IMF asks Romania to abandon flat rate: 25% tax for the rich, VAT at 21%

The International Monetary Fund recommends that Romania adopt a package of fiscal measures that would shift the tax burden from labor taxation, including social contributions, to consumption taxes and, to a lesser extent, on capital, the institution estimating that, if fully implemented, these proposals could generate revenues of at least 1.2% of GDP in 2025, writes Ziarul Financiar.

Romania’s medium-term fiscal framework envisages the fiscal deficit gradually declining from around 8% of GDP in 2024 to 7% in 2025 and 3% (or less) by 2031.

“With limited scope for expenditure consolidation – given the low share of expenditure in GDP – revenue mobilization is imperative. The IMF’s technical assistance proposes a package of fiscal reforms aimed at raising revenues, improving work incentives and closing loopholes for abusive tax planning. The main recommendations aim to shift the tax burden away from taxation on labour (including social contributions) towards taxes on consumption and, to a lesser extent, on capital. The recommendations, if fully implemented, could generate revenues of at least 1.2% of GDP by 2025,” the IMF said in a report.

The IMF’s main recommendations:

1. Labor taxes

– moving from a flat 10% tax rate on labor income to a two-rate system of 15% and 25%, the latter being applicable to the highest incomes. To reduce the tax burden on labor for the majority of taxpayers, the Fund recommends significantly reducing or eliminating the health insurance contribution.

2. Capital and property taxes

– The tax on dividends distributed to individuals should be increased from 8% to 10%; merging the land and building tax into a single tax and reducing exemptions, while providing tax breaks for vulnerable individuals in other forms; the research and development tax incentive should be restructured as a refundable tax credit; the turnover threshold for the micro-enterprise regime should be substantially reduced from its current level of EUR 500,000, preferably by aligning it with the VAT registration threshold (EUR 88,500). Taxation of corporate profits can be improved by eliminating the tax credit for corporate sponsorships and replacing the tax exemption for reinvested profits with a tax credit of up to 50% for eligible investments, capped at 10% of the corporate tax due

3 Consumption taxes

– Reduced VAT rates should be increased to the standard rate, with the possible exception of basic foodstuffs (the increase could be staggered over time to mitigate the impact on consumer prices); the standard rate should increase from 19% to at least 20% in 2025 and thereafter to 21%, close to the EU27 average of 22%; excise duties should be adjusted for inflation; excise duty rate for still and sparkling wines should be unified at around 60 lei/hl

“Romania has the third lowest tax-to-GDP ratio in the European Union, with ample scope for fiscal policy to complement the ongoing digital transformation of the tax administration to generate additional revenues. The IMF’s technical assistance, requested by the Minister of Finance, proposes a package of fiscal reforms aimed at increasing revenues while improving incentives for work, remaining attractive for capital investment and eliminating loopholes for abusive tax planning. Rather than making the minimum fiscal adjustments needed to save the EU funding package, the deficit pressures can be seen as an opportunity for Romania to make important structural improvements in the fiscal area, in particular by shifting the tax burden away from mandatory social security contributions and relying more on consumption and income taxation,” the report says.