – or a 3 percent tax on turnover.
Daniela Zar, ACCA, tax senior manager at Zamfirescu Racoti Predoiu Tax, said this measure aimed to bring small firms that registered losses concomitant with reporting significant turnovers into the taxable base.
“I think these fiscal measures will have a negative impact on the taxpayers that are having difficulty in their activity, and it’s possible we might see a small number of firms close as a result of this measure,” said Zar.
Filling the public coffers will come at a cost for companies, some of which will go to the wall, warn pundits.
“This will impact micro-enterprises, because many will not be able to afford it. We estimate the number of insolvencies will exceed 20 percent this year,” said Constantin Coman, country manager, Coface Romania, a credit risk insurer.
Small firms may resort to fiscal evasion to survive and they will be tempted not to issue invoices and tax receipts in order to reduce their turnover, reckons Ionut Bohalteanu, partner at Musat & Asociatii – Tax Advisory.
“The effects of this system will not be more beneficial than the minimum tax that was enforced in 2010, as many entrepreneurs will have to pay taxes despite not making a profit,” said Bohalteanu.
Mihaela Pohaci, tax partner at Popovici Nitu & Asociatii, commented that the authorities are aiming to simplify the administration of a large number of taxpayers through this system, which is not fully in line with EU regulations.
“Small firms that trade goods and register a low profit margin will not be able to bear the fiscal cost, and will have to close their doors,” predicted Pohaci. She added that this system is transitory, in preparation for the lump-sum tax and other measures that aim to reduce the tax burden for small taxpayers.
Fewer fiscal inspections are an important measure for small firms that don’t have an accountancy department, but the taxation harms start-ups and companies that are in a tight fiscal spot, commented Romulus Badea, tax partner at Soter & Partners, a tax consultancy.
Mihaela Mitroi, tax partner at PwC Romania, the professional services firm, argues that the government wanted to simplify the tax system for small companies so as to make it in line with VAT registration provision, where companies register as VAT payers above the EUR 65,000 annual turnover ceiling.
“This measure is creating some difficulties for small companies and we believe that the system should be optional and not mandatory, meaning small companies should be able to choose whether to pay corporate income tax, or the 3 percent tax on turnover,” said Mitroi.
Hiking the minimum wage without a tax compromise
Aside from an ailing sector of small firms that lack competitiveness, Romania is also grappling with the lowest minimum wage in the EU 27. The gross wage stood at EUR 157.3 in January, but it is set to go up by 14 percent this year. However, employers should not expect a 5 percent reduction in social insurance contributions this year.
The increase in the minimum wage will lead to increased upward pressure on all wages, with paid labor taxes also expected to climb.
Bohalteanu of Musat & Asociatii – Tax Advisory estimated than an increase of the minimum wage to RON 800 (EUR 180) would lead to a 5 percent hike of the contributions paid by the employers. Companies will come under intense pressure to increase all wages, and remuneration that is partially paid under the table may come into the fiscal light.
“In the current difficult market environment, it is highly unlikely that private companies could support a wage increase much higher than the rate of inflation,” commented Mitroi of PwC. She expects wages in the private sector to be driven mostly by supply and demand. She cited IT and telecom as sectors with a higher than average growth and banking as the industry that might report a dismal wage increase, coupled with a reduction in employment.
Pohaci of Popovici Nitu & Asociatii believes that an increase in the minimum wage needs to be coupled with a real growth of labor efficiency in order to be truly beneficial.
“Apart from the possible inflationary effect, this growth may turn into a burden for the employer, with grave consequences, running to layoffs or even bankruptcies,” said Pohaci. She added that companies face the difficult task of keeping more people on lower wages – which damages motivation and morale – or firing some of the staff and increasing the workload of the remaining employees.
She suggested that reduction or capping social contributions could help companies maintain or create new jobs.
Romania has one of the highest levels of social contributions, but the government hasn’t announced any plans to reduce it this year.
“A decrease in social contributions would be welcomed by the business environment and would stimulate the economy; it has been requested on numerous occasions by the business environment,” said Zar of Zamfirescu Racoti Predoiu Tax.
Bohalteanu added that the government would have to find fresh revenue sources if it moved to cut the social contributions.
“We maintain our position that reducing social contributions would support economic growth and job creation and, on the medium run, would have positive effects on the state budget,” stated Mitroi of PwC.
Taming the taxman
The Ponta government intends to increase the tax base, while overhauling the tax collection strategy, helped by a World Bank loan.
It attempts to remove the popular perception that the fiscal authority is hounding firms and wants companies to deal with their taxes online.
Badea of Soter & Asociatii argued that the tax collection rate will not go up if the income and tax payment statements are not simplified. He described the current situation faced by a taxpayer who has wait in five queues to present a delayed statement.
“A taxpayer has to queue twice to see the allotted fiscal inspector, at the counter that issues the installment sheet for the fine, at the cash desk to pay the fine and at the registry office. In addition, he or she has to make a copy of the receipt of the paid fine that must be deposited at the same fiscal administration. All this means half a day lost,” said Badea. He added that all these operations could be handled by a single clerk from the fiscal body ANAF, helped by an improved IT system.
Reforming ANAF requires profound changes in various fields, from bolstering the IT infrastructure to reducing the staff and developing the tax assistance function, argues Pohaci of Popovici Nitu & Asociatii.
“This is why the political decision to carry out the reform has to make the expected step, from statements to effective implementation,” said Pohaci.
She cited Bulgaria as a successful reformer of the fiscal administration. The neighboring country has ended up with five regional administrations – down from 200 – and gained 5 percent of GDP in tax collection. Tax experts say Romania could improve its current collection rate of 31-32 percent of GDP by a similar figure by following a bold reform program.
With foreign direct investments at an all-time low and a tax collection rate below the EU average of 40 percent, Romania needs to find additional funding.
“I expect that the fiscal authorities will focus on increasing the tax collection for the budget this year,” said Zar of Zamfirescu Racoti Predoiu Tax.
Bohalteanu of Musat & Asociatii – Tax Advisory warned that ANAF is undergoing constant reform, while the Fiscal Code and fiscal procedure have been rewritten “more frequently than specialized fiscal magazines”.
The Ministry of Finance said it wants to rewrite the Fiscal Code and the Fiscal Procedure Code this year, some ten years after the first documents of this type were issued.
Tax experts welcomed this announcement, saying it would help companies stay in line with the tax inspectors when interpreting the fiscal provisions.
Pohaci of Popovici Nitu & Asociatii said the new code needed to update certain concepts and principles, and correlate provisions on profit and income tax with VAT. It should also organize better the provisions of the Fiscal Code with the Norms.
Bohalteanu called for a realistic fiscal system, tailored to the market conditions and the requirements of entrepreneurs, to support economic development. This would ultimately lead to an increased tax collection.