Analysis. Private sector rings the alarm bells over Romania’s tax change frenzy

Ovidiu Posirca 12/12/2017 | 17:24

The raft of fiscal changes adopted by the government in early November, despite street protests, might result in higher costs for companies, warn consultants and business associations. Some 261 articles in the Fiscal Code have already been changed in the first 11 months of 2017, according to the association representing SMEs (CNIPMMR), which has been calling for a more stable legal framework.


The general mood in the business community is rather gloomy, although GDP expanded by more than 8 percent in the third quarter, while in the first nine months it grew by 7 percent.

“Mister prime minister, ultimately, who will answer for the missed opportunities and the placement of Romania in another league for investors, due to the massive changes made to the Fiscal Code in 2017 just seven weeks before their enforcement?” said the Coalition for Romania in a letter to PM Mihai Tudose. The association comprises over 2,000 companies that have a combined turnover of over EUR 50 billion yearly and more than 600,000 employees.

After the minister of finance, Ionut Misa, claimed that over 150,000 companies had failed to pay social contributions for more than 2 million employees, the coalition said that if there were cases of public or private companies evading taxes, they should be brought to justice. The organization added that the business environment in Romania is mostly fair and produces prosperity for the country.


IT sector blows the lid on real fiscal impact

In short, the main change that has triggered criticism from trade unions and companies is the shift in the payment of social security contributions from employers to employees. The heads of trade unions say that employees will lose money from this move, while companies complain that this shift could cost them more next year.

“Apart from the estimated administrative impact, which includes adaptations to IT and reporting systems and which could be quite significant in some cases, companies are reluctant about this shift of social contributions, mostly because of the potential additional costs that they may face in the future – that is, there is concern that the shifting of the social contributions by placing the bulk of social security costs in the hands of the employees will open a new door for the government to increase charges applicable on the employer (from the 2.25 percent provided by the new legislation), or to introduce new levies, in the relatively near future,” Lucian Barbu, tax partner at NNDKP Consultanta Fiscala, told BR.

Social contributions for wages will be slashed by 2 percentage points, while the number of contributions will be slashed from nine to three (CAS – Contribution for Social Insurance; CASS – Social Health Insurance Contribution; and the labor insurance contribution).

Misa said that the social contributions payable by employers will stand at 2.25 percent as of next year, while employees will pay 35 percent.

The changes were included in an emergency government ordinance that also brought in a turnover tax of 1 percent instead of the 16 percent corporate tax rate for companies with annual turnover between EUR 500,000 and EUR 1 million. The draft bill was submitted to Parliament for approval and may undergo other amendments before enforcement. The government also plans to cut income tax from 16 percent to 10 percent and expand the tax deductibility system for low earners. The minimum wage was also set to grow from a gross RON 1,450 to RON 1,900, but this measure was still under review.

“While the changes in individual taxation and social security contributions may be viewed by investors as somewhat neutral at best, one can hardly consider any of the fiscal measures recently introduced as favoring foreign investments.  In fact, the package seems to mean quite the opposite, as investors are very sensitive to the level of uncertainty and to the lack of predictability shown by a country in which they are considering investing,” said Barbu of NNDKP.

Nevertheless, players in the IT sector have issued some of the starkest warnings following the shift in contributions.

IT employees benefiting from the income tax exemption will see their net wages go down by at least 6.5 percent despite the hike in the gross wage, warned the Employers’ Association of the Software and Services Industry (ANIS).

In an industry in which the unemployment rate is practically zero, productivity per employee stood at EUR 45,000 this year. The sector had a combined turnover of EUR 4 billion and had 100,000 employees, according to ANIS.

“Romania is in direct competition on the global market, with all the relevant countries investing massively in the development of the IT sector. Unfortunately, changes to fiscal policy in the short term have a strong impact on the industry and investors and can undo the progress that has been made in the last ten years by Romania as a relevant actor on the global market,” said Teodor Blidarus, ANIS president, in a statement.


Romania to enforce Anti-Tax Avoidance Directive

The package of fiscal measures approved by Tudose’s center-left government also included the adoption of the Anti-Tax Avoidance Directive 2016/1164. In preparation for the roll out of the directive, the minister addressed multinational firms in Romania, saying they should pay their fair share of taxes and respect Romanians and the country.

Among the provisions brought in by the directive is a limitation of the tax deductibility of financing costs.

“It must be said that Romania is one of the first states in the region to implement the ATAD Directive and also does it in a rather restrictive manner, e.g., the country has set the deductible threshold at EUR 200,000 while the directive allowed for up to EUR 3 million, and deductible percentage at 10 percent of EBITDA while the directive allowed up to 30 percent,” said the NNDKP Consultanta Fiscala tax partner.

Barbu added that the limitations will also apply to bank loans, which might generate a significant impact for several categories of investors, such as those active in the real estate sector. Under the old thin capitalization rules, interest deductibility was not subject to limitations.

“The introduction of a new anti-abuse provision is also worth noting, as it essentially supplements the existing principle in the Fiscal Code, and its application in practice by the tax authorities has the potential to give rise to fierce debates. The other measures concerning the exit tax and controlled foreign corporations would likely have a limited overall impact in the near future, considering that such operations are relatively rare on the Romanian market,” concluded Barbu.

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