Keeping track with the( hundreds of) changes to the Romanian tax legislation has never been an easy endeavor. This year things have been taken to a whole new level, as fiscal predictability, scarce as it was before, has disappeared entirely.
These days Romania is holding its breath in anticipation of news regarding the tax measures which are expected to come into force on January 1, 2018. The failure of Romanian Government officials to promote a clear and consistent position keeps the business community and the public in limbo, as some of the proposed measures may significantly disrupt operational flows throughout the Romanian economy and impact the life of every Romanian.
The changes to the fiscal legislation were included in Romania’s governance program for 2017–2020 presented at the beginning of this summer and were designed to reduce taxation while improving collection to counter-balance any loss of revenue. The changes included: (i) a personal income tax system focused on household income rather than individual income, the implementation of which has since been postponed (indefinitely) because the Romanian authorities realized they did not have the necessary infrastructure to manage it; (ii) a 0% VAT rate for the sale of apartments, which was recently abandoned (most likely because it was incompatible with EU legislation); (iii) the replacement of the corporate income tax with a turnover tax for all Romanian companies, which was also abandoned as being contrary to EU legislation; and (iv) a solidarity tax, meant as a surcharge for individuals with high income, which was also abandoned because of a poor cost-benefit ratio.
That’s not all. To improve VAT collection, which is currently the lowest in the EU, the Romanian Government has decided to change the country’s VAT payment system by requiring companies to collect VAT charged on supplies in a special-purpose bank account that is distinct from their operational bank accounts, where only VAT-free amounts will continue to be cashed in. The input VAT incurred for acquisitions of goods or services would be paid from the same VAT account.
This mechanism’s implementation is unique in the European Union, and affects all taxpayers registered for VAT purposes in Romania (both resident and non-resident). Despite numerous debates and significant criticism, the Romanian Government published legislation making the system optional from October 1, 2017 and mandatory as of January 1, 2018. Recently, contradictory opinions at the level of the Romanian Senate have provided some hope to the business environment that the split VAT payment system will remain optional and will become mandatory only for companies which are insolvent or which default on their VAT payments to the treasury. A final decision is still pending.
In the meantime, banks have adapted their products accordingly by opening the special VAT accounts, and a limited number of companies have even opted to be registered in the said system and are currently operating according to the new rules. It remains unclear how these companies will deal with leaving the system if they are no longer required by law to apply it.
Another change involves the consolidation of social contributions at the level of the employee. Social security charges in Romania are currently split between employer and employee, amounting to a total of 39.25%. The new system intends to consolidate all social charges at the level of the employee (i.e., they would be entirely withheld from the gross salary) while also reducing the overall percentage to 35% (according to estimates). Naturally this would significantly reduce net wages. To counter this loss of income for private individuals, Government officials have announced that a piece of legislation will be put in place to compel employers to increase gross wages. It remains unclear if this endeavor is possible or even legal.
Finally, personal income tax will be reduced from 16% to 10% as of January 2018.
Considering that all of these changes have been announced/renounced/published/postponed in less than one year, potential investors are thinking twice before doing business in Romania. Romanian and foreign investors alike are reluctant, and if the past is any indication of the future, we can expect a slow-down in investments, a postponement of transactions, a downward adjustment of growth projections and, overall, a stalling of the Romanian economy as a whole.
The silver lining? At least tax advisors will have reasons to stay awake at night processing tax legislation updates.
By Anamaria Tocaci, Tax Manager, Schoenherr Bucharest
This Article was originally published in Issue 4.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.