"The fiscal revolution" is over before it began

TEODOR STOLOJAN (translated by Cosmin Ghidoveanu)
English Section /

"The fiscal revolution" is over before it began

Finally, after many statements concerning the fundamental changes in the fiscal policy, announced from one day to the next and then denied, we have the argumentation note and the draft of the emergency ordinance to amend the Tax Code published, which the Ministry of Public Finance will apply starting with the beginning of next year.

Now, we can draw conclusions concerning what the PSD- ALDE government intends to do in the sector of fiscal policy, to the extent where it doesn't change its mind at the last minute.

First of all , a positive fact for Romania: a European regulation to combat tax evasion and abusive fiscal planning is being transposed in Romanian legislation. The main measures concern: capping the interest rates which can be accepted when calculating the taxable profit for loans received from parent companies; the taxation of capital gains when transferring some assets abroad; the denial of tax benefits resulting from abusive tax arrangements; the banning of transfers to tax havens. What is important is that the National Tax Administration (ANAF) to also have the ability to implement these fiscal provisions to prevent the reduction of the taxable base in Romania, by transferring the profit to tax jurisdictions with a lower or even zero tax rate.

Second of all , a fiscal arithmetic operation is being done, specifically, the contributions to retirement and healthcare which are currently borne by the employer, are included in the employee's gross wage. The payment of those contributions to the special pensions and healthcare budgets will also be done by the employer, through tax withholding, but in the name of the employee. The Ministry of Labor and Social Justice supports this transfer through the fact that employers, using some ambiguities of the legislation in effect, weren't transferring to the retirement and healthcare funds, the contributions they owed. Of course we can ask ourselves whether it wouldn't have been easier to remove from the current legislation the ambiguities in question concerning the responsibility of employers, compared to the measure of transferring those contributions to the employee which requires the modification of millions of employment contracts. But as they say, never ask a public administration "why"?

In order to compensate the effect of the increase of the amount of the social security contributions borne by the employee, through the calculation of these contributions to a higher gross salary, a cut of the income tax from 16% to 10% is being proposed. This cut of the income tax will not only apply to salaries, but also to other incomes, such as interest income, investments (with the exception of dividends), asset rental etc.

Third of all, the minimum required wage will be raised from 1,450 lei, to 1,550 lei (in the current system), respectively to 1,900 lei, having the effect of the shift of the social security contributions from the employer to employee, simultaneously with the increase of the personal deductions, taken into consideration when calculating the taxable wage. As a result, for an employee (a single person), the following changes will occur:

a) the minimum gross wage will be raised 31.0% (1900 compared to 1450);

b) the net wage will increase 9.1% (1162 lei, compared to 1065);

c) the labor cost (for the employer) will increase 10.9% (1943 lei, compared to 1780).

We do not yet know the reaction of the business sector, particularly of the sectors in the area of textiles, clothing, footwear, car parts etc, where the competitive advantage comes from the labor cost. What we do know is that over a million employees are paid the minimum wage and therefore will benefit from a real increase of the net minimum wage, because the employers grant will be forced to grant the gross minimum wage of 1,900 lei.

We do not have the confirmation whether the spectacular increases in salaries of 2019-2020, announced by the PSD-ALDE include or not the effect of the shifting of the social security contributions from the employer to the employee. Based on the statements of the president of the PSD, who said that the law of salaries can only be applied together with the transfer of the contributions from the employer to the employee, it would follow that these announced salary increases also include the effect of the transfer of the social security contributions from the employer to the employees. Or, as can be seen, in the case of the minimum wage, for an increase of 31% of the minimum gross wage, what matters for the employee is the 9.1% increase of the net salary.

For wages that start at 3600 lei, for which personal deductions are no longer granted for the calculation of the taxable wage, the changes for the employer and employee are insignificant. Thus, in the case of a gross wage of 3600 lei, with including the transfer of the social security contributions from the employer to the employee (respectively, the equivalent of a gross salary of 3000 lei under the current circumstances), the changes are the following:

a) the gross wage increases 20% (3600 lei compared to 3000);

b) the net wage increases 0.19% (2108 lei compared to 2104);

c) the labor cost decreases for the employer by 0.03% (3681 lei compared to 3682).

In conclusion, if the government doesn't keep the cut of the wage tax rate from 16% to 10%, all the employees, including those being paid the minimum wage, will lose out when it comes to the net wage. Also, the employees may see their net wage decrease, if the employers don't raise the gross wage to match the effect of the transfer of the social security contributions from the employer to the employee (to that end, the union confederations are asking for the introduction in the law of the requirement for employers to increase the gross wage).

Also in limbo is the situation of the IT sector, where no wage taxes are paid, and the shift of the social security employers, to the extent where they want to maintain the net salary of the employee.

Fourthly, , the profit tax will drop from 16% to 10%, but with the clarification that the limit for companies to qualify as microenterprises will be increased from 500,000 Euros to 1 million Euros. And for microenterprises the tax rate will be 1% of the revenues.

Under these circumstances, microenterprises with profitability that exceeds (calculated in relation to their revenues) 6.25% will pay a lower tax than they do now, just like all the microenterprises with a profitability below 6.25% will suffer losses due to the obligation to pay a tax of 1% of their revenues.

Essentially, the dream of the PSD-ALDE to move to the taxation of income of is taking place for most of the Romanian companies (according to the president of the Association of Financial-Banking analysts, in 2016, 90% of the companies that posted revenues, had a turnover below 1 million Euros).

Fifth of all , the minister of labor and social justice announced that the rate of contribution for the private mandatory pension (2nd pillar) will be reduced from 5.1% to 3.7%, but the size in absolute amount will remain the same because the percentage of 3.7% will apply to a bigger gross salary. In reality, the media has already revealed that a percentage of 3.7% is not enough to ensure the same amount in absolute size and that a percentage of 4.25% is necessary. So far, the Ministry of Labor and Social Justice has not responded to this finding.

What is more worrisome is the uncertainty on whether the second pillar would be made optional. As I have already said at other times, given the demographic evolution and the free movement of the labor force in the European Union, the solution would be to strengthen the 2nd pension pillar and not weaken it.

As was to be expected, on a macroeconomic level, according to the estimates of the Ministry of Public Finances, the revenues of the consolidated budget will decrease by 5.1 billion lei, as a combined effect of the increase of the social security contributions by 8.6 billion lei and of the decrease in the revenues of the state budget from the taxation of wages, profit and other incomes with 13.7 billion lei. As usual, the government's hope lies with the boosting of the economy which the fiscal measures which will be generate.

Instead of a fiscal revolution, we have changes of the tax rates, the moving around of the retirement and healthcare contributions and a still unclear outlook on the fate of the budget balance in 2018.

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