KPMG cautions government against tax rises to beat crisis

Top tax officials at KPMG have warned the government that raising taxes to fill state coffers depleted by the crisis could backfire, after releasing an international report on the topic. The Romanian government has taken a number of steps to try to fill the gap in budget revenue, such as ending deductibility on VAT for fuel and personal income tax, as well as imposing a presumptive tax on businesses and a minimum tax on small enterprises, said Niculae Done, senior tax partner at KPMG in Romania.

The consultancy firm has published a study of the steps taken by governments in 47 countries including Romania to respond to the global economic downturn with taxation measures. It is divided into chapters on each country, each presenting a succinct summary of the main changes.

Done added that the budget deficit remained high at around 7.5 percent. Some rather aggressive measures have also been taken in practice, such as delaying VAT refunds, which have not been helpful to the business climate, said the tax professional.

“In 2009, there was political instability as well as presidential elections and elections for the European Parliament. These factors acted as a disincentive to tough decision-making by the government. Hopefully 2010 will be a more stable year politically, with a new government now in place, and no elections scheduled,” commented Done.

Valentin Tic, tax partner at KPMG in Romania, said that the recession has meant less revenue coming in through taxation, leading to shortfalls in the budget. “So some countries have reacted by raising taxes. However, increasing the tax burden can also have negative effects – deepening the recession by reducing individuals’ disposable income, or companies’ budgets for investment. So in other countries, governments have reduced taxes to stimulate recovery. For example, in the UK, VAT was temporarily reduced from 17.5 percent to 15 percent between 1 December 2008 and 1 January 2010,” said Tic.

Anda Dragan