According to this year’s report of the European Commission on taxation trends at the level of the European Union, in 2020 Romania collected revenues from the state budget amounting to 26.3% of GDP, consisting of direct and indirect taxes, as well as social contributions, an indicator that puts it at 26 place at the EU level. The largest percentage was recorded in the direction of social contributions, which is 11.1%.

In order to increase revenues to the state budget, Decree No. 16/2022, published in mid-July in the Official Gazette, foresees a number of significant changes, such as those concerning the regime of micro-enterprises, taxes or income taxes and social contributions. Some measures have already come into effect on July 18 and August 1, but the vast majority apply from January 1, 2023.

Why Romania needs a restructuring of the fiscal system. What social categories will it affect?

One of the most discussed aspects of the tax system in Romania is the over-taxation of low and middle wages, so the private sector is implementing solutions for workers, such as income-based PFA, copyright contracts or gift vouchers.

As a result of pressure from the private sector, the authorities have introduced various provisions to improve the tax regime, among which the most controversial are exemptions from paying payroll tax and social contributions for the construction, agricultural and food industries.

Through the National Recovery and Resilience Plan (PNRR), Romania has committed to eliminate such fiscal distortions in the economic environment, in particular, the gradual reduction of tax benefits for personnel employed in the construction sector starting in 2025, and to phase out the reduction of excessive fiscal distortions and incentives, mainly for income tax and social contributions, which also apply from 2025.

“These long-term obligations oblige Romania to restructure the tax system. Abolition of existing tax incentives, even gradually, will not solve the problem of excessive taxation of low wages in Romania.

The system should be reformed in such a way as to achieve certain objectives, such as:

• low-paid workers should not have the biggest tax burden;

• benefits and social rights will be based on direct personal contributions;

• attract individuals to the employee status that offers them the most protection in terms of social, medical and pension security, rather than choosing alternative payment systems that offer them more immediate income, but at the subsequent price of a small pension,” explains Romulus Badea , tax partner of Soter & Partners.

Several options for reforming the tax system were circulated in the public sphere, and one of the most common is the introduction of a progressive tax system, which would provide for a higher tax burden on taxpayers with incomes above certain thresholds.

“Such a measure is theoretically possible, but those who receive high and very high incomes are most often not employees. Their earnings refer to the area of ​​capital, not to wages. In addition, individuals in managerial positions with high incomes will turn to other forms of activity, such as micro-enterprises, for example,” adds Dan Manolescu, tax partner at Soter & Partners.

According to the Ministry of Public Finance, changes to the Fiscal Code according to OG no. 16/2022 will have a budgetary impact of 2.2 billion lei in 2022, respectively 13.4 billion lei in 2023.