Romania-September 2003: the Government (Minister of Finance) announced a radical change of the tax on global personal income – to replace the progressive tax and the reporting system of global income with a flat tax, because the current system is not efficient.
Romania-October 2003: what we saw many times, it happened again – the Government changed its mind. The Government postponed the flat tax for 2005…because this reform is not well elaborated.
1. The Features of the Main Romanian Taxes (year 2004)
a) Direct taxes
Tax on profit – 25 %, a single rate since 2004 (until
2004, the rate was lower for the profit generated by the export business).
For dividend, a 5 % rate in the case of dividend paid to persons, and 10 %, if it is paid to companies.
For interest paid to persons, a 1 % rate.
Tax on global
personal income – a progressive system of rates*.
The figures are in Euro/year**:
< 718 18 %
718.1736Euro 128 + 23 % for
amount over Euro 718
1736-2783 Euro 363 + 28 % for
amount over Euro 1736;
2783 – 3890 Euro 657 + 34 % for
amount over Euro
> 3890 Euro 1033 + 40 % for
amount over Euro 3890.
*)The same tax rates are applied for pension. The pension is not added into global income and each pensioner has a standard tax exemption of Euro 160.
**) The figures are calculated in Euro, based on data projected for 2004; average exchange rate for 2004 Lei 40.100/Euro. An Euro 50/month is the standard personal tax exemption.
b) Indirect Taxes
The value added tax – 19 % , a single rate by the end of 2003.
Since 2004, a reduced rate of 9 % will apply for school books, medicaments, hotels, museums.
The excise – Sparkle wine Euro 42/hl
Ethyl alcohol Euro 150/hl
Gasoline unleaded Euro 347/ tone
Diesel Euro 221/tone
Cigarettes Euro 4,47/1000 +
32 % ad valorem
c) Social Contribution and Payroll Taxes
rates – percent
health insurance 7 6,5
pension insurance 22,0 9,5
unemployment 3,0 1,0
Nota Bene: In Romania, companies and persons pay local taxes and a lot of other „payments” for different services of state public institutions which are perceived as a real parallel tax system.
2.Conclusions on the Romanian main taxes
Any comparative analysis of the Romanian main taxes with the
tax systems of other countries based on the level of tax rates is misleading, because the Romanian rates are in line. For instance, the value added tax (VAT) in the European Union (EU) varies between 15 % the minimum rate and 25 % the maximum rate (set through the EU Directive). Romania has a 19 % VAT rate. In Romania, the highest tax rate on global personal income is 40% the same as in Bulgaria and Hungary.
Thus, why the Romanian taxpayers are complaining against the burden of taxation ? The Romanians taxpayers are entitled to complain because there are at least three important differences between the Romanian tax system and other tax systems:
(i)the tax burden is higher than it is induced by official data;
(ii)the evasion is larger in Romania than in other countries;
(iii)the tax administration is cumbersome and under the influence of politics which makes it unfair.
(i) The Tax Burden Is Higher Than In Other Countries
In Romania, the ratio of total taxes to GDP is around 30 percent2. This size is low as compared with other European countries. For instance, the average tax burden in the European Union is 42.6% (1997)3. However, taking into account the current tax rates in Romania, this percent should be between 36 and 38 percent of GDP, which is a different story. At the level of the 2004 projected GDP , the difference of 6-8 percentage points means Euro 3.2-4.2 billion, which is public revenue missed for investment in infrastructure , education and health.
There are two important reasons for this gap of public revenues in Romania as compared with other countries with similar tax rates:
a)the government does not implement a hard budget constraints for state companies and for private companies which belonged to ownerss well connected with political party in power. The famous case of two rafineries privatized 2-3 years ago and allowed by the government to build arrears to state budget and to Petrom (The Romanian State Oil Company). After, decapitalization of these rafineries, the smallest one (Darmanesti) went bancruptcy and the largest one (Rafo Onesti) changed its ownership with an offshore one. The loss for the state is around hundreds of millions of Euro;
b)the evasion and fiscal arbitrage are high in Romania.
As a consequence, for the companies and people who pay their
taxes and social contributions the burden of them is heavy. In addition, the global personal income tax destroys exactly the middle class which transition to market economy should create. For instance, the highest tax rate is 40 %. This rate is for that part of income which is above Euro 330 per month. And, in Romania, today, above Euro 300 the middle class starts. In Bulgaria, the same rate of 40% is for income above Euro 700.
(ii)The Evasion And Fiscal Arbitrage Are Higher In Romania Than In Other Countries
When we talk about evasion we refer to :
the black economy appreciated between 25 and 40 percent of GDP (by different evaluations). The black economy is located mainly in construction, alcoholic drinks, tobacco products, services (maintenance etc.);
Romania has become the heaven of too many black boxes – companies established by Romanians and foreigners for just one or several transactions and then put aside without paying taxes or after these companies just concluded VAT returns.
When we refer about fiscal arbitrage we underline the fiscal
planning taking into account the mobility of tax base within the country between two or more categories of taxes or out of the country. Today, according to the Romanian fiscal code a tax payer may translate his or her income from the impact of personal income tax to the impact of the capital income tax. Outside of the country, many Romanian companies have opened offshore companies and price transfer is growing. As far as Romania is approaching the European Union, more and more high income people will have the right to have fiscal residence in the neighboring countries, wherever the tax environment is more friendly.
The most interesting example is the number of the Romanian citizens who declared a global income over Lei 1 billion in 2002 (about Euro 32,000): only 1,771. This number is in a country where tens of thousands of “vilas-expensive houses“ have been build and expensive cars have been bought. Therefore we may understand better the large gap between the ratio of the global personal income tax to GDP in Romania which is 3.0% and the same ratio in the EU which is 9.4% (6.5% the lowest in Greece and 25% the highest in Denmark).
(iii)The Tax Administration Is Cumbersome and Under The
Influence Of Politics Which Makes It Unfair
What is unbelieving in a civilized country, it is possible in Romania: people staying on long lines for paying their taxes, because of obsolete and cumbersome tax administration.
On the other hand, the government has a different implementation of the tax policy regarding different companies:
companies, usually small and medium companies, not linked to political party in power which are the best tax payers;
state companies for long years in restructuring without success. The political party in power has not let them in bankruptcy because interested people decapitalized them and the bankruptcy could start social unrest. Finally, these companies which could not become viable in the market economy wasted the scarce resources of Romania;
privatized and private companies belonging to owners well connected to political party in power which do not pay taxes and are subject of rescheduling and writing off of taxes and social contributions.
This “adjustable“ tax administration according to the links or lack
of links of the companies with political party in power creates an unfair business environment.
In addition, the tax administration staff as well as the general staff of the Ministry of Finance receive special bonuses financed from fines imposed on companies. Thus, the tax administration staff , especially the fiscal control bodies, has powerful incentives for fiscal harassment of companies.
3.The Guidelines For A Tax Reform In Romanian
Any tax reform in Romania should be based on two fundamentals:
(i)the Romanian tax system should match better the requirements of an efficient and fair tax sysytem;
(ii)the Romanian tax system should align to the requirements of the EU integration.
(i)The Romanian Tax System Should Match Better The Requirements Of An Efficient And Fair Tax System