Fiscal highlights for the beginning of 2017

Year 2017 begins with important fiscal changes some of them announced for quite some time, e.g. over one year as it is the case for the reduction of standard VAT level from 20% to 19% (return to its 2008 value, increased in 2009 due to the crisis to 24%), others modified overnight in the first days of the current year effective immediate or starting with February 1st, e.g. taxation of microenterprises, tax on profit exemption for the companies which activate exclusively in the field of research and development, removal of minimum threshold for the revenues obtained by software companies in order for their employees to benefit of tax on salary exemption  a.o.

Overall, apparently, there is a certain move of the new Government towards the reduction of taxation level in order to boost economic activity in the field of SMEs and in sectors with high value added such as research and software. It is still unclear how that loss of income will be compensated having in view that some categories of state employees will also benefit of increased salaries. In addition, a law adopted by the Parliament just before the parliamentary elections held in December last year, cancelled over 100 parafiscal taxes such as the tax for state radio and television, the green stamp tax which was used to stimulate the acquisition of new cars, tax on constructions and many others.

Romania registered in 2016 the highest GDP growth of all EU, according to the latest forecast released in November 2016 by the National Commission for Prognosis, the advance of the country’s GDP would be 4,8% for the past year after being 3,8% in 2015. For the current year the estimated advance is around 4,3%. Considering those high values for the GDP growth, and the fact that in 2016 the budget deficit did not exceed the established ceiling, it is obvious that there is space for a fiscal relaxation.

The big problem is that there is still unclear how this loss of income for the state budget will be compensated. By mid-year we could realize that fiscal deficit goes higher and higher and that it becomes more and more expensive for the government to borrow to cover the deficit. It will be then necessary to impose some new taxes which would affect the credibility of the government with even more negative impact on the country’s rating and borrowing capacity.

One solution would be of course to limit the public investments in order to keep the budget deficit under control but this would hamper the economic growth and would make even greater the development gap between Romania and the EU average. Other solution which is under consideration at the governmental level would be to replace those taxes which were either cancelled or reduced with some other fiscal measures which would affect only higher salaries or incomes.

A first measure was approved by the Government last week, the ceiling of five average gross salaries for the payment of the contributions to state pension and to state health care was removed starting with February 2017. In October 2016, the average gross salary was 2.874 ROL (around 640 Euro) which means that the measure will be applied for the employees earning more than 3.200 Euro gross per month. According to the Government, there are 36.000 people affected by this measure including the prime minister, the president and other high ranked officials. But this measure which is estimated to bring additional 2 billion ROL (approx. 450 mil. Euro) to the state budget will only cover the increase of salaries granted for some categories of civil servants beginning January 2017 and the general increase of the pensions.

It is thus necessary to have an overall increase of the state budget revenues which could be achieved by curving the tax evasion, by recovering the seized assets from those who were convicted for frauds and by a more efficient and higher absorption of the non-reimbursable European funds which would not only fill the budgetary gaps but will also support a healthy growth of the economy.

In brief, the fiscal landmarks of the year 2017 are the following:

  • Standard VAT level is 19% starting with January 2017.
  • Increase of the ceiling of 100.000 Euro to 500.000 Euro for the revenues of a company in order to qualify as micro-enterprise.
  • According to new regulations, tax on revenue for micro-enterprises will be 1% for the companies with one or more employees and 3% for those with no employees.
  • Companies active exclusively in Research, Development and Innovation (R&D&I) are exempted of tax on profit for the first 10 years of activity with the observance of state aid regulation. As a transitory measure, companies with R&D&I profile, established before the adoption of that legislation, are exempted of tax on profit for the period January 6th, 2017 – January 6th, 2027.
  • Beginning with February 2017, medical services paid by the employees can be also deducted from the taxable income up to 400 Euro along with voluntary health care insurance.
  • Removal of the ceiling of five average gross salaries for the payment of the contributions to state pension and to state health by the employees and employers starting with February 2017.
  • For the real estate transactions done by natural persons, the 3% tax will be applied after the deduction of 450.000 ROL (100.000 Euro).
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