To hear about tax in Romania, Finance Monthly reached out to Florica Cira who is the Managing Partner and Founder of FinACo -an accounting and tax advice company.
Have there been any recent/upcoming updates or changes to tax rules in Romania?
There have been quite a few changes in Romania in the last few years. Some of them were needed, but others, in my opinion, simply increased the bureaucracy.
2017 was a very dynamic year in regards to changes in the tax rules in Romania. An amendment was published almost every month so tax advisers, accountants, managers, as well as business owners had a busy year.
A lot of things changed in labour taxation:
- The increase of minimum gross salary per economy to 1,450 RON. The previous change was made in May 2016, from 950 RON to 1,400 RON, therefore in less than 1 year, an increase of 50% affected several industries.
- The increase of Pension insurance for salaries higher than €3,000 a month.
- The employers pay additional tax for the part-time labour contracts.
- Stricter rules for the time sheet evidence and labour contracts conditions were activated. At the same time, the penalties increased.
- The disability fund paid by the companies was increased by 100%.
- Due to a new regulation published in November, as of January 2018, a new social security system will be applied by transferring the employer cost with social security to the employees. The employer will still be obliged to withhold on payroll the employees’ social security.
The main modifications refer to:
- Increase the employee social security from 16.5% to 35% and decrease the income tax from 16% to 10%.
- Decrease the employer taxes on labour from 22.75% to 2.25%.
The actual labour cost will not change much. However, in some sectors like IT and R&D, where the employees are exempted of income tax, this transfer of taxes will decrease the net salaries with around 7%.
This major change could have a negative impact on companies considering that the budget for the next year was approved beforehand.
In the long run however, these changes could be very beneficial for Romanian social security, since individual insurance will increase. Furthermore, the public funds for future payments to social security could be managed much better.
Still, business managers and owners ask themselves whether the Government guarantees to keep the labour taxation to 2.25% in the next few years.
The period of time for implementation, software updates, discussions, negotiations between employer and employees is very short and involves efforts by both sides.
Additionally, there have also been recent changes in regards to VAT – the so-called “split payment” of VAT which set-up a new method to follow-up collection and VAT payment, starting in 2018. The system implies that VAT tax payers will have the obligation to open a new bank account for managing only VAT payments. The companies are forbidden to withdraw cash or use this funds for anything that’s not VAT payments. The fines and penalties are extremely high if the rules are not respected.
The Government’s main objective is to increase the level of collection and reduce VAT fraud. However, specialists note that this measure will increase operating cost and cause cash flow issues.
The business sector firmly rejects this new form of bureaucracy and economic experiment, hoping it will not be applied.
As of 1st January 2018, there will be some major changes in regards to corporate tax too. Companies with a total in revenues under € 1mil per year, will pay tax on revenues:
- 1%, if it has employees.
- 3% if it does not have employees.
In the last five years, the threshold for this type of taxation has increased from € 65,000 in 2013, € 100,000 in 2016, € 500,000 in 2017 to € 1 mil, as of 1st January 2018.
Because this form of taxation is mandatory, it could have a negative impact on industries with EBITA lower than 6%, as well as on investment projects, where the operating expenses cannot be deducted from the operating profit in the current year or in the next fiscal years.
What would you say are the advantages of setting up a business operation in Romania, in terms of tax?
Even though there have been many changes in tax regulations in the last few years, which has created challenges in setting-up a business strategy, there are still some fiscal advantages which are worth mentioning:
-Developers and employees from R&D projects are exempted of income tax on salary. This facility can decrease the labour cost.
-Small companies with a turnover under €1 mil, which report EBITA over 7% has an advantage by paying only 1% to their revenue.
-Companies which invest in equipment are exempted on tax on profit for the value of the investment.
What are some of the key challenges of helping clients with tax, accounting and payroll?
The SME sector have grown very quickly in the last years, partially because of the investments made with European Funds. Our role is to assist and help our customers with their goals and to be more competitive and dynamic in a market influenced that is more and more by new technologies, data volume and high speed of reaction. At the same time, a challenge that we face is ensuring that the accounting and reporting standards are respected as well as that the taxes are correctly assessed.
We assist our clients with finding new better solutions to optimise their activity. Some of our projects that we work on include:
-Assisting with setting up ERP systems in compliance with the local accounting and fiscal standards. The challenge is to localise the system, ensure that the reporting criteria is fulfilled, and ensure that the automatic processes are correctly set.
-A lot of small companies have gone through mergers or have split to better organise their activity or to sell the business. Such a project implies team work from managers, lawyers, accountants and advisers.
-Assisting and representing our clients to fiscal audits performed by Tax Authorities on field like: corporate tax, transfer pricing, labour tax, VAT.
-Project-based accounting and management reporting is requested more and more even by small companies, to optimise their cost, to measure and increase their performance.
What differentiates FinACo from its Romanian competitors?
We provide integrated services to our clients for projects regarding: accounting, budgeting, consultancy, and tax-related issues.
Where do you see the company in 2-3 years?
New technology will challenge us to find a new way of using our knowledge. Booking routine works will be taken over by machines. We must be prepared for new methods like cloud accounting, and learn to be more than an accountant and become an adviser on business environment.