Deloitte Experts: the new turnover tax will increase the effective tax rate to 20%-30% and could bring an additional 6.5 billion lei to the budget next year

The impact of the fiscal measures included in the law for which the Government has assumed responsibility in Parliament will be significant, especially for entities that are to be taxed based on their turnover, where the effective tax rate will increase considerably, to 20%-30%, after the new regulations come into effect, according to an analysis conducted by Deloitte Romania’s experts.

The most affected sectors are technology and telecommunications, the automotive industry, retail, the pharmaceutical sector, and manufacturing. According to the same analysis, the turnover tax would bring an additional 6.5 billion lei to the state budget annually. Deloitte experts draw attention to the fact that the law could come into effect as early as October, as it only needs to be promulgated by the President of Romania and published in the Official Gazette. Among the measures with immediate applicability are the restriction of tax exemptions granted to employees in certain sectors, such as the exemption from income tax on earnings exceeding 10,000 lei per month for IT employees, and the reintroduction of health contributions for employees in the construction and agricultural sectors.

“This package of measures addresses an acute ‘symptom,’ but not the ‘disease’ itself, which leads to adverse effects on the economy. It is true that the budget deficit needs to be reduced, and measures in this direction were necessary, but they seem unbalanced, as the estimated financial impact for the coming years comes largely from additional taxation and, consequently, only to a small extent from expenditure reduction. However, once again, the authorities have adopted an approach lacking impact studies, specific measures to curb tax evasion, and a clear vision for the reorganization of the national tax system as a whole. It remains to be seen what their real impact will be in practice, but it is very important, from this moment on, to begin developing a coherent fiscal strategy based on solid studies, which, even if they require time to shape, will realign the tax system on a fair and sustainable basis. Moreover, the revision of the tax framework is provided for in the National Recovery and Resilience Plan (PNRR), but at least for now, it does not seem to be a priority. In addition, decision-makers need to identify priority areas for the development of the national economy, with productivity well above the average, to stimulate them with tax incentives, forming one of the pillars of the strategy. At the same time, it is necessary to start treating the ‘disease’s cause,’ which is represented by the proportion of current state expenditures, which is much too high compared to that destined for investments, which amounts to just over 18% of the total in 2023, even though it is an increase from the previous year, so that the additional revenues obtained as a result of the new fiscal measures will be directed toward priority state projects, such as the development of transportation infrastructure, education, healthcare, etc., for the benefit of society as a whole,” said Vlad Boeriu, Partner, Head of Tax & Legal Services, Deloitte Romania.

Minimum Turnover Tax/Additional Profit Tax

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“Perhaps the most impactful measure included in this package is the introduction of a minimum profit tax level, which will be determined by applying a rate of 1% to the turnover, and it will apply if the profit tax calculated according to the general rules is lower in absolute value than this minimum level. This measure will apply to companies with a turnover exceeding 50 million euros, approximately 1,000 companies, according to our estimates, so one third of major taxpayers, both Romanian and multinational companies. To this measure, an additional profit tax is added for financial institutions (2% of the main revenues in the first two years, 1% thereafter) and for companies in the oil and gas industry with a turnover exceeding 50 million euros (0.5% of turnover). Among the companies targeted by the minimum tax, 70% are expected to be taxed on turnover, and only 30% will remain subject to profit tax, according to the data reported by companies for 2022 and estimates for 2023. Consequently, for these companies and for taxpayers who will owe additional tax, the effective tax rate will most likely increase starting in 2024. The most affected will be companies in technology and telecommunications, with the total tax reaching 31%, the automotive industry (30%), retail (29%), the pharmaceutical sector (29%), and manufacturing (28%). The calculations are based on the profit tax reported by companies for the previous year and the estimated turnover. It is worth noting that the turnover tax also applies to companies in the same categories that have a fiscal loss, approximately 100 out of the total mentioned. These measures come into effect on January 1, 2024, and could bring approximately 6.5 billion lei to the budget next year,” said Alexandra Smedoiu, Partner, Tax Services, Deloitte Romania.

Measures Affecting Income Tax

“Provisions regarding the taxation of salary income, unlike most measures, will be applicable from the first month after the official publication of the act. In these conditions, employers must be prepared for immediate compliance since it involves taxes withheld at the source. Abandoning the exemption from income tax on earnings exceeding 10,000 lei per month for IT employees will affect the net salary or labor costs for the employer. For example, at present, for a gross salary of 14,000 lei per month, an IT employee takes home 9,100 lei net after deducting contributions of 4,900 lei. In the new formula, an IT employee can choose to waive the contribution to the second-pillar pension fund (which is currently 3.75% but will increase to 4.75% next year), in which case they will have a net salary of 9,350 lei per month (or 9,486 lei starting in 2024), which is more than at present. Choosing to maintain the second-pillar pension fund contribution will reduce the net salary to 8,840 lei per month. Additionally, the reintroduction of health contributions for construction workers will result in a lower net income for them. For example, at a net salary of 5,000 lei, the total cost for the employer is currently 6,492 lei. Subsequently, to maintain the net salary, the employer will have to bear a total cost of 7,436 lei (+15%). Otherwise, the net salary drops to 4,365 lei (-13%). Employees in this sector still have the option to waive the contribution to the second-pillar pension fund. Consequently, both measures will put pressure on employees in these sectors who have benefited from these exemptions until now, as well as on employers, who are expected to cover at least part of this possible decrease in net income. In addition, meal and vacation voucher beneficiaries will have to pay a 10% health contribution for these benefits, which was not previously required.

Among other measures, it is also worth noting the increase in the income tax rate from 16% to 70% for income sources that have not been identified and are identified during a personal tax situation check. However, this measure will apply to income identified following checks initiated after July 1, 2024, so taxpayers are indirectly given a period to voluntarily comply, a situation that would allow them to use the current lower tax rates, depending on the type of income,” said Raluca Bontaș, Partner, Tax Services, Deloitte Romania.

Generalization of RO e-Invoice

“For companies, an important measure included in this law is related to the generalization of the RO e-Invoice reporting system for all taxable operations in Romania, with the exception of exports and intra-community deliveries. The process has two important stages: between January 1 and June 30, 2024, it is mandatory to report invoices electronically within five business days of issuance, and after July 1, 2024, invoices must be issued directly from the RO e-Invoice system, so paper invoices or those issued in the old electronic format will no longer be accepted from a fiscal point of view. Suppliers will benefit from a grace period in the first three months of 2024, during which no fines will be applied for non-compliance. With this measure, Romania aligns itself with European trends regarding electronic invoicing, as countries such as Italy, Serbia, or Hungary have implemented similar systems, and other countries, such as Germany, Belgium, Latvia, Poland, have announced their intention to introduce mandatory electronic invoicing in the next two years. In the area of indirect taxes, other important measures include the increase in certain VAT rates. Among these is the increase in VAT from 5% to 9% for homes that meet the conditions for applying the reduced rate, a measure that requires special attention because it comes with a set of criteria regarding the minimum amenities of a home to be considered a dwelling that can be delivered as such. Additionally, VAT is increased for sugar-containing foods, and excise taxes are introduced for non-alcoholic beverages with a high sugar content and for electronic cigarettes containing tobacco substitutes, with or without nicotine, and vaporizing or similar devices,” said Vlad Boeriu, Partner, Head of Tax & Legal Services, Deloitte Romania.

A New Approach to Tax Audits

“The implementation of electronic tax reporting systems aims, among other things, to simplify and streamline tax audits conducted on taxpayers. For this reason, the notion of compliance notification was introduced into the legislation at the end of last year, which the tax authority is obligated to send to the taxpayer when discrepancies in their reports or non-compliance with their obligations are identified, with the goal of increasing voluntary compliance and directing audits to areas with high tax evasion. ANAF (National Agency for Fiscal Administration) has already issued 3,700 compliance notifications in the first half of this year, a considerable volume, considering that the form was introduced halfway through the semester. On the other hand, tax inspection activity has slowed down, both in terms of the number of audits and the amounts imposed. According to ANAF data, in the first half of this year, there were 7,500 audits of legal entities, a decrease from 8,800 in the same period last year. At the same time, the imposed amounts amounted to one billion lei in the first half of this year, compared to 1.4 billion lei in the first half of 2022. On the other hand, documentary checks have increased, operationalized as well, through legislative changes made at the end of 2022, to simplify the process and free up resources for both the taxpayer (audits no longer take place at the taxpayer’s premises but at ANAF) and for the auditing institution, which can direct resources toward combating large-scale tax evasion. This procedure still requires some adjustments in implementation, but in the long term, we expect positive results,” said Alex Slujitoru, Partner at Reff & Associates | Deloitte Legal.