Innovation – in today’s age, there is a constant interest in creating new products/services, as well as improving existing ones, for various reasons. However, these reasons usually come together with a drive to: i) reduce associated costs; and ii) obtain a competitive advantage.
It is already noticeable that in a global context fields like IT and research-development innovation are key factors for sustainable development, and accelerated digitalisation has led to not just governments, but also companies making significant changes. For governments, the main targets were and still are economic growth and to attract foreign investment and decisions which were made have been linked with applicable fiscal policies for the research and development (R&D) industry. Accordingly, there are countries which have introduced attractive fiscal measures and Romania is one of them.
In Romania, there have been tax incentives relating to the IT industry since 2004. Tax legislation has provided that there is a salary income tax exemption for employees who render IT activities linked to computer software creation.
Since 2016, there has been an increased interest in R&D incentives. Thus such employees can also be salary tax exempt though the eligibility conditions are different when compared with incentives for the IT industry. Moreover, there is a profits tax deduction for 150% of eligible R&D expenses, which overall would result in an approximately 7-8% lower profits tax payable. No state aid scheme needs to be applied for both these incentives, but the companies must record the expenses separately as per local rules.
Thus, employers can benefit, if they can support innovative projects and meet the eligibility conditions. If they can, they can retain more highly qualified experts, using the incentives for financing other costs/initiatives such as equipment or innovation workshops for the expansion of innovation labs. It is important to highlight the fact that this tax incentive can also be applied in the IT arena if the ongoing projects are innovative until the moment of commercialisation.
In Romania, there have been heated discussions in the past months about the possibility of elimination of IT salary tax incentives. One of the arguments for this is the fact that, at the moment, the IT area is already mature. According to ANIS (Employers’ Association of the Software and Services Industry), tax incentives have made Romania’s IT industry competitive and are maintaining this, in a race with other countries which offer developers a null tax per wage, such as Ukraine, Poland and Belarus. The workforce deficit in IT at an EU level is so substantial, that such a measure could result in a massive decrease in proficient workers at state level, causing major economic impact.
It must be emphasised that there is a small number of projects which qualify for tax incentives in the IT area and those which can also be eligible for R&D tax incentives. Therefore, an inquiry for each project and each activity needs to be conducted to illustrate the financial impact, but also the administrative effort for applying an incentive.
For a software-development project to qualify as R&D, the achievement must depend on scientific and/or technological progress, and the project’s purpose must be the systematic explanation of a scientific system and/or technological uncertainty.
With the above in mind, and if the substance of the activities in the IT field is innovative and compliant with the legislative provisions regarding R&D, it is clear that Romanian tax incentives are relevant and should be applied by taxpayers while they are still available.