New Romanian Government Lowers Income, Corporate Profit Tax

30/12/2004

In a bid to reduce the size of its black economy and encourage foreign direct investment, Romania's new government has approved a measure lowering income and corporate profit taxes.

(FT, International Herald Tribune, Ziarul Financiar - 30/12/04; Reuters, VOA, AFP, RFE/RL, Rompres, Mediafax, Press Review - 29/12/04)

Prime Minister Calin Popescu Tariceanu (left), seen here with President Traian Basescu, has vowed to fight corruption and poverty in Romania. [AFP]

Romania's new government issued an emergency decree Wednesday (29 December), lowering the taxes on personal incomes and company profits to a 16 per cent flat rate. The move, approved hours after Prime Minister Calin Popescu Tariceanu's cabinet was sworn in, takes effect on 1 January. It is aimed at encouraging foreign direct investment and job creation, as well as at reducing the country's sizeable black market.

The new measure replaces the current progressive taxation scheme, under which the income tax can range from 18 per cent to 40 per cent. For businesses, it means a 9 per cent reduction of the current 25 per cent profit tax levied.

"This decision is very important for the development of Romania's economy," Tariceanu said after the government's first meeting on Wednesday, adding that it would help make Romania more competitive as it moves towards EU membership in early 2007. "We will inform the IMF about our decision and I expect the Fund to sustain our moves to stimulate the Romanian economy," the prime minister added.

Some experts, however, have voiced concern about possible risks to the economy stemming from the drastic tax cut, particularly on efforts to curb inflation from less than 10 per cent this year to 7 per cent in 2005.

Critics argue that the move could increase next year's budget deficit -- which, under the country's agreement with the IMF, should not exceed 1.5 per cent of GDP.

Earlier this week, new Finance Minister Ionut Popescu issued a statement saying additional measures would be introduced to ensure the country honours arrangements with the Fund. These, according to Reuters, would include increased funds from VAT taxes, higher revenues from the sale of state assets via the stock exchange, and postponement of a planned reduction in social security contributions. Furthermore, the turnover tax paid by small, and medium-sized enterprises will likely be doubled to 3 per cent from the current 1.5 per cent.

Announcing the government's decision Wednesday, Tariceanu also pledged to take measures against tax evasion and to instil tighter financial discipline as part of efforts to offset a temporary budget revenue shortfall.

Tariceanu heads a 24-member cabinet, including representatives of the alliance, comprising his National Liberal Party and the Democratic Party, headed until recently by President Traian Basescu. Two smaller parties, the Hungarian Democratic Federation of Romania and the Humanist Party, are also represented in the coalition government, supported by 242 lawmakers in the country's 469-seat parliament.

As his government was sworn in Wednesday morning, Tariceanu pledged to fight corruption and poverty. About a third of the population lives below the poverty line. In his acceptance speech he also vowed to "build an independent judiciary and strengthen individual freedoms".

"A difficult period follows, but I am determined to bring prosperity to Romania," Tariceanu said after the ceremony in parliament. "I want to see a real market economy that serves the Romanian people, not an oligarchy."