Romania is at the forefront of significant tax reforms, as delineated in the Fiscal Code of 2024 and recent legislative updates. These reforms are part of a larger European movement towards fiscal modernisation and equity. This article delves into the three primary trends in Romanian taxation:
The institution of a minimum turnover tax;
The drive towards digitalisation; and
The ongoing debate over progressive taxation.
Minimum turnover tax: a new baseline for business contributions
Romania's tax policy has taken a bold turn with the introduction of a minimum turnover tax. This policy targets businesses that report minimal profits or losses despite substantial turnover, ensuring they contribute a baseline amount to state revenue. The tax is a percentage of the company's turnover, setting a minimum tax contribution and preventing companies from evading tax payments entirely. This strategy aims to expand the tax base and curb tax avoidance, and has sparked discussions on its impact on business expansion and investment strategies.
The Fiscal Code of 2024 stipulates that taxpayers with a turnover exceeding €50 million in the previous year must pay the minimum tax if their calculated profit tax is lower than this minimum threshold.
Results after the first-quarter declarations and tax collection are yet to be shared (namely, to see if the minimum tax on turnover triggered an increase in tax revenues and a reduction in tax evasion). However, some companies have reported financial strain, suggesting the need for adjustments to balance tax requirements with firm sustainability.
One important note must be added. The concept of a minimum tax for companies has been discussed extensively at the European and international levels. The OECD proposed a global minimum corporate tax rate as part of its BEPS project. This proposal aims to ensure that multinational companies pay a minimum level of tax on their profits, regardless of where they are headquartered or where they operate.
While the Romanian minimum turnover tax is unique in Europe (where turnover-based taxation systems have been introduced only for small businesses; i.e. in Hungary, Italy, and Romania), tax professionals hope that it remains only a short-term intervention by the Romanian government, that should be replaced in the larger BEPS context with a more transparent and functional profits-based taxation mechanism.
Digitalisation of tax processes: embracing technological advancements
Romania is also undergoing a digital transformation in tax administration. The adoption of electronic systems for tax reporting and payment was intended to simplify compliance. Electronic invoicing, online portals, and the Virtual Private Space (an electronic system that allows documents to be exchanged between a taxpayer and the tax administration) have revolutionised taxpayer interactions with the National Agency for Fiscal Administration (ANAF), enhancing convenience and reducing administrative costs.
The Standard Audit File for Tax system was designed to align Romania with international standards by facilitating the exchange of fiscal and accounting information, aiding the authorities in efficient audits. The RO e-Invoice system, particularly in the B2G and B2B sectors, has been seen as crucial in maintaining the integrity of fiscal transactions and combating tax fraud. Electronic cash registers connected to ANAF's IT system enable real-time sales monitoring, reducing retail tax evasion.
The shift towards electronic tax declarations has streamlined the filing process, benefiting taxpayers with a more efficient experience. These digitalisation measures should fortify Romania's fiscal system once the inherent initial bugs are solved, offering a more transparent and less burdensome interaction with tax authorities.
Progressive taxation debate: striving for fiscal equity
The debate over progressive taxation is a contentious issue in Romania. While the Fiscal Code of 2024 maintains a flat tax rate on global income, discussions are ongoing about introducing progressive rates. Proponents argue that adjusting tax rates based on income levels would lead to greater fiscal equity, with higher earners paying more and lower earners paying less. However, opponents are concerned about the potential adverse effects on investment and economic growth.
Returning to progressive income taxation seems unlikely to produce the desired benefit in the Romanian state budget, and support measures or tax stability are more necessary at this stage. Altering the mechanism for collecting direct taxes such as income tax can distort investment decisions, and the administrative effort to manage a progressive system is significant, especially during the increased efforts for the digitalisation of the tax system (mentioned above). The impact of targeting specific public sector groups would be minimal, and the private sector would suffer, with high costs and little gain for the budget.
Conclusion: Romania's vision for a modern tax system
Romania is implementing significant tax reforms, including a minimum turnover tax to ensure businesses with high turnover but low profits contribute to state revenue, and is embracing digitalisation to streamline tax administration.
The minimum turnover tax could be a temporary measure, adopted as a healing patch, in view of the BEPS alignment of corporate taxation, aiming to expand the tax base and reduce avoidance, while digital advancements such as electronic invoicing and real-time sales monitoring aim to improve efficiency and combat fraud.
The debate on progressive taxation continues, with arguments for fiscal equity countered by concerns over economic impact and administrative challenges, particularly during the transition to a more digital tax system.
