The Romanian government has transferred most of the social contributions from employers to employees since the beginning of this year but this reform missed its target as the tax burden gap between different types of work has increased.
From the 1st of January 2018, approximately 20 percent of the social security contributions (SSC) have been transferred from the employer to the employee which makes the gross to net salaries to be more transparent in Romania.
This year, the SSC are the following: social security contribution (25 percent – employee part), health insurance contribution (10 percent – employee part) and work insurance contribution (2,25 percent – employer part).
Dependent activities – regular employee work – are subject to SSC at the employee (35 percent) and the employer level (2.25 percent).
But independent activities (like those based on intellectual property rights) are subject to SSC only if the revenue from such activities is higher than the minimum salary (RON 1,900 in 2018). Otherwise, the SSC is optional for the taxpayer.
The social security contribution tax rate (25 percent) is applied on a tax base that is equal to the minimum salary per country.
By the option of the taxpayer, the social security contribution can be applied on a tax base higher than the minimum salary.
The health insurance contribution tax rate (10 percent) is applied on o tax base capped at the level of the minimum salary per country.
But experts say this reform has missed its prime target.
“The idea was to cap taxes on work in order to reduce differences between the tax burden on different types of work,” tax consultant Gabriel Biris told Business Review.
“But this target was missed. The differences between SSC payed for employees and those payed for independent activities have increased,” Biris added.
However, experts say this reform brought some advantages to employers.
“Some simplification has been achieved as there are now only three contributions, but the cost of this reform was high for employers – they needed to change 5 million work contracts,” Gabriel Biris points out.
Limited effect on real wages
Official statistics show that the effect on real wages was limited as the net wage growth rate has maintain its regular level.
In September 2018, the net average wage in Romania was RON 2,688 (EUR 578), up 13.1 percent against September 2017 (and 7.7 percent in real terms year-on-year when adjusted to inflation rate).
During the same period, the gross average wage has increased by 35.6 percent, from RON 3,305 in September 2017 up to RON 4,482 (EUR 964) in September 2018.
The government also reduced personal income tax from 16 percent to 10 percent since January 1st.
Romania now applies a 10 percent flat tax rate to revenues obtained from dependent activities (e.g. employment or activities assimilated to employment) or independent activities (e.g. freelancers) but the effect was not positive for everyone.
“The hard-working mayors have been penalized as their budgets lost revenues from income tax. In the same time, the government created the appearance of a smaller deficit in the public pensions budget, but the state budget lost revenues and this is the budget that subsidizes the pensions budget,” Biris indicates.
Based on this smaller deficit in the public pensions budget, the government has increased pensions up to more than RON 1,000 on average and plans another increases in the next year.
Experts suggest these plans are unrealistic as they threaten Romania’s fiscal position and risk to send the country back into ‘junk’ rating zone.