The sales tax will affect companies the most, with the most affected sectors being energy, automotive, tobacco, pharmaceuticals and construction, many of which are already overtaxed. This measure will bring about 6.2 billion lei to the budget, according to PwC Romania’s assessment data presented on Friday during the conference “Preparing for changes in taxes and duties?”.

The proposed fiscal measures announced by the government this week are the result of an unacceptable budget deficit, and the large fiscal burden suddenly placed on the business environment, in an already fragile context, risks further slowing the economy. The main expected consequences of these proposals are hindering investments, especially those made by companies in the short and medium term, the migration of some companies’ activities to other countries or the postponement of the intentions of some foreign companies to invest in the Romanian market, inflationary pressure due to the transfer of costs to end consumers, a decrease in competitiveness Romania, affecting exports.

Basic statements

Daniel Angel, Head of Fiscal and Legal Services:

• Public finances are unbalanced due to increased public spending, especially on salaries and pensions, dilution of the tax base, tax evasion and poor tax collection. We have a very large deficit in VAT collection, where Romania has been the absolute champion for many years. Unfortunately, little action has been taken to improve collection.

• The government must find sources of financing, so we are not facing a tax reform born of a strategy and based on certain principles, which seek to re-adjust taxes for the purpose of economic development. In practice, the expected effect of increasing revenues to the budget may not be achieved, and some companies may suffer so much that it will be very difficult to restore them.

• If we look at the categories of taxpayers, we see that there have been very large fluctuations in the number of those with income tax. The reason is the use of preferential regimes. Thus, the number of micro-enterprises was around 1 million euros in 2022 and halved in 2023 after lowering the turnover threshold for inclusion in this regime. Last year, approximately P120,000 owed income tax.

• Of all the sales taxes will have the biggest impact. Turnover taxation is almost non-existent in developed countries precisely because the size of turnover does not implicitly mean commensurate profits. Rates of return vary from one economic sector to another and also depending on the economic context. According to our estimates, 756 companies may qualify (income tax < 1% CA), 20 are credit institutions and 335 companies will still pay 16% income tax. The amount that, according to our estimates, the Ministry of Finance will additionally collect through the application of this tax is 6.2 billion lei. I would like to note that these estimates take into account only the balance sheet indicators of the companies, as they are presented on the MEF website, and not the total revenues provided for by the draft law, which in certain situations can be even higher.

• As far as we know, we will have other surprises or emergency orders that will happen in the coming days.

• Romania has a difficult budget situation, but raising taxes should not be the only solution. We have a collection that still puts us at the bottom of the rankings. And yes, some adjustments are necessary for tax fairness, with fewer exemptions, exemptions, exemptions that reduce the tax base.

• But since “hope dies last”, I hope that the institution of real dialogue and consultation between the authorities and the business environment will again find its place in our agendas and that such tax initiatives are first discussed with specialists, there are some thorough impact analyses. done and then accepted. Because no consultation benefits anyone, and if we sow uncertainty, we will certainly not reap development and sustainable economic growth.

Ruxandra Tarlescu, partner of PwC Romania

• This tax will be paid from January 1, 2024 by all companies whose turnover in the previous year exceeds 50 million euros. When we talk about turnover, we are not talking about the one we know from the financial statements, but about the year of calculation, which adds to the real turnover and other income. Specifically, the difference between gross income and exempt income (tax-free income, inventory changes, compensation, subsidies).

• The calculation formula does not mean 1% of the turnover that we talked about, it is 1% of the turnover, from which we subtract investments in assets, the list of which we will see in the Minister’s order. Taxpayers will pay the maximum of what they have been charged so far as income tax and what this minimum turnover tax yields.

• Based on discussions with customers, this measure will affect the majority, according to their calculations. There are three categories that will suffer more from the regulated industries: energy, pharmaceuticals, which already pay different taxes specific to their sector and have a small regulatory margin. Energy companies are already in a difficult financial position due to price caps, delayed compensation for these caps, inflation, and more. For example, on the invoice we see transport tariffs, green certificates, which are also included in the income of other companies of the chain and which do not bring income. Basically we are in a situation where we are charging something that is not profitable and also creates an impact among other companies.

• In pharmaceuticals, the drug trade is the most affected sector in the entire economy because there are regulated small markups on drugs, in some cases below 1%. The imbalances are very large. Big companies in the industry are wondering if they can continue to operate under these measures.

Diana Coroaba, partner at PwC Romania

• Turnover does not matter, all banks pay, there is no comparison, both profit and turnover tax are paid. A new sales tax declaration will appear. 1% is paid from revenues reported to the NBR, real turnover.

• We looked at the top 10 banks and found that the additional tax would be between 14% and 50% of corporate tax, reaching an effective tax rate of up to 33%. Sales tax will be paid quarterly. Sales tax expenses are not deductible.

• It is effective from January 1, 2024, and the forecasts of the Ministry of Finance are calculated for four years. We expected this tax to be at least four years.

Andreja Mitirice, partner of PwC Romania:

• The proposed changes bring together all existing employee-level opportunities, with the exception of research and development employees.

• Thus, for IT workers, the income tax exemption will no longer apply in full, but only for gross monthly income of 10,000 lei. It is important to note that gross income is the sum of wage income and wage-equivalent income. In addition, this exemption will only apply to one employer, that is, only for one contract, and even if the amount is not fully covered by the contract, the institution will not be able to apply the difference in the case of a second employment contract. The employee must inform through an affidavit who the employer applying the exemption is.

• All other contributions apply as before, with the exception of the contribution to private pension funds, which is optional.

• A possible impact will be the migration of employees to other organizational forms (micro, PFA), and there may also be a negative impact on pension funds.

• Objects in the construction sector, food industry and agriculture already apply within the limit of gross income of 10,000 gross lei per month in the sense that they are exempt from taxes and partly from contributions. The proposed changes also limit application on the basis of a single individual employment contract and abolish the exemption from paying contributions after deducting contributions to a non-state pension fund. Given that the rationale for including this option was to reduce labor shortages in these sectors or to make these sectors more competitive, the possible impact could be the opposite.

• Also in the field of income from wages, not directly related to the specified objects, the bill introduces additional taxation of certain benefits from wages that are widely used by employers, such as meal vouchers or vacation vouchers (meal vouchers can now also be to provide in cash).

If these payments are now taxable but exempt from social contributions, in the future it is assumed that they will be included in the calculation of the social health insurance contribution, which means a lower net benefit for employees.

Adina Vizoli, director:

• Indeed, the landscape of VAT rates is changing from January 1, 2024. In the form contained in the draft law, reduced VAT rates for goods that are considered vital, affordable prices for heating the population in the cold season, as well as for supporting education were supported. Yes, book delivery, access to cultural events, firewood and heat delivery in the cold season remain at the 5% discount rate, and medicine and food and HORECA remain at the 9% discount rate, some changes.

• As for the changes, the biggest rate increase is in the field of recreation, entertainment and leisure, where the VAT rate increases from 5% to 19% VAT, after 5 years of applying the super reduced rate.

• In food products, organic products reach from 5% to 9%, and products with sugar content – up to 19%. In addition, soft drinks with sugar content, which have already been subject to VAT at the rate of 19% since the beginning of this year, will also be subject to excise duty from 2024.

• We are also seeing other important changes for the real estate sector, which has already been affected by the numerous changes introduced in recent years to the ceiling on houses that can be supplied with 5% VAT. Here, starting in 2024, those homes will be subject to the 9% quota, but we will have to carefully review the new definition of homes that qualify for the 9% quota. Thus, 9% VAT can be applied only to those houses that can actually be inhabited by beneficiaries without significant additional investments.

• We expect all these changes to be reflected in the prices of the products affected by the quota increase in a relatively short period of time, possibly gradually after the publication of the Law. It should be borne in mind that the application of different VAT rates causes problems of interpretation regarding the correct classification of products.