Transcript the fiscal reform in romania

THE FISCAL REFORM
IN ROMANIA
Government Ordinance for the
modification of the Fiscal Code,
starting January 1st 2005
THE FISCAL REFORM IN ROMANIA
Context
 Romania had one of the highest taxation levels in the
region (corporate tax of 25% and personal income
tax from 18% to 40%) but one of the lowest tax
collection rate, of 15-16%;
 A significant size of the gray economy, estimated at
30% - 40% of GDP;
 A low level of FDI, due to the insufficiently attractive
business environment;
 The fiscal relaxation proved to be long-term
beneficial for countries in the region facing similar
challenges (Slovak Republic, Russia, Ukraine,
Estonia, Lithuania, Latvia).
THE FISCAL REFORM IN ROMANIA
Tax levels in CEE countries 2005
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30
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10
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Personal Income Tax
Corporate Tax
THE FISCAL REFORM IN ROMANIA
Fiscal Relaxation Principles
 TRANSPARENCY
 SIMPLICITY
 PARTNERSHIP WITH TAXPAYERS
 PRUDENCE
THE FISCAL REFORM IN ROMANIA
Objectives
 Enhancing and sustaining the economic growth;
 Increasing the economic competitiveness;
 Higher net revenues for population and business
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sector;
Stimulating entrepreneurship, private investment
and job creation;
Attracting more FDI inflows;
Supporting the development of the middle-class;
Improving tax collection and reducing the gray
economy.
THE FISCAL REFORM IN ROMANIA
Main provisions
 Introduction of the 16% flat tax on personal income
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to replace the previous taxes which were varying
between 18% and 40%;
Corporate tax reduced from 25% to 16%;
Increase of the tax on micro-companies turnover
from 1.5% to 3%;
Increase of the dividend tax for individuals from 5%
to 10%;
Fiscal deductions in favor of the less paid
employees, set to decrease as wages increase.
THE FISCAL REFORM IN ROMANIA
Impact on budget revenues
 The short-term decrease in the budget revenues due
to the introduction of the flat tax will be
compensated by:
- improving tax collection and enhancing fiscal
control;
- increasing dividend tax and micro-companies
turnover tax;
- rationalizing government expenses.
THE FISCAL REFORM IN ROMANIA
Impact on foreign investments
 Central-Eastern Europe has become a region of
opportunity for foreign investors, out-performing the
world economy and most of the emerging markets
and attracting an increasing share of the global FDI.
 As the experience of other CEE countries shows, the
fiscal relaxation will increase Romania’s comparative
advantages in the regional and global competition
for attracting a larger amount of FDI in export
oriented and high value-added sectors.
 FDI increase in Romania is essential for generating
new
jobs,
technology
transfer,
increased
competitiveness, increased exports and increased
profits to be taxed.
THE FISCAL REFORM IN ROMANIA
FDI inward stock per capita in CentralEastern Europe, USD
2003
5000
4000
3000
2000
1000
0
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THE FISCAL REFORM IN ROMANIA
Romania – a prime attraction for FDI in the
region
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One of the lowest taxation levels in the region;
High and sustainable GDP growth rate;
One-digit inflation rate;
Domestic money-market will be opened for nonresident investors in 2005;
 Accession negotiations concluded;
 Labor cost advantage.