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THE FISCAL REFORM IN ROMANIA Government Ordinance for the modification of the Fiscal Code, starting January 1st 2005 THE FISCAL REFORM IN ROMANIA Context Romania had one of the highest taxation levels in the region (corporate tax of 25% and personal income tax from 18% to 40%) but one of the lowest tax collection rate, of 15-16%; A significant size of the gray economy, estimated at 30% - 40% of GDP; A low level of FDI, due to the insufficiently attractive business environment; The fiscal relaxation proved to be long-term beneficial for countries in the region facing similar challenges (Slovak Republic, Russia, Ukraine, Estonia, Lithuania, Latvia). THE FISCAL REFORM IN ROMANIA Tax levels in CEE countries 2005 Es to ni a Sl ov ak ia Se rb ia R us si U a kr ai ne B R om ulga ria an ia R om 20 an 04 ia 20 05 tv ia La Li th u an ia 50 40 30 20 10 0 Personal Income Tax Corporate Tax THE FISCAL REFORM IN ROMANIA Fiscal Relaxation Principles TRANSPARENCY SIMPLICITY PARTNERSHIP WITH TAXPAYERS PRUDENCE THE FISCAL REFORM IN ROMANIA Objectives Enhancing and sustaining the economic growth; Increasing the economic competitiveness; Higher net revenues for population and business sector; Stimulating entrepreneurship, private investment and job creation; Attracting more FDI inflows; Supporting the development of the middle-class; Improving tax collection and reducing the gray economy. THE FISCAL REFORM IN ROMANIA Main provisions Introduction of the 16% flat tax on personal income to replace the previous taxes which were varying between 18% and 40%; Corporate tax reduced from 25% to 16%; Increase of the tax on micro-companies turnover from 1.5% to 3%; Increase of the dividend tax for individuals from 5% to 10%; Fiscal deductions in favor of the less paid employees, set to decrease as wages increase. THE FISCAL REFORM IN ROMANIA Impact on budget revenues The short-term decrease in the budget revenues due to the introduction of the flat tax will be compensated by: - improving tax collection and enhancing fiscal control; - increasing dividend tax and micro-companies turnover tax; - rationalizing government expenses. THE FISCAL REFORM IN ROMANIA Impact on foreign investments Central-Eastern Europe has become a region of opportunity for foreign investors, out-performing the world economy and most of the emerging markets and attracting an increasing share of the global FDI. As the experience of other CEE countries shows, the fiscal relaxation will increase Romania’s comparative advantages in the regional and global competition for attracting a larger amount of FDI in export oriented and high value-added sectors. FDI increase in Romania is essential for generating new jobs, technology transfer, increased competitiveness, increased exports and increased profits to be taxed. THE FISCAL REFORM IN ROMANIA FDI inward stock per capita in CentralEastern Europe, USD 2003 5000 4000 3000 2000 1000 0 lg u B ia ar C tia a ro R om ia n a C ch e z R u ep ic bl H un ry a g nd a l o P ov l S ia k a THE FISCAL REFORM IN ROMANIA Romania – a prime attraction for FDI in the region One of the lowest taxation levels in the region; High and sustainable GDP growth rate; One-digit inflation rate; Domestic money-market will be opened for nonresident investors in 2005; Accession negotiations concluded; Labor cost advantage.