Search for...

The Clock is Ticking: Is Romania’s IT Competitiveness at Risk with the Proposed Taxation Changes?

The Victoria Palace in Bucharest, the building of the Romanian government; Canva
Image credit: The Victoria Palace in Bucharest, the building of the Romanian Government; Canva
, ~

Only have 1 minute? Here are 3 takeaways:

  • In a bid to reduce the budget deficit and access European Union funds, the Romanian government has recently introduced a series of tax proposals that have a direct influence on the IT industry. 
  • Experts highlight significant changes, such as the introduction of minimum profit tax and the reduction or elimination of tax benefits in the IT, agriculture, and construction sectors.
  • By removing tax facilities for IT professionals, the measures are threatening the competitiveness of one of the sectors contributing most to the growth of the Romanian economy.

 

The Romanian government has recently proposed a series of fiscal measures that have taken the country by storm once the draft ordinance appeared in the press. The ruling parties, the Social Democratic Party (PSD) and the National Liberal Party (PNL), are in talks over a package of 67 fiscal and budgetary measures aimed at addressing the budget gap. The proposed new taxes, duties, and excises are set to roll out in three stages: September 1, 2023, October 1, 2023, and January 1, 2024.

To cover its budget deficit, the government is betting on the money that will come through tougher taxation of SMEs and the IT, construction, and agriculture sectors. So far, key fiscal changes proposed include a 3% tax on micro-enterprises with incomes over 300,000 RON (~61,000 EUR), a tax on multiple real estate properties, and the non-ceiling of social health insurance contribution taxes for freelancers (PFAs).

In the tech sector, income tax exemptions for IT professionals will only apply to incomes under 10,000 RON (~2,000 EUR), with the portion exceeding this threshold not benefiting from tax breaks. In practice, this means that an IT employee who earns 25,000 RON (~5,100 EUR) monthly would only pay tax on the difference between the two thresholds, resulting in a monthly tax of 1,500 RON (~300 EUR).

Behind Romania’s new fiscal measures

Starting in 2017, the European Commission launched the excessive deficit procedure for Romania due to the breach of the budget deficit threshold. Consequently, Romania entered an agreement with the EC to implement measures aimed at fiscal consolidation, preventing any prolonged economic instability. In line with this, Romania committed to reducing the budget deficit from 5.7% of GDP in 2022 to 4.4% of GDP in 2023. 

Read more:  Founder at 22, Minister of Finance at 31, Successful exit at 32: Nina Angelovska’s spectacular entrepreneurial journey

A violation of the deficit above 5% would trigger the suspension of European funds, according to the statements of the finance minister. As the government seeks to cover a hole of approximately 30 billion RON (6 billion EUR) by the end of the year, they are looking at the promising SME and IT sectors, which had a preferential fiscal regime over the past years.

Currently, Romania’s tax system is less burdensome in comparison to other countries in the EU and the region, with a 10% personal tax rate and a 16% corporate tax rate. Romania is at the bottom of the ranking in the EU regarding the collection of budget revenues, at 27-28% of GDP, compared to the European average of over 40%. This newly proposed tax reform is intended to substantially increase budget revenues and, therefore, increase the burden on taxpayers.  

Speaking to local media, Romania’s Prime Minister Marcel Ciolacu said he would resign from his position if the tax reform is not approved, emphasizing that Romania can no longer afford certain exceptions and move without substantial administrative reform. 

At stake: The IT industry’s regional competitiveness

The Romanian IT industry is one of the biggest contributors to the growth of the national economy. In 2022, about 1.3% of the 4.8% GDP growth came from the IT industry, according to ANIS. It is also the second largest exporter in the services sector, one of the top 5 VAT payers, and an important contributor to the state budget, with IT employees annually transferring around 10 billion RON (~2 billion EUR) in contributions to the social and health budgets, 10 times higher than the total value of the tax facility they benefit from.

To support the potential of the country to become a regional technology hub and prevent highly specialized employees from moving abroad, the cabinet led by PSD in the early 2000s introduced an income tax exemption for IT professionals. Since then, the IT industry has been growing at a rate almost three times higher than the growth rate of the national economy and has been at the forefront of projects of national importance, most recently in the realm of digital transformation.

Read more:  How ICT academies can help foster and develop the programming community in Albania

The elimination of the tax facility for the industry will increase the total cost with payroll for employers such that it positions Romania behind other countries in the region like Poland and Bulgaria, according to a study by Roland Berger for ANIS.

The industry’s response

Representatives of the sectors affected by the new tax measures have also reacted in recent days, asking, above all else, for predictability and consultation with the business environment. 

The National Council of Small and Medium-sized Private Enterprises in Romania (CNIPMMR), an employers’ confederation, warned that if entrepreneurs are burdened with unmanageable taxes, it could cast a shadow over Romania’s economic prospects. CNIPMMR urged the Government to bring stability and foresight to fiscal policies, suggesting that any new measures should be disclosed at least half a year before they take effect. They emphasized the importance of consulting the business community and conducting thorough impact analyses before making these critical decisions.

“We understand that the public debt and the state budget deficit are increasing. Politicians always believe that this deficit must be corrected through tax increases. We, the business people, however, convey unequivocally that the state must first of all reduce its own expenses, and behave responsibly in the administration of public money. When you realize in the middle of the year that the difference between income and expenses is so big, then the problem is with the budget construction, not with the taxpayers. (…) You can’t spend money you don’t have and then tell the taxpayers that they have to pay more,” says Dan Șucu for Ziarul Financiar.

In the IT sector, ANIS, the Employers’ Association of the Software and Services Industry, together with 138 other companies and 5 signatory organizations (Business Service Leaders Association, Cluj IT – Cluj IT Cluster Association, Sibiu IT Association, Transilvania IT Cluster, Romanian Digital Innovation Centers Association – RODIH), also criticized in harsh terms the Government’s decision and addressed a Memorandum to signal the impact that the changes in the tax code.

Read more:  Bulgaria’s Fund of Funds Unveils New Financial Instrument to Boost Bulgarian SMEs with €100M

“The governing coalition chooses to endanger the future of the IT industry and Romania’s advantage in this sector at the regional and global level through tax measures discussed without consulting industry representatives, with immediate applicability, without respecting any principle of the Fiscal Code,” ANIS representatives stated for the press.

ANIS drew attention to the fact that by continuing the current intentions, the decision-makers risk removing Romania from the regional competitiveness map in terms of innovation, digital transformation, and economic growth. They pointed out that the tax reform will affect more than 80% of the IT industry’s employees nationally, which is almost like removing the facilities altogether. 

In turn, the signatories call on the Government to keep the facilities for the IT industry and carry out in-depth consultations with the industry to identify ways to increase government revenue without affecting the competitiveness of the industry. 

If the tax regime does change, the signatories further request that the action be implemented gradually, in alignment with the minimum of 6 months provisioned in the Fiscal Code, to allow companies to adjust their operating budgets.

As negotiations over the final form of the proposal are expected to come under conclusion soon, Romania’s business community, particularly the IT industry, awaits the outcome of these proposed changes, with potential implications for economic growth and foreign investment. The government’s balancing act between budget consolidation and industry concerns remains a central issue in this ongoing debate.

Tags:

Help us grow the emerging innovation hubs in Central and Eastern Europe

Every single contribution of yours helps us guarantee our independence and sustainable future. With your financial support, we can keep on providing constructive reporting on the developments in the region, give even more global visibility to our ecosystem, and educate the next generation of innovation journalists and content creators.

Find out more about how your donation could help us shape the story of the CEE entrepreneurial ecosystem!

One-time donation

You can also support The Recursive’s mission with a pick-any-amount, one-time donation. 👍

https://therecursive.com/author/antoanelaionita/

Antoanela is a Sustainability Communications Specialist and Deputy Editor at The Recursive media. From these roles, she is helping organizations communicate their latest sustainability goals, strategies, and technologies. She writes about climate tech, ESG, impact investment, sustainability regulation, and related topics.