“The Romanian Recovery and Resilience Plan (PNRR) forms part of an unprecedented coordinated EU response to the COVID-19 crisis, to address common European challenges by embracing the green and digital transitions, to strengthen economic and social resilience and the cohesion of the single market,” according to the European Commission.
One of the key measures to reinforce Romania’s economic resilience is fiscal sustainability with its key goals to reinforce budgetary framework, better expenditure control, the review of the existing tax environment, and the reform of the pension system.
Changes to the existing tax legal framework will be implemented gradually by 2026, which is the deadline for implementing the PNRR measures. What should the Romanian businesses expect?
One thing we expect from the PNRR is that taxpayers will feel the pressure of the Romanian tax authorities in achieving the proposed goals and the relationship between the business environment and the tax authorities, already strained, will become even tenser: (i) to achieve the collection goals in the PNRR (especially in regards to VAT Gap which is one of the highest in the EU), the Romanian tax authorities plan a 10% increase of the number of tax audits with 60% of audits being digital desktop audits, by 2025; (ii) tax audit bodies will have amended and/or increased prerogatives and powers during tax audits (the antifraud directorate already has increased powers, the customs administration has been moved again under the umbrella of the tax authorities, etc.); (iii) tax administration measures will be designed to revolve more around the tax risk class of taxpayers. Implicitly, the tax risk assessment process will be revised and perfected; (iv) there will be an increased audit focus on employment and on alternative remuneration models to reduce un/under-declared labor.
Secondly, part of the review of the taxation policy is the gradual removal of certain tax incentives that are now in place for the construction industry, namely the exemption from the payment of social insurance contributions and income tax for qualifying employees. At the same time, the income tax exemption for IT workers in the IT field also seems to be on its way out. As one may imagine, these tax measures have increased the already existing concern of qualified labor migration which would have an overall negative impact on Romania’s budget.
Micro-companies are also in the spotlight. The measure contemplated by the Romanian Government mainly considers the decrease of the turnover threshold under which companies are considered micro-companies from EUR 1 million to EUR 500,000. Following the implementation of this measure, a gradual decrease is estimated in the number of taxpayers who benefit from this tax regime, as follows: a decrease of 15% in the first year, a decrease of 33% in year two, a decrease of 33% in year three.
With regards to VAT, the PNRR mentions that Romania needs to avoid the extension of reduced VAT quotas to other categories of goods or services other than the ones already existing, e.g. food, medicine, water, housing, etc.
One key measure in the PNRR is the digitalization of the National Agency for Fiscal Administration which should lead to a higher collection of taxes and higher prevention of tax fraud. As part of this measure, starting 2022, the Government has taken the responsibility to enforce digital communication, by introducing the obligation to register in the Virtual Private Space for all taxpayers.
Although not part of the PNRR, in the context of future tax amendments, there is an increasing level of discussions around the implementation of a progressive taxation system and the removal of the fixed-rate system, which has been attractive for foreign investors so far and which has been in place for the better part of the last two decades.
In a nutshell, we expect important tax changes this year and in the following years that will trigger heated discussions between the business environment and the Government as some are envisaged to have a negative impact on companies and private taxpayers alike. Stay tuned!
By Theodor Artenie, Head of Tax, Noerr
This article was written before the advent of the war in Ukraine and was originally published in Issue 9.2 of the CEE Legal Matters Magazine on March 1, 2022. More current articles on developments in Ukraine can be found in our #StandWithUkraine section. If you would like to receive a hard copy of the magazine, you can subscribe here.