Times of crisis are challenging both for governments and the private sector, but eyes are focused more than ever on the authorities which have to come up with rescue strategies. Economists say that during turmoil the knight in shining armor is “investments, investments, investments”. Recently, Romania's government reintroduced into fiscal legislation a measure making reinvested profit from production or technological equipment tax exempt. Gheorghe Pogea, the minister of finance, announced that the measure would be included in the new Fiscal Code and would come into force next year. Some market players believe that the move will have a significant impact on the level of investments made by small and medium size companies (SMEs). Ovidiu Nicolescu, president of the National Council of SMEs, said this measure would raise the investments made by SMEs in Romania by approximately 30 percent and would also compensate for the drop in lending, which decreased considerably in the second part of 2008. But not everyone is so positive. Although the market has expected such a measure from the Romanian authorities for quite some time, market economists and lawyers have identified some drawbacks.
Ups and downs of the government measure
Marius Ionescu, partner at NNDKP Fiscal Consultancy, believes that the decision does not constitute a real fiscal facility in the true sense of the word, because it doesn't grant a tax exemption, just a postponement of payment. “The measure offers an exemption for reinvested profit in certain fixed assets, which later one cannot amortize. So the benefit is from an exemption at the moment at which the investment is made. But by not being able to write off that asset, the tax will be paid in the future, if the company is profitable,” said Ionescu. He added: “If the income tax rate increases, the tax to be paid will be higher than the rate at which the dispensation was obtained and the company will lose out by applying this ‘facility'.”Gabriel Biris, managing partner at Biris-Goran, believes that the main advantage of this measure consists in the possibility of full deduction of the investments, at no higher than the taxable income value, as a super-accelerated depreciation. “The main disadvantage is, however, the possibility of applying the minimum tax, if the investment is higher or equal to the profit. Another disadvantage is that if the assets to which the measure is applied are kept for at least half their life span, not only must the tax then be paid, but also interest on the tax,” said Biris. Fiscal Consultants Chamber (CCF) officials have stated that limiting the application of this measure to investments made in production and/or the purchase of technological equipment is selective. This selectivity discriminates against companies whose business does not involve the use of equipment and may contravene European legislation regarding state aid. In addition, the CCF points out that the proposed measure is not applicable if the income tax due is below the minimum tax threshold. So companies with lower profits will also miss out.
The NNDKP Fiscal Consultancy partner doubts the measure will be widely applied, as it provides only a cash flow advantage, but one not without risk. “The taxpayer must be very careful in applying the measure, because if applied wrongly (either on the establishment of the eligible profits or the nature of eligible fixed assets, etc) it would result in future increases of about 36 percent per year from the amount exempted. In addition, the exempted income will create a taxable reserve, if its destination changes,” said Ionescu.Biris also believes that the government's measure will have few effects on the market because of the limited period of time in which this measure will be applied, meaning Q4-2009 and 2010, which “misses the profits”. “Few investments have been made, as firms are more focused on survival strategies. However, it is a measure that may help some taxpayers who have development plans in the near future,” said Biris. Market analysts believe that much more helpful for the business environment is a tax system that is based on low tax rates and a high tax base, meaning fewer exceptions to ensure predictability and stability. Facilities, they say, do not contribute to any of these goals.