Generous, multiple tax cuts take many by surprise

Companies operating on the Romanian market will pay 19% profit tax as of next year, instead of the current 25% quota. The maximum income tax rate for natural persons will also drop, from 40% to 38%, with the minimum quota set to go down from 18% to 14%. Companies will also benefit from a two-point reduction to social security contributions, down to 30.5%. Both companies and natural persons will pay 5% higher taxes for dividend incomes, though: 15% for legal persons and 10% for natural persons.

All these tax changes were disclosed yesterday by Finance Minister Mihai Tanasescu. How will the state budget cover the losses that will occur during the first stage? “We want the budget revenue surplus, resulting from economic growth, to be used in order to reduce taxes,” Tanasescu stated.

Generosity towards companies does not stop here, as the sizeable profit tax reduction is accompanied by an extended deductibility for certain expenses. Thus, companies will be able to increase deductible expenses related to amortisation, whereas the deductibility cap for losses incurred as a result of failure to cash receivables will go up from 20% to 25%. Moreover, this deduction will no longer be confined to those receivables accumulated after January 1, 2004. As for deducting interest-related expenses, Tanasescu says the Exchequer will accept that loans from Romanian and foreign banks should be excluded from the loaned capital, implicitly aiming for the better monitoring of price transfers between related companies.

Furthermore, the only 10% tax on real estate income will be extended to those properties bought before January 1, 2004, with the previous restriction to be eliminated from the current form of the Fiscal Code. The Ministry of Finance will also introduce the annual profit tax payment system, with anticipated quarterly payments.

All these modifications, which were kept secret until Monday night when they were mentioned by Premier Adrian Nastase, are to be included in an emergency ordinance to amend the Fiscal Code that entered into effect on January 1, 2004. According to the Code, the changes must be applied by means of a law draft six months before the new fiscal year begins.

Although the Ministry of Finance had made no secret of its desire to implement fiscal relaxation, the size of the tax cuts announced yesterday by Minister Mihai Tanasescu took many by surprise. Following last month’s talks with International Monetary Fund experts, Finance Ministry officials were estimating profit tax to drop to 22-23%, with the minimum income tax rate anticipated to go down to 16%.

Experts from the Ministry of Finance and the large consultancies knew nothing about the generous tax cuts on Monday.

However, the PSD (Social Democrat Party) economic committee did tackle tax cuts last week, after the first round of local elections.

The cuts were welcomed by representatives of the business environment, who accepted to attend the press conference organised by the Ministry of Finance.

“It’s terrific,” said Gilbert Wood, head of the Foreign Investors Council, an organisation that has been very vocal in criticising Romania’s tax system over the past few years.

razvan.voican@zf.ro