The coalition continues discussions on raising taxes. No decisions have yet been made, but most of the action is based on a report commissioned by the World Bank.

World Bank report on proposed tax hike – Document – click to open

In addition to raising taxes, there are also proposals to reduce budget expenditures, for example, canceling vacation vouchers and others. HotNews.ro recently wrote an article on this topic.

Going back, the World Bank report is only a recommendation. What measures will be taken depends precisely on the wishes of the Coalition.

Please note that the following measures are on the discussion table.

What tax increases are recommended in the World Bank report

1. “Repeal the residential sales tax and replace it with a 10% capital gains tax, possibly with a moderate amount of relief for owner-occupied properties.

Capital gains tax should be implemented prospectively, applying only to real estate acquired after the date of the reform announcement. While this reduces revenue, it avoids having to reassess all properties.

The 10% tax rate on capital gains received through an intermediary (such as an investment fund) and will not continue with the announced reform of the 1%/3% split rate, which is preferential.

This will maintain the neutrality between direct and intermediary investments in shares, while the announced reform will lead to a significant tax advantage for intermediary investments, as opposed to direct ones.”

2. Dividends: 10% taxation.

“Increasing the dividend tax rate to 10% to align the taxation of the majority

to other forms of income from capital”.

We would like to remind you that last year OG 16/2022 tax on dividends was increased from 5% to 8%.

3. Lowering the threshold for micro-enterprises to 250,000 euros from January 1, 2024

Another proposal is to reduce the eligibility threshold for the micro-enterprise regime to the VAT level (currently €88,500).

“To give businesses time to adapt, this reform can be implemented in stages, starting with the already agreed reduction to €500,000 from 1 January 2023, then to €250,000 from 1 January 2024 and reaching the VAT threshold (adjusted for inflation) on January 1, 2025.

The thresholds for registration and de-registration of a micro-enterprise for VAT purposes should remain consistent.”

4. Restrictions on the division of companies to benefit from the micro-business regime

The World Bank is also talking about introducing additional rules to prevent the artificial division of businesses to access the micro-enterprise regime.

It is also proposed to exclude the possibility of deducting individual costs from turnover.

“This will further simplify the micro-business regime and reduce opportunities for tax evasion.

If desired, a fixed amount of deductions (as a percentage of turnover) can be applied instead.

Revaluation of the relevant sales tax rate. The proposed rate of 1% assumes a rate of return of approximately 6.25%, which is likely to be lower than the actual rate of return of most micro-enterprises, resulting in a preferential tax treatment for micro-enterprises compared to eligible companies

ordinary income tax regime”.

5. Dismantling the CAS ceiling on PFA

Another measure: equalizing the taxation of employees and the self-employed by removing the CAS limit that currently applies to the self-employed.

“An alternative option would be to apply the maximum CAS amount to both employed and self-employed workers, although the potential implications for pension rights also need to be assessed,” says BM.

6. Cancellation of reduced VAT rates

In the short term, according to the World Bank, Romania should consider canceling reduced quotas that were introduced for non-distributive purposes, such as reduced quotas for restaurant meals, accommodation, books, newspapers, magazines, museums, zoos, gardens and parks.

“These reduced quotas have a negative distributional impact, distort consumption decisions, income expenditure and are unlikely to be an effective means of addressing any social or cultural goals,” the document says.

• “In the longer term, and certainly not before the end of the current food and energy price crisis, consideration should be given to further broadening the tax base for the reduced rates that have been introduced for distributional purposes, including the reduced rate for food. , pharmaceuticals, water and heat supply”.

“However, to ensure that poor households are not affected by such reforms, targeted cash transfers should be implemented simultaneously to fully compensate the poorest households. This reform should be based on a micro-simulation model to determine the necessary coverage of cash transfers compared to existing social assistance transfers,” the quoted source said.

7. Cancellation of benefits for construction, agriculture, food industry and IT

The World Bank also proposes removing exemptions for workers in agriculture, construction and the information technology (IT) sector.

It also talks about reducing the overall burden on low-income workers through significant health and pension contributions by:

• Abolition of the 10% contribution to health care (instead, funding of health care through general taxation); or

• Introduce a refundable earned income tax credit (CFTC) to offset some of the current burden of health care and/or pension contributions for low-income workers. If health care contributions remain, consider expanding the contribution base, for example by removing exemptions for construction workers and possibly high-income retirees.

8. Change in property taxation

The World Bank also plans to improve the periodic property tax structure by moving from a location-based property tax system to a market value-based system to improve equity and efficiency.

It is also suggested that consideration be given to combining land tax and construction tax into a single tax, as this will make it easier to assess market value based on market transactions.

After the transition to the market value tax base, the entire rate structure needs to be revised in order to increase the total regular property tax revenues above the current level, which is relatively low among EU countries.

Another measure is to limit the use of property tax relief for low-income taxpayers and seniors, government buildings and a narrow range of public utilities.

At a minimum, periodically reassess and analyze the profitability of property tax credits.

“The transition to a market value tax base will require significant work to develop the mass assessment model and related administrative systems, and therefore the timing of implementation will depend on the progress of this work,” the document says.

The World Bank has committed to helping Romania develop the necessary evaluation model and related systems, and analysis and advice on this will be provided in future reports.

9. Additional carbon tax

Another proposal is to plan and phase out fossil fuel subsidies.

A necessary prerequisite for energy price reform that takes externalities into account is the absence of fossil fuel subsidies.

Potential candidates for fossil fuel subsidy reform (RSCF) in Romania are subsidies for coal, natural gas and thermal energy.

Thus, the document refers to the introduction of additional taxation of carbon emissions (for example, higher excise tax rates) to eliminate the externalities of fossil fuels.

“To fully account for climate and other externalities, it is estimated that fossil fuel prices in 2030 would need to increase by approximately 50% (gasoline), 62% (diesel), 34% (LPG), 55% (kerosene), 51 % (other) petroleum products/non-transport petroleum products), 113% (coal), 32% (natural gas) and 7% (electricity) compared to baseline levels (i.e. in the absence of an additional carbon tax),” the World Bank notes. .

According to the quoted source, it is recommended to use the revenues received from the RSCF and additional carbon prices to compensate vulnerable groups.

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