by Clare Nuttall in Bucharest
Romania’s tax rates aren’t especially high by international standards; it’s the confusing, cumbersome and frequently changing tax regime that troubles Romanians and foreign investors alike. In the last month, this situation took an abrupt turn for the worse when new Prime Minister Mihai Tudose’s announcement of dramatic changes to the tax system was followed by u-turns and internal squabbling within the government, leaving everyone in the dark over how much tax they will be paying in future.
Tudose outlined the plans on June 29 when he presented his new ruling programme to the parliament shortly before being endorsed as Romania’s new prime minister. The changes were unexpected to say the least, since most observers had been expecting continuity rather than change from the new government.
One of the reasons why the ruling Social Democratic Party (PSD) turned on Tudose’s predecessor Sorin Grindeanu was that he had failed to carry out the promises made by the party before the December 2016 general election quickly enough. Tudose – like Grindeanu – is seen as a proxy for the PSD’s leader Liviu Dragnea, who is barred from taking up the prime minister position himself but is very much the power behind the throne. As a result, no major changes were expected from the new prime minister.
Instead, he shocked investors with a raft of drastic changes, in particular the replacement of the existing 16% profit tax with a turnover tax, a shifting of the burden of paying social security contributions to employees, and a “solidarity tax” for high earners. All this was a dramatic departure from the PSD’s pre-election manifesto.
The American Chamber of Commerce (Amcham) in Romania claimed on June 30 that the changes would “generate turmoil in business climate and severely affect the stability and confidence in the Romanian economy”. It also slammed the lack of consultations on any of the planned measures. Meanwhile, the Romanian-German Chamber of Commerce and Industry (AHK Romania) forecast the measures would make Romania a less attractive location for investors, most likely leading to job losses in the medium term.
Further adding to the confusion, once the reaction from the investors Bucharest wants to attract became apparent, officials started to backtrack, and there were rumours of divisions already emerging between Tudose and Dragnea.
This negative reaction came despite the fact that the overall thrust of the new tax plans address one of the issues frequently raised by local economists and external observers like the International Monetary Fund, namely Romania’s growing budget deficit. The new package appears to be a departure from the earlier expansionary fiscal policy to a slightly tighter one – though probably not tight enough to avoid sending the deficit above the 3% threshold that will push Romania’s into the European Commission’s excessive deficit procedures. This does, however, depend on which measures are actually carried out.
Currently the indications are that the turnover tax and a planned hike in the minimum wage will be scrapped, though it’s still an open question which other changes the government will forge ahead with and which will be quietly dropped.
But there’s one tax being levied on everyone from employees waiting to find out if their employers will raise wages to cover social security contributions, to the multinationals wondering whether to locate their next factory in Romania or a competing country. This is the “confusion tax”, which is paid not in money but in the stress and inconvenience of not being able to make informed decisions based on future financial position.
Clare Nuttall is a Bucharest-based journalist specialising in Eastern Europe. Currently news editor at bne IntelliNews, she has been with the magazine since 2008, initially in Kazakhstan and more recently in Romania. Clare has also written for the Financial Times and the Economist Intelligence Unit.