While 2017 was characterized by various fiscal changes, experiments, and abandoned proposals, the tax landscape at the end of 2018 underpins the competitive edge of Romania in the region. Still, there are reasonable threats with regard to the predictability of the tax system, considering the current macroeconomic trends and the budgetary constraints faced by the Romanian government.
Generally, Romania’s tax laws have been perceived by investors as far from stable and predictable, suffering hundreds of amendments, both large and small, in the last few years, with 2017 (which followed general parliamentary elections) at the top in the number of proposed tax changes. Some of these proposals have been adopted (most notably, the reshaping of the social contribution system and the lowering of the personal income tax rate to ten percent, both of which entered into force in 2018). Others have been abandoned (e.g., plans to introduce a globalized tax system for personal income) or drastically limited (e.g., the very burdensome VAT split payment system, initially intended to apply to all companies as a way to reduce VAT leakage, is applicable in the end only in limited situations).
Fortunately, the tax environment has avoided further other major changes in 2018. And this is a good time for businesses active in Romania to take advantage of the country’s competitive tax system. The 16 percent flat rate for corporate income tax is one of the lowest in the EU, combined with an alternative treatment for small enterprises which can pay a turnover tax of one percent for turnover up to EUR 1 million. In addition, the standard dividend tax has been reduced to five percent, while the 19 percent VAT rate is below the average standard rate applicable in the EU. Labor taxation is relatively high (i.e., slightly above 40 percent of the combined effect of income tax and social contributions on employer’s aggregate payroll costs), with no caps for individual social contributions; still, this burden does not grossly deviate from the average costs incurred by employers in other countries from the region, while it is at the low end when compared with other western EU countries. In addition, IT sector professionals are exempt from the ten percent individual income tax.
Importantly, in the context of current trends at EU and international levels, due to the implementation of anti-abuse and anti-BEPS (base erosion and profit shifting) actions, Romania may boost its role as a holding hub for local and regional investors, who may consider re-routing their investments from traditional holding locations. Thus, Romania benefits from a favorable local holding treatment and a vast number of Double Taxation Treaties concluded with various countries. Subject to certain shareholding conditions, investment outcomes such as dividends and capital gains can transit efficiently through Romanian holding companies with no tax burden.
Nevertheless, Romania’s current budgetary pressures and inefficiencies in tax administration may create vulnerabilities for the general tax environment. The public budget deficit is increasing and expected to exceed three percent of GDP in 2018, impacted by a rapid advance of budgetary expenses and a relatively low rate of tax collection. Romania continues to raise the lowest amount of tax revenue as a percentage of GDP and faces the largest VAT gap in the EU. In this context, the threats concern potential changes in fiscal policies to cover short-term budgetary needs, and the worsening of the taxpayers-government relationship. The business environment has already voiced various complaints about excessive tax administration measures, which create obstacles for good taxpayers, including, for example, the bureaucratic and non-transparent procedures in place for obtaining and keeping VAT codes and for assigning different risk levels to taxpayers. Also, companies have generally faced an increase of tax audits and a lack of time-efficient remedies (e.g., appeals in the administrative phase, obtaining advance binding rulings) to protect their business.
So, the key for Romania to keep a friendly and stable tax system is to improve the quality of tax administration and limit general bureaucracy and barriers for businesses. The government can reach this goal by continuing to improve tax digitalization and voluntary compliance while centralizing taxpayer information and risk analysis to eliminate tax leakage.
By Alexandru Cristea, Partner, Tuca Zbarcea & Asociatii Tax
This Article was originally published in Issue 5.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.