Romania is heading for changes in the tax area if the November elections see the governing coalition returned to power. The Ponta cabinet has announced several fiscal propositions ranging from reducing income tax for lower earners to reduced VAT on food products and higher taxes for profitable oil and gas firms from 2013. BR surveyed tax specialists to gauge the potential impact of some of the proposed measures.
The ruling social liberal coalition (USL) formed a new government earlier this May, headed by Victor Ponta, after the Ungureanu regime lost a no-confidence vote after being in office for less than three months. Some of the first measures adopted by the Ponta government include hiking public sector salaries, which were cut by 25 percent in the summer of 2010, and the return of social contributions paid by seniors with pensions of over RON 740 (around EUR 160), which were ruled unconstitutional. The healthcare insurance contribution of 5.5 percent applied to all pensions exceeding RON 740, instead of taxing only the resulting surplus.
The government and the IMF agreed in the letter of intent that an 8 percent increase in wages would come into effect in June, and another 7.4 percent in December 2012. The pension contributions will be returned through to 2013.
Lucian Isar, delegate minister for the business environment, said last week that no tax reduction measures were foreseen in the next six months, but the government is working on a provision that doesn’t tax additional profit made by companies this year.
“It means no taxation for profit which exceeds what was produced in a certain period, let’s say 2011, or some quarters of it. Basically, it is an incentive system for the private sector to produce more than it did in 2011 or if they can’t do that at least to post a larger profit,” said Isar.
The fiscal code will be changed this year in order to meet the demands of the IMF and European directives, but no budgetary changes will be made in the next six months, according to Liviu Voinea, state secretary in the Ministry of Public Finance.
Gains for low earners
PM Ponta said during a recent television appearance that the government was planning to keep the 16 percent flat tax, but adopt a progressive element so that people on lower incomes pay 8 or 12 percent. Labor minister Marian Campeanu said the coalition wants to increase the minimum wage by 14 percent to a gross RON 800 to RON 840 (around EUR 180) in 2013. Part-time workers earning below the minimum wage will be taxed at 8 percent, while those making up to RON 1600 (around EUR 350) would pay 12 percent. Income exceeding this value will be taxed at 16 percent. In addition, social contributions (CAS) paid by employers would be cut by 5 percent.
The USL said these measures would be implemented only after the parliamentary elections scheduled for this November. Recent polls suggest the ruling coalition is likely to remain in power after autumn.
“The introduction of a progressive decreasing tax system will not negatively impact the middle class, but will create a more generous framework for disadvantaged categories, and so is a good initiative,” said Mihaela Mitroi, partner in fiscal consultancy at PwC. She added that cutting CAS to 5 percent would generate new jobs and fuel economic growth through increased consumption and investments.
Romania is currently consolidating a fiscal system in an economy that doesn’t allow a large capital accumulation by people, so the 16 percent flat tax allows easy management and fast collection, according to Raluca Bontas, senior manager in global employment services at Deloitte Tax. She adds that reducing the tax burden on the less well off while maintaining the flat tax can be done through a deduction system to achieve this goal without fundamentally changing the system, while a progressive system would increase budgetary costs and raise less money.
Uncertainty surrounding the final sum collected would be another drawback of this system, suggested the manager.
“For instance, the state could find itself in the situation where a taxpayer has an income taxable at 16 percent in one month, but may not earn any income in the following months, so the accumulated income would enter into the lower tax bracket, let’s say 12 percent. Therefore at the end of the year, the state would have to issue a rebate, meaning the collection during the year may not be reflected in a ‘real’ growth of collected revenue,” explained Bontas.
Romania’s fiscal revenue from taxes and social contribution was 27.2 percent of GDP in 2011, 12.4 percent lower than the EU average, according to the think tank Fiscal Council. The figure was 36 percent in Hungary and 32.1 percent in Poland.
A 5 percent decrease in CAS or a capping of this contribution paid by employers would encourage companies to pay their debts to the state budget or cease to use undocumented labor, but would also attract investors and make room for wage increases, argued the Deloitte manager.
Food ‘needs lower VAT’
The government plans to tackle the endemic fiscal evasion in agricultural products by lowering VAT in this area to 9 percent. “Those who present invoices and sell legally regain from the budget 15 percent, while only 9 percent remains in the budget,” explained PM Ponta. He added that all EU members, apart from Denmark and Romania, have a differential rate for food products. The current VAT for food products in Romania is 24 percent.
Daniel Constantin, minister of agriculture and development, estimated tax evasion in the agricultural sector at EUR 2.5 billion.
“By introducing a 9 percent VAT rate for basic food products, fiscal evasion in this sector would be reduced by 15 to 20 percent,” said Mitroi of PwC. This would discourage potential fiscal evasion in fruit and vegetables, as the profit would be small, although it would not bring food prices down, she argued.
Some EU members have a VAT rate for food products below 5 percent. VAT on food is 4 percent in Italy and Spain, 4.8 percent in Ireland and 5 percent in Cyprus and Poland, while Luxemburg charges 3 percent.
Vlad Boeriu, indirect tax manager (VAT) at Deloitte Tax, suggested that an efficient measure for reducing fiscal evasion in VAT could be the application of reverse taxation on domestic transactions, which involves not paying VAT on the commercial chain, something that is already happening in grain and waste.
Cutting VAT to reduce tax avoidance for certain types of products needs to be supported by clear legislation, according to Ramona Jurubita, tax partner at KPMG. “The law must be very specific and detailed in defining the products for which the reduced rate is applicable, to prevent taxpayers attempting to broaden it to cover other similar products,” said the partner.
Oil and gas firms to be divested of deregulation spoils
Gas prices in Romania will be deregulated between 2013 and 2018, both for companies and households consumers. The government believes this will bring significant profit to oil and gas companies and so is looking at ways to tax them. The tax revenue will subsidize vulnerable consumers, who will be defined in the new energy law.
Authorities are also planning a bill that will regulate royalties in the oil and gas sectors for 2015-2024. These measures were agreed by the government in the letter of intent with the IMF. Romania has a EUR 5 billion stand-by agreement with the IMF, World Bank and European Commission.
Economy minister Daniel Chitoiu said earlier this month, during hearings in Parliament, that the level of royalties and taxes on mineral resources is 0.8 percent of GDP in Romania. Neighboring Bulgaria charges 7 percent of GDP, while in the EU it varies between 4.5 and 9 percent. The minister wants OMV Petrom to pay higher royalties by 2014, and if negotiations fail, the ministry will consider a tax on exceptional revenue.
OMV Petrom, which was privatized in 2004, reported a profit increase of 72 percent to EUR 887 million in 2011.
Earlier this year, the Competition Council slapped several oil companies with a combined fine of EUR 205 million, for removing a cheaper gasoline product from the fuels market. The transgressors were OMV Petrom, Rompetrol, Mol and ENI. However, OMV Petrom was accused of initiating the cartel and got the largest share of the fine, around EUR 117 million.
The government also wants to reduce the price of gas so has started negotiations with oil and gas firms. “I am sure the respective companies can reduce their profits by investing in Romania’s future,” said Ponta in a recent televised appearance. The price of Euro-super 95 gas with tax has jumped by 4.3 percent since the start of this year to EUR 1.283 per liter on May 21, according to data from the European Commission.
Governments worldwide choose to tax extractive industries, which exploit natural resources, and this is done by overtaxing profits, according to the PwC partner.
The UK has an additional tax of 32 percent (a windfall tax) on exploitation and production activities, while in the US companies pay a compensation tax for onshore/offshore extraction, which varies depending on the state. This is added to exploitation royalties and an income tax of 35 percent.
In Venezuela, additional tax represents 33.33 percent of the extracted oil, while Brazil has a special tax of between 10 and 40 percent for the exploitation/concession of oil deposits.