“For the short-term I would say the increase of taxation and competition are the main challenges for the Romanian companies, irrespective if these are locally owned or are part of mutinational groups. For the medium and long term, alongside taxation and competition, I would say that corruption and migration are going to be the main challenges for the Romanian companies. For the Romanian companies investing in R&D (from all industries, not only technology and IT), the competition from China and USA together with the migration of highly skilled people towards these countries will be a real challenge,” Ciprian Gavriliu, Transfer Pricing Partner at Taxhouse told The Diplomat-Bucharest.

“Romania’s 2025 fiscal landscape exhibits significant risks stemming from heavy and complex taxation, inflationary impacts, labor market strains, and governance weaknesses that collectively challenge economic resilience. A durable solution entails balancing revenue needs with strategic growth initiatives and robust tax compliance reforms to restore competitiveness, fiscal discipline, and public confidence. The state cannot just increase taxes without looking if these are fair, disproportionate or heavy.”

How would you describe the current tax environment in Romania compared to other EU countries?

This is a simple question which has a very complex answer. This is my opinion and should be treated as such.

Romania’s tax environment in 2025 is heavily impacted by several additional fiscal measures beyond the standard corporate income tax and VAT changes. These include the tax on turnover (IMCA), supertaxes on oil, gas products and financial institutions (ICAS), a 100% tax on energy and gas production, a tax on special constructions, increases in local taxes, increases in customs duties, and excise duties. All these taxes significantly add to the tax burden of a company and in the end on each of us as.

These measures collectively create a materially higher effective tax rate for many companies, for example the IMCA is pushing the effective tax rate of a multinational group in Romania to be between 35% and 40% of their accounting profits. This contrasts sharply with the nominal 16% corporate income tax rate marketed by the politicians for Romania, reflecting a complex and multi-layered tax landscape that substantially increases fiscal pressure on all businesses, including automotive.

Despite Romania’s traditionally low to medium overall tax-to-GDP ratio and competitive base corporate tax rate compared to the EU average, these new fiscal policies signal a strong government drive to increase revenues through targeted sectoral taxes and consumption-related levies. Even if these increases of taxes will result in short term increase of the revenues at the State Budget, the cumulative effect increases the actual taxation level significantly, impacting company’s profitability and investment decisions. A secondary consequence of increasing taxes is rise of inflation. As Milton Friedman was saying “Inflation is taxation without legislation”.

In sum, Romania’s tax system in 2025 is no longer competitive due to arbitraraly specific taxes, regulatory fiscal measures and by inflation. However, this is the part of the story and in the long run, fiscal deficits cannot be reduced increasing taxes arbitrarily, for that affects the productive capacity of an economy, the individual income and its tax base and government revenues. Given that indebtedness is the ratio Debt/GDP, the best way to reduce it is to operate on the denominator, by the adoption of pro-growth measures. Which at this point, it seems like they are missing from the polical agenda.

The second part of the story is regarding the taxation of labour/work in Romania.

The average net salary in Romania in 2025 is around €1,100 per month (approximately RON 5,500), with an average gross salary about €1,750 (RON 8,800) monthly. This salary level is significantly lower than the average salaries in most Western and Central EU countries, which can be two to three times higher or more depending on the country and sector.​ However, the salary tax and related contributions are approximetlly 45%, which is a level similar with most of the other EU countries. According to publicly available articles, officaily more that 14.000 Romanians lost their job during 2025 due to restructuring process affecting many industries, including automotive. For each 1.000 employees the Romanian State Budget is losing annually EUR 9.24 million and, if these employees request unemployment aid, the Romanian State will need to pay annualy EUR 7.29 million. So, based on local media, the Romanian State has already lost in 2025 an amout of EUR 129 million as salary tax and related contributions and must pay EUR 102 million as unemplyment aid. And this is the tip of the iceberg, because the local communities and local businesses will suffer from this reduction of purchasing power. And I am not talking about other areas where the lack of action from the authorities is making Romania to lose money from European Union.

On the labor side, despite relatively low average gross salaries (circa €1,750 or roughly RON 8,800 monthly), the combined tax and social contribution rate on wages stands near 45%, aligning Romania with broader EU norms but imposing significant costs on employers and employees alike. This dynamic, combined with workforce reductions in key sectors, strains public finances due to lost payroll tax revenues and increased unemployment support outlays. Consumption-based taxes such as VAT at 21%, excise duties on fuels, and rising dividend taxes further increase the indirect tax load on the population, disproportionately affecting lower and middle-income groups given Romania’s wage levels. The tax environment thus reflects a hybrid of competitive direct taxation for businesses but a regressive pattern in consumption taxation.

The last part of the story is about two invisible affiliated factors called corruption and tax evasion. Endemic corruption and tax evasion remain critical structural challenges, draining tens of billions of RON from state coffers annually and exacerbating fiscal deficits. Despite administrative efforts, enforcement inefficiencies and political constraints hamper effective recovery and deterrence, undermining both public trust and fiscal stability.

Romania faces persistent corruption challenges, including in public administration and state institutions. While some high-profile anti-corruption prosecutions have taken place, the overall perception remains problematic, affecting investor confidence and public trust. Romania’s justice system is key to tackling corruption and tax evasion. Effective investigation and prosecution of financial crimes and corruption cases are crucial. However, delays, inefficiencies, and political pressures sometimes hinder justice delivery, reducing deterrence and enabling continued illicit practices. Also, in most of the big cases the financial prejudices are not recovered by the justice or by the state institutions. All these issues collectively reduce tax revenues by tens of billions of RON annually, worsen budget deficits, stifle public investments, and increase inequality by undermining the rule of law and fair competition. The imbalanced tax structure—highly reliant on indirect taxes and social contributions—exacerbates pressure on compliant taxpayers (companies or individuals). Tax evasion severely damages Romania’s public finances. For example, in 2025 the Romanian Court of Accounts mentioned that the country experiences an estimated tax gap of around €7 to 8 billion annually due to unpaid taxes, particularly VAT. This harms government’s ability to fund public services and increases the fiscal deficit. Persistent corruption and weak state institutions lead to poor enforcement of fiscal policies, increased tax evasion, and lower collection of public revenues. The EU reports Romania’s tax evasion gap is is one of the highest in EU (around 30%), constraining fiscal stability and reducing the funds available for reforms.

In sum, Romania’s 2025 tax landscape is multifaceted and evolving, presenting heightened fiscal risks alongside sector-specific tax burdens. This environment demands strategic tax planning and continual adaptation by businesses to navigate both direct obligations and indirect economic impacts, including inflation and systemic governance issues. The long-term fiscal health of Romania hinges on balancing revenue needs with measures that support economic growth and tax compliance reform.

What are the main fiscal challenges that companies in Romania are facing today?

For the short-term I would say the increase of taxation and competition are the main challenges for the Romanian companies, irrespective if these are locally owned or are part of mutinational groups. For the medium and long term, alongside taxation and competition, I would say that corruption and migration are going to be the main challenges for the Romanian companies. For the Romanian companies investing in R&D (from all industries, not only technology and IT), the competition from China and USA together with the migration of highly skilled people towards these countries will be a real challenge.

In your view, what are the most significant tax policy changes that could impact the Romanian economy soon?

The next wave of taxes, such as the increase of dividend tax, the applicability of tax on turnover for all Romanian companies and the “tax on affiliates” (i.e., the non-deductibility of the royalties and management/consultancy expenses reveived from non-resident affiliated suppliers) are going have a significant impact on the Romanian companies.

What trends are you observing in Romania regarding tax transparency and international cooperation?

Romania’s aspiration to join the OECD reflects a strategic national priority, driven by the benefits of aligning with international best practices, attracting investment, and enhancing economic governance. The country has made significant progress in meeting OECD accession criteria. However, a notable tension exists between this ambition and Romania’s performance in key areas of international tax practice, particularly regarding the issuance of Advance Pricing Agreements (APAs) and the resolution of Mutual Agreement Procedure (MAP) cases.

These mechanisms are vital pillars of transfer pricing and dispute resolution frameworks promoted by the OECD. Romania’s low scoring on APAs issued and MAP cases finalized suggests ongoing challenges in delivering timely and consistent rulings in complex cross-border tax matters. Correlating this aspect with the hight VAT gap percentage of Romanian according to the EU Commission, these aspects can undermine investor confidence and raise concerns about the efficiency and reliability of the Romanian tax administration, which are critical evaluation factors for OECD accession.

Mandatory SAF-T implementation and electronic invoicing demonstrate awareness for the tax transparency and a move towards modern tax administration. However, effectiveness in international tax cooperation also depends on administrative capacity, legal certainty, and dispute resolution efficiency, areas where Romania must accelerate improvement to align fully with OECD expectations.

In summary, Romania is making commendable strides toward OECD membership through broad structural reforms and increased fiscal transparency, but the lag in arbitration mechanisms like APAs and MAP creates friction in the accession path. Addressing these procedural and administrative weaknesses will be essential not only to secure OECD membership but also to sustain investor trust and facilitate a truly transparent and cooperative international tax environment consistent with OECD principles.

What are the main transfer pricing challenges for multinational groups operating in Romania?

Multinational groups operating in Romania face considerable transfer pricing challenges largely stemming from an aggressive approach by the Romanian tax authorities (ANAF) during tax audits. ANAF often rejects the taxpayer’s transfer pricing analysis, opting instead to conduct its own independent benchmarking and economic studies. This frequently involves a subjective and sometimes inconsistent application of the arm’s length principle, where comparable companies are selected without clear rationale or the rejection of comparables solely because of their profitability or because they are or aren’t in loss positions rather than based on economic grounds.

ANAF’s audits tend to be rigorous, with a strong presumption against the taxpayer’s positions, leading to frequent upward adjustments of taxable profits. Sometimes, the tax authorities have an aggressive approach and reclassify certain intercompany transactions from an economic point of view which leads to transfer pricing adjustments or, in other cases, treat the intercompany transaction as artificial which might lead to criminal charges against the representatives of the Romanian companies. In respect of transfer pricing audits, the authorities also scrutinize intra-group transactions with high intensity, often questioning management fees, royalties, loan interest, and service agreements. The transfer pricing documentation requirements are stringent, especially for large taxpayers, and failure to comply may trigger significant penalties and adjustments.

A key pain point for multinationals is the very low number of Advance Pricing Agreements (APAs) issued by Romanian authorities. Despite legislative changes aimed at facilitating APAs, the uptake remains minimal due to low on personal on ANAF’s team or due to bureaucratic procedures and long processing times, which limits taxpayers’ ability to secure upfront certainty on transfer pricing matters. Consequently, this increases exposure to audits and disputes.

Similarly, the number of Mutual Agreement Procedures (MAPs) initiated or finalized by Romania in the context of transfer pricing disputes remains very low to almost zero. This lack of effective dispute resolution through MAPs implies that double taxation risks remain high, with companies facing adjustments in Romania without corresponding relief from treaty partners. The absence of MAP engagements also reflects administrative bottlenecks and limited cooperation capacity within the authorities, which can lead to protracted tax uncertainty and costly litigation.

How is the digitalization of the tax system (such as SAF-T, e-Invoice, e-Transport) changing the way companies handle compliance?

The mandatory implementation of SAF-T (Standard Audit File for Tax), electronic invoicing (eFactura), and e-Transport represents a significant step towards increased tax transparency and modernization of tax administration in Romania. These initiatives, though costly and complex for taxpayers to implement, aim to standardize data submission and enable tax authorities to access comprehensive, accurate financial information in real time.

In theory, these digital tools should reduce tax evasion and streamline tax compliance, ideally decreasing the need for frequent onsite tax audits. Instead, they should facilitate data-driven risk assessments, enabling authorities to focus enforcement efforts more efficiently.

However, in practice, there has been no observed reduction in the number of tax audits. On the contrary, Romanian tax authorities have recently announced plans for intensified audits, targeting approximately 500 major taxpayers in the near term. This includes also a marked increase in audits specifically related to Country-by-Country (CbC) reporting and transfer pricing compliance.

The persistence and growth of audits despite enhanced fiscal transparency measures may be attributed to several factors:

• The authorities use SAF-T and related reporting as tools to identify discrepancies or potential irregularities, often triggering more, not fewer, audits.
• The detailed data allows ANAF to conduct more targeted and thorough inspections, raising the audit rate for high-risk or complex taxpayers.
• Increased scrutiny on CbC reports reflects a focus on transfer pricing and profit shifting issues, aligned with OECD BEPS action plans but requiring deeper investigations.
• The gradual rollout of SAF-T obligations, now covering virtually all taxable entities including small and non-resident taxpayers, expands the tax authority’s audit base.

In essence, while SAF-T and electronic reporting improve the tax administration’s analytical capabilities, they have not yet translated into a reduction of audit frequency. Instead, tax authorities appear to be leveraging these data flows to intensify enforcement efforts, prioritizing taxpayer transparency and compliance verification over audit reduction. I would like to say that these measures will show a decrease in tax evasion, however, in practice, these tax audits are targeting compliant taxpayers which in most of the cases have been audited in the past. As mentioned at the first question, the increase of taxation correlated with a high level of tax evasion will exacerbates pressure on compliant taxpayers (companies or individuals).

Therefore, businesses must prepare for a more data-intensive tax environment, expect increased scrutiny, particularly around transfer pricing and related international tax matters, and invest accordingly in compliance systems and advisory support to manage heightened audit risk effectively.

How can businesses use technology and automation to improve their tax compliance and efficiency?

Technology in tax compliance is a double-edged sword—it offers powerful tools but can also present significant risks. For businesses operating in Romania, adopting technology and automation is particularly challenging amid rising digitalization demands such as SAF-T, electronic invoicing (eFactura), and e-Transport. Large multinational ERP systems—like SAP, Oracle, and Microsoft Dynamics—often arrive without ready-made local modules for Romania’s specific tax requirements. This lack of built-in support for SAF-T XML formatting, electronic validation, and filing processes imposed by ANAF means companies must allocate substantial resources to customize or supplement these systems. Without these adaptations, data submissions risk being non-compliant, exposing companies to penalties.

Adding to the complexity, the latest generation of tax technology tools relies heavily on Artificial Intelligence, deployed by both tax authorities and taxpayers for analyzing massive datasets and selecting audit targets. Although AI has the potential to improve compliance accuracy and efficiency, unchecked use can lead to “hallucinations”— erroneous or misleading outputs generated by the algorithms. Without experienced tax professionals validating these insights, businesses may be misled into poor decisions or unwarranted tax exposures.

Digital communication with tax authorities has streamlined many processes, enabling electronic document submission and faster responses. Yet, fully leveraging these channels requires technical know-how and familiarity with evolving regulatory procedures, underscoring the necessity of informed advisory support.

Ultimately, while technology and automation are indispensable for navigating Romania’s fast-evolving tax administration landscape, their successful deployment relies on carefully balancing system customization, AI risk mitigation through expert oversight, and strategic management of digital interactions with the tax authorities. Failure to do so can transform a powerful compliance asset into a costly liability.

Do you see any risks in Romania’s current fiscal policy direction?

The cumulative effect of the factors mentioned at the first point (i.e., high taxation environment for business and workers corroborated with corruption and tax evasions) places Romania’s fiscal sustainability at risk, as high deficits and growing public debt constrain room for maneuver for the Romanian government and for the tax authorities. Without a shift toward pro-growth reforms that enhance productive capacity and broaden the tax base sustainably using fairness as base principle, current policies may undermine long-term economic health and social cohesion.

In summary, Romania’s 2025 fiscal landscape exhibits significant risks stemming from heavy and complex taxation, inflationary impacts, labor market strains, and governance weaknesses that collectively challenge economic resilience. A durable solution entails balancing revenue needs with strategic growth initiatives and robust tax compliance reforms to restore competitiveness, fiscal discipline, and public confidence. The state cannot just increase taxes without looking if these are fair, disproportionate or heavy.

Historical evidence clearly indicates that many major revolutions were triggered by issues related to unfair taxation principles.

One of the most prominent examples is the American Revolution, which was largely fueled by the colonists’ protest against “no taxation without representation.” The infamous Boston Tea Party in 1773 was a direct response to the heavy taxes imposed by Britain on tea, which the colonists viewed as unjust and exploitative. Similarly, the French Revolution was influenced by a drastically unequal tax system. The aristocracy and the clergy enjoyed exemption from taxes, which placed a disproportionate burden on the common people.

Beyond these well-known examples, numerous other uprisings highlight the link between unfair taxation and rebellion. For instance, the Peasant’s Revolt in England was sparked by a newly imposed poll tax that heavily burdened the peasantry and the Revolt of the Comuneros in Spain further exemplify the theme. These uprisings often attributed their causes to oppressive tax policies that oppressed the lower classes, ignored the principles of equity, or targeted specific social groups unjustly.

What lessons can Romania learn from other EU countries in terms of tax reform and stability?

In my opinion, countries such as Ireland, Argentina, Israel, and Singapore each provide instructive lessons for Romania in the domains of tax reform, fiscal stability, and economic growth. Argentina is the best recent example how to apply short-term policies, and all the other three countries represent examples of long-term policies.

Ireland’s transformation since the 1980s shows how a low-tax regime, combined with a pro-investment environment, can produce sustainable economic success. By instituting a low tax regime, Ireland attracted multinationals and stimulated foreign direct investment, which exponentially increased the tax base and the number of workers. This focus on competitiveness, supported by social partnership agreements, innovation incentives, and education, enabled Ireland not only to grow its economy but also to achieve a tax revenue surplus by 2024. Crucially, Ireland’s experience reflects a strategy prioritizing broad economic growth through a favorable tax environment, balanced by strong institutions and workforce development.

In contrast, Argentina’s recent reforms under President Javier Milei demonstrate a different approach—one centered on fiscal austerity and liberalization. Confronted with triple-digit inflation, high poverty rates, and chronic deficits, Milei’s government implemented stringent austerity: slashing government spending, reducing subsidies, cutting public sector employment, and deregulating trade. By 2024, this led to a notable decline in inflation and the first primary fiscal surplus in over a decade. However, this path also entailed social costs and required overcoming institutional weaknesses. Argentina’s experience underscores the challenges of restoring fiscal discipline while maintaining political and social stability, emphasizing that reform pace and broad consensus matter.

Israel offers a powerful example of leveraging tax policy to drive innovation-led growth. Its tax regime includes full deductions for domestic R&D expenditures, generous government co-funding through grants, and preferential tax rates for technology enterprises. This aligns with a national focus on high-tech innovation across multiple sectors, fostering a globally competitive economy. Investments in R&D coupled with supportive tax incentives position Israel as a leader in knowledge-intensive industries, proving that targeted tax policies incentivizing innovation can be pivotal for economic diversification and resilience.

Singapore mirrors the importance of combining tax competitiveness with comprehensive socio-economic policies. It maintains moderate corporate tax rates but supplements them with substantial incentives for R&D and skills development. Simultaneously, Singapore enforces strict legal frameworks, security policies, and governance standards that create a stable, safe, and business-friendly environment. The nation’s investment in education and human capital development supports sustained productivity and innovation, validating an integrated model where tax policy, security, education, and governance collectively reinforce economic success.

So, we don’t need to invent the wheel, we need to look around how succesful countries are doing it. For Romania, the combined lessons are clear: adopting a competitive and transparent tax framework that encourages investment and innovation is paramount. Ireland’s model shows the benefits of low effective tax rates coupled with social cooperation and education reforms. Argentina’s recent reforms highlight the necessity of fiscal discipline and structural reforms to restore sustainability, albeit the importance of social consensus. Israel and Singapore demonstrate that targeted R&D incentives along with education and strong governance are critical for fostering a modern, diversified economy.

In synthesis, Romania can move toward fiscal stability and growth by simplifying its tax code, reducing excessive and layered taxation, incentivizing R&D and innovation, investing heavily in education and workforce skills, and reinforcing institutional integrity, especially at level of the judiacial system and tax authorities, and security. This balanced path, grounded in international best practices, offers the most promising avenue for reducing deficits sustainably while fostering economic dynamism and resilience.