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February - 2005

Slamming tax down flat

“It is to be seen whether novelties are still to be brought by the end of this year,” is how I signed off my column in the December issue of .At that
time, the second round of presidential elections was yet to come, so we had no way of knowing whether the new year would bring any new regulations to Romania. But only one day after being approved by the recently elected Parliament, the Government, dominated by the Liberals and the Democrats, implemented a couple of extraordinary measures to reform the tax system: to reduce the profit tax rate even further than had been announced by the previous Government to 16 per cent instead of 19 per cent and introducing a flat 16 per cent income tax for most of Romanian people's wages.
Besides reducing the tax rate, an Emergency Ordinance (No. 138/2004) published on 30 December 2004 did not amend the profit tax regulations. Thus, all the good and the bad (not so many) things I described in my previous article remain unchanged. The most important difference is to the income tax regulations and the entire section on 'Income tax', in which I described the transformation of the existing progressive tax schedule from five bands to three. This now needs to be rewritten.
The Government was very carefully ensuring that the adoption of the flat tax would not cause some categories of employees to pay more tax than before, so it introduced a system of decreasing deductions. Thus, for incomes up to ten million ROL, there is a personal deduction of between 2.5 and 6.5 million ROL(depending on the number of people in the care of the individual). For salaries between ten and 30 million ROL the personal deduction will decrease progressively to become zero for salaries higher than 30 million ROL. No other deductions will be allowed except due to an individual taxpayer's compulsory social contributions, fees paid to the union and a maximum 200 Euro per year contribution to private pension schemes.
This system of deductions will only be available to employees of a company orinstitution and not to the other categories of tax payers, such as freelancers. It is possible to calculate some of the taxable incomes in order to deduce a percentage from the gross income. So, for example, this is 40 per cent in the case of incomes from intellectual property rights, down from 60 per cent as it was before. In the case of incomes obtained
from monumental art, this is 50 per cent, down from 70 per cent before. And in the case of revenues from rents, this is 25 per cent, down from 30 per cent for movable and 50 per cent for immovable property, as previously established.
Although the deductions are lower than before, the effective tax rate will also be lower due to the very acceptable 16 per cent flat tax.
The only increase in taxation refers to micro-companies (those with a turnover of less than 100,000 Euro and between one and nine employees). The 1.5 per cent revenue tax has now been increased to three per cent. However, these companies will have an option to switch to the flat profit tax regime by 31 January 2005.
By introducing this reform, Romania follows the general trend of developing countries which are reducing their direct taxation. The flat tax of 16 per cent, combined with the fact that this new government, formed mainly of young professionals and entrepreneurs, appears to be very determined in creating a competitive business climate, makes Romania a prime target for attracting significant direct investments in the close

Who benefits from the flat tax?
The following incomes now have a
16 per cent flat tax:
- independent activities, such as the
income from intellectual property rights or that obtained by lawyers, public notaries and other reelancers
- pensions, exceeding nine million
- rent from movable or immovable
- income obtained from agriculture
- income from 'other sources'
- income from prizes exceeding eight million ROL, with the exception of gambling (which will be subject to a 20 per cent tax).
What about incomes from
This will continue to have a different
tax treatment
- incomes from dividends now have a ten per cent tax.
- capital gains from selling shares now have a one per cent tax
- incomes from interest on deposits
are now taxed by one per cent