Nothing special about new Fiscal Code

A series of changes to the Fiscal Code were passed in the Romanian Parliament this week and are due to become law on January 1, 2007. But the ado that surrounded the vote in the House of Deputies proves rather political, as the legislation does not bring spectacular news on the fiscal system of the country.

While authorities say the new Code should be as functional as the EU requests and strengthen the business environment in Romania, economic analysts consulted by Hotnews.ro take a more nuanced way.

Constantin Rudnitchi, editor-in-chief for economic magazine Bilant, says one should not consider the new Fiscal Code as a move to reform the taxation system in Romania in line with EU demands. “Europe itself is rather diverse when it comes to taxation. Additionally, Europe is permissive as it does not sets common quotas or a specific percentage to member states”, he says.

The main issue, according to Rudnitchi, is how much the fiscal system is adapted to the Romanian economy. From this point of view, the new Fiscal Code sparked futile noise that created a lot of confusion and political speculations, as it did not bring about spectacular changes.

And he says two major problems should have been tackled in the Code – the micro-enterprises and the tax on the capital market, which remain “close to the bearable limit of the Romanian economy”.

According to the Code, micro-enterprise incomes will be taxed 2% starting 2007 but will be progressively boosted to 2.5% in 2008 and 3% in 2009.

And companies that invest more than 500,000 euro may take advantage of local tax exemptions for periods of up to five years.

Gabriel Biris of the law firm Biris Goran SCA, says the reduction of the micro-enterprise taxes is a good measure aimed at encouraging small firms. But he sees negative aspects as well.

“Unfortunately, this taxation regime could and will be able to be used abusively. I’sm speaking about using it in speculative businesses, for paying salaries and for the transfer of profit from 16%-taxed companies to micro-enterprises”, he says.

According to Biris, the main issue with the new Fiscal Code is that it keeps a high level of social contributions – some 47% of salaries, while the European average is 36.5%. This is one of the main reasons for which the 16% flat tax introduced last year did not have the expected effect of bringing high salaries in the economy to light, Biris claims.

One of the most talked about provisions of the Fiscal Code was that of taxes on the capital market. In its final version, the Code says people selling shares they’ve owned for longer than a year will pay a 1% tax for the resulting income and those owning stocks for less then a year will pay a 16% tax.

Rudnitchi believe the times have gone when the capital market could be encouraged through lower taxes. “But i mainly believe that the capital market needs a predictible fiscal legislation. I think it fair that the tax on stock exchange transactions should have been 16% as long as market players know when and how the level is applied.

From this point of view, I believe the new Fiscal Code is unfortunate”, he says.