Income Tax in Romania: Possible Revolution Starting 2018

A common project of the Ministry of Finance and that of Labour and Social Justice Ministry, issued and presented for the first time in April 2017, brought a great surprise for both specialists and society members. This project, if materialized, will be a part of the new Economic Code, bringing some very important changes from multiple points of view, the present Fiscal Code included. These changes are primarily related to the issue of how income tax is calculated and collected.

INCOME TAX IN ROMANIA: THE CURRENT SITUATION

The sole quota of income tax has been, since 2005, of 16 %. It applies to:

  • employees – it is calculated, retained and paid by the employer;
  • free-lancers – it is paid individually, 4 times/year and a regularization, if the case, next year;
  • rent, after deducting 40% of it;
  • prizes and gains from games, under certain specific conditions;
  • other incomes.

NEW REGULATIONS STARTING 2018: THE PROJECT STAGE

The new project brings what we can qualify, without exaggerating, a revolution in the field of income taxation in Romania. The officially presented text states a new taxation formula and introduces a new concept – taxation per household – after the model used in France, Belgium and in The United States.

According to this material, a household can consist of:

  • a family;
  • a single person;
  • an unmarried couple who decided to manage a common patrimony.

The possibility of more than one household existing at the same address is also recognized; for example, two brothers who decided to have different households, a divorced couple who still lives in the same house, or an unmarried couple.

The necessity of defining this new concept is justified by the fact that certain expenses made during the year will be deducted from the total taxable income of the household. The income tax will be apply afterwards.

  Which will be the new level of taxation?

Starting 2018, the government wants to eliminate the sole quota of 16 % and introduce 2 taxation levels:

  • 0 % for income until 2000 lei/month (around 445 €);
  • 10 % for what exceeds 2000 lei.

What deductible expenses?

The project presents quite a comprehensive list of deductible expenses:

  • Educational expenses (kindergarten and private schools tuitions, private courses, books, theatre tickets, stationery etc.);
  • Private health system expenses;
  • Gym subscriptions;
  • Renovating or construction expenses;
  • Mandatory insurances (car and house);
  • Spa / travel expenses.

The above mentioned expenses will have a superior level of deductibility of 1 000 lei/person/month and a household will be calculated as number of persons plus one. Meaning that a household consisting of two persons will be allowed to deduct expenses until (2+1) x1000 lei = 3 000 lei and one consisting of a single person, will deduct until (1+1) x 1000 lei = 2 000 lei. This level will be multiplied by 12 months, resulting in a yearly level of deductible expenses of 36 000 lei for the first case and of 24 000 lei for the second one.

The declared goal of this change in regulation is to determine the population to always ask for the fiscal receipt and to whiten some fields out of the black economy (such as small renovating and constructions, for example).

How should the new taxation system work for employees?

First of all, the employer will no longer retain the income tax on every payslip. Moreover, the social contributions which are now split between the employer and the employee will be paid only by the employee. The employer will still be the one who to retain, transfer and also declare them.

The income tax for year N will be declared in May N+1, due to be paid at that time.

Who will survey the whole process?

This project also defines a new profession, the one of tax consultant. These professionals will function on the same system as the family doctors. They will have a steady office, a declared schedule and an average of 200-300 affiliated households, for which they will provide calculation, payment services and even consulting for financial investments. Their salaries will be supported from the state budget. 35 000 tax consultants are expected to be needed all over the country in order to manage an average of 7 million households.

NEW TAXATION PROJECT, MANY QUESTION MARKS

At the moment, the income tax is retained and paid by employers for their employees on a monthly basis. In the happy case of total compliance, these amounts, which will be considerably diminished by the new quota and the several deductions, will credit the state budget beginning the month of May next year.  This fact leads to the idea that the state budget doesn’t necessarily “need” this amount of money. Or that it will be compensated by other taxes that will soon come to be effective. Details on this subject and reliable analyses are very much expected. 

Another even much more vulnerable aspect is the lack of fiscal education of the common people. The average employee was used to think of his salary as a net amount. It is very difficult to tell them now they will have to save a certain amount of money on a monthly basis in order to pay the income tax in May next year.  Such an education will take years, at least 2 or 3. Some organisations claim for 5 years of preparation of this new philosophy of taxation in order to prepare the people and to hire and train the tax consultants.

Last but not the least, the new profession of tax consultant actually uses the nomination of the profession already existing, the one of the certified members of the Tax Consultants Chamber.  Still, no word is spoken out if these specialists are intended to be the seed of the new profession – or it is simply, let’s say, a lack of imagination. They will be paid by the state and not by the contributor, unlike the present situation, when a tax adviser is paid by the client.

 It will be indeed an awkward situation to put the affairs of a private person in the hands of a specialist paid by and representing the state. If only because all that mass of possible deductions give a clear and certain profile of the household and its members. Not to mention the dangers of potential errors in calculation.  What to do then? Will we have to hire private consultants to contest what state consultants had done?

This project has still to be put in public discussion, after which it will be examined and submitted to voting in the Parliament. It will probably suffer a lot of amendments, beginning even with the presently contestable definition of the “household”.

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