Lecture 7Taxation. Romanian Tax System

Income and Corporate Tax

ANDREEA STOIAN

PROFESSOR OF FINANCE, PHD

DEPARTMENT OF FINANCE AND CEFIMO

BUCHAREST UNIVERSITY OF ECONOMIC STUDIES

Income Tax (I)WHO IS LIABLE

Individuals domiciled in Romania are considered to betax residents and are taxed on their worldwide income(with certain exceptions).

Under certain circumstances, individuals who are notdomiciled in Romania may be subject to tax on theirRomanian-source income, regardless of where theincome is received.

In the absence of a tax-residency certificate issued byanother state based on a double tax treaty, a foreignindividual or one who carries out independentactivities through a permanent establishment inRomania becomes subject to tax on worldwide incomebeginning on the date on which the tax-residencycriteria are met.

INCOME SUBJECT TO TAX

salary income, income from freelanceactivities, rental income, pensionincome, investments, prizes,investment income, agricultural,forestry and fisheries income, andother types of income.

special tax rates apply to incomefrom gambling and transfer of propertyownership.

Income Tax (II)DEDUCTIONS

Individuals domiciled in Romania and individualsmeeting the residence criteria for worldwide incometaxation are entitled to personal deductions, whichvary according to gross monthly income and number ofdependents of the individuals.

For gross monthly income up to RON1,500, themonthly deductions vary between RON300 forindividuals without dependents and RON800 forindividuals with four or more dependents.

For gross monthly income between RON1,501 andRON 3,000, an order of the Ministry of Economy andFinance sets the deductions.

No deduction is allowed for gross monthly incomegreater than RON3,000.

RATES

most types of income aresubject to tax at a flat rate of16%.

the tax rate applicable todividends distributed to residentindividuals is 5%, effective fromJanuary 2016.

Income Tax (III)

Salaries

Benefits in cash or kind (for example, allowances and perquisites)

Wage premiums

Rewards

Temporary disability payments

Paid holidays

Other income received by an individual based on an employmentagreement, document for appointing civil servants, secondmentagreement or a special statute in the law

Fees and compensation paid to directors and managers of privateenterprises and to members of the board of directors, generalshareholders meeting, administration council and audit committee

The monthly tax on employment income is determined by deductingmandatory social security charges, personal deductions, trade unioncontributions, contributions to the voluntary occupational pensionscheme and contributions to the voluntary health insurance scheme(each of the last two deductions is capped to a maximum of theequivalent in Romanian currency of EUR400 per year per participant)from gross income.

Income subject to tax

Employment Income

Example: Employment income tax in RomaniaTAXPAYER

Income from salary: 1500 lei

No other individual in care

TAX PAID ON INCOME

Social security contribution: 10.5%·1500=157.5 lei

Health contribution: 5.5%·1500=82.5 lei

Unemployment contribution: 0.5%· 1500=7.5 lei

Deductions: 247.5 lei

Personal deduction: 300 lei

Taxable income: 1500 -247.5-300=952.5 lei

Tax on income=16%· 952.5=152.4 lei

The legally imposed rate

Example: 16%

Statutory tax rate

It measures the total tax paid as a percentage of the individual’s (business’s) income

Example: 10.16%

The effective tax rate

Is the ratio of total amount of taxes paid to the total tax base

Example: 26.66%

The average tax rate

Top statutory personal income tax rates

Development of top personal income tax rates

Corporate Income TaxWHO IS LIABLE

Resident entities are subject to tax on their worldwide income.

An entity is resident in Romania if it satisfies any of the followingconditions: It is incorporated in Romania.

Its place of effective management and control is located inRomania.

It is a legal entity that has its headquarters in Romania andthat is incorporated in accordance with the Europeanlegislation.

Nonresident companies that do not have an effective place ofmanagement in Romania are subject to tax on their Romanian-source income only, including capital gains derived from specifiedtransactions (see Capital gains).

The standard rate of income tax for Romanian companies is 16%,regardless of whether the companies have foreign participation.

ADMINISTRATION

In general, the tax year is the calendar year.However, certain companies may opt for afiscal year other than the calendar year.

Under the corporate income tax law, payersof corporate income tax (for example,companies, branches and permanentestablishments) must file tax returns and paycorporate income tax quarterly (computedbased on actual numbers) by the 25th day ofthe first month following the first, second andthird quarters.

Reason on taxing corporate profits

Diamond and Mirlees(1971): a pure profit tax is much better way to raise revenues than is a tax on factors of production.

Example: Corporate Profit Tax in RomaniaTAXPAYER

Income: 50000 RON

Non-taxable income: 5000 RON

Costs: 30000 RON

Non-eligible costs: 10000 RON

TAX PAID ON CORPORATE PROFITS

Income: 50000 RON –

Non-taxable income: 5000 RON –

Costs: 30000 RON +

Non-eligible costs: 10000 RON

Taxable base (profit): 25000 RON

Tax on profit: 16% *25000 RON = 4000 RON

The legally imposed rate

Example: 16%

Statutory tax rate

It measures the total tax paid as a percentage of the individual’s (business’s) income

Example: 8%

The effective average tax

rate

Top statutory corporate income tax rates

Corporate income tax rates and average effective taxation indicators

Share of direct taxes

Direct taxes – strengths

Meet the equity on taxation principle

Flexible and adjustable depending on the business cycle

Good fiscal stabilizers

Do not distort the prices

References

Ernst&Young (2016), 2016 Worldwide Corporate Tax Guide, http://www.ey.com/gl/en/services/tax/worldwide-corporate-tax-guide---xmlqs?preview&XmlUrl=/ec1mages/taxguides/WCTG-2016/WCTG-RO.xml

Ernst&Young (2016), Worldwide Personal and Immigration Tax Guide 2016-17, http://www.ey.com/gl/en/services/tax/worldwide-personal-tax-and-immigration-guide---xmlqs?preview&XmlUrl=/ec1mages/taxguides/TGE-2016/TGE-RO.xml

European Commission (2016), Taxation Trends in the European Union, http://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/taxation/gen_info/economic_analysis/tax_structures/2016/econ_analysis_report_2016.pdf