The year 2017 was marked by discussions about changes to Romanian tax legislation. Beyond the pros and cons of these changes, they are now on the table of local business decision makers in view of compliance and implementation.
Challenges for the business environment
The application of split VAT to certain types of companies, the transfer of social contributions to the employee, the elimination of dividend tax or the VAT deduction are just some of the tax measures whose application is still rather unclear.
That is why we believe it is important these changes to be kown by all the CEOs, financial directors and entrepreneurs who are preparing for 2018 so that the economic performance of the companies is not affected by a new fiscal context.
The main changes in force since 1 January 2018
Some of the amendments that will be in force since 1 January 2018, brought to Law no. 227/2015 regarding the Fiscal Code by Emergency Ordinance refers in particular to income from salaries, but also other types of income.
1. Income tax
• The income tax rate will be reduced from 16% to 10%
• The tax rate for pensions higher than 2,000 lei decreases from 16% to 10% (pensions below 2,000 lei were exempt from tax starting with 1 February 2017, and for other pensions the 10% tax reduction will be applied for which exceeds 2,000 lei)
• The tax on income in independent activities, interest income tax, rental income, lease income, agricultural activities, forestry, fish farming drops from 16% to 10%
• Tax on income from awards, investments (excluding dividends) also decreases from 16% to 10%
2. Mandatory social contributions
• The overall social contribution rate for salaries will be reduced from 39.25% to 37.25%
• The number of social contributions related to salaries will be reduced:
o At present: employee CAS 10.5%, employee CASS 5.5%, employee’s contribution to unemployment fund 0.5%, employer CAS 15.8%, employer CASS 5.2%, employer’s contribution to sick leave fund 0.85%, Guarantee Fund 0.25%, Work accidents, risk insurance, and professional disease fund 0.15% - Total 39.25%
o According to the Emergency Ordinance: employee CAS 25%, employee CASS 10%, Labor Insurance Contribution 2.25% - Total 37.25%
• Increasing contributions to pension pillar 1
• Personal deduction is granted to individuals who have a monthly gross income of up to 1950 lei:
o For taxpayers who have no dependents - 510 lei
o For taxpayers with a dependent person - 670 lei
o For taxpayers who have two dependents - 830 lei
o For taxpayers who have three dependents - 990 lei
o For taxpayers who have four or more dependents - 1,310 lei
• For taxpayers who earn monthly gross earnings from salaries ranging from 1,951 lei to 3,600 lei, the personal deductions are degressive in relation to the above.
• For taxpayers who earn monthly gross salaries of over 3,600 lei, no personal deduction is granted.
3. Profit tax
• The thin capitalization rules will be repealed and the new rule for limiting interest deduction laid down in Directive 2016/1164 / EU will apply.
• "Surplus leverage costs" (including the difference between interest / currency and similar income) may be deducted within 10% of the Reference Value.
• The reference value is the accounting profit (income minus expenses) adjusted with the deduction of non-taxable income, plus profit tax, excessive borrowing costs and tax amortization.
• Excessive borrowing costs may be carried over (without time limitation), including interest expense and net foreign exchange losses carried forward until 31.12.2017. If the reference value is negative or 0, excessive borrowing costs can not be deducted, but they can be carried forward.
4. The income tax of micro-enterprises (turnover tax)
• The definition of "microenterprise" will include all private companies that have a turnover below the threshold of € 1 million and are active.
• The possibility to opt between the corporate tax and the turnover tax is eliminated. The micro enterprise will pay the corporation tax starting with the quarter in which the turnover exceeds the threshold of 1 million euros (profit tax will be calculated on the profit recorded from the quarter in which the threshold is exceeded).
• Tax rates will be 3% for micro-enterprises without employees and 1% for micro-enterprises with at least one employee (full-time).
Recommendation for companies
The year 2018 brings not only changes to tax rates in Romania, with a new tax landscape based on a new tax philosophy. Changes in the Fiscal Code have been made every year, but this time, the scale and depth of change is unprecedented. It is therefore advisable that all companies, either the most affected or less affected by the changes that will take effect on January 1, 2018, should take the following steps as soon as possible:
• Carefully analyze all changes to the Fiscal Code along with management team members.
• Discuss with a tax consultant to clarify all the elements that are unclear to you. It is essential to have a clear understanding of the impact that changes will have on the company.
• Work with all department leaders to identify the processes that will be affected and assess the risk areas.
• Validate with a business consultant and / or a tax consultant what resulted from this analysis.
• Based on departmental analysis, prioritize compliance and implementation measures for changes that are relevant to your business and industry.
• Set up an action plan, and indicators to measure progress with this plan.
• Keep in touch with a tax consultant to fix in real time any situation that appears and does not conform to the foregoing.
* * *
For more than 22 years, PKF Finconta is one of the 10 leading professional services companies in Romania. Since 2006, we are a member of PKF International Limited. PKF International is a leading international business advisory organization. The company grew consistently over the years, forming a Group of four companies: PKF Finconta, PKF Finconta Consultanta, PKF Finconta HR and Finconta Consulting SPRL, members of national professional organizations CECCAR, CAFR, CCFR and UNPIR. We provide a wide range of business advisory and related specialist services. We have seven core areas of expertise and within these areas, we tailor our services to your business and your needs: audit, corporate finance, tax, bookkeeping and accounting advisory services, transfer pricing, payroll and personnel administration and insolvency.