THE "ROMANIA'S DEVELOPMENT IN THE NEW EUROPEAN FINANCIAL CONTEXT" CONFERENCE/ FINANCE MINISTER: "The cut of the VAT will happen before January 1st, 2016"

The value added tax and the excises may be cut earlier than we would have expected, specifically, by the end of 2015, as announced on February 19th by Darius Vâlcov, the minister of Public Finance, at the "Romania's development in the new European financial context" conference, organized by the BURSA newspaper.

The two fiscal easing measures stipulated in the draft fiscal code which is sought to applied starting next year "will not happen before January 1st, 2016, to avoid creating a void in the economy in the November-December period, months which are usually good for consumption", the finance minister said, who added: "We don't want for the population to postpone its consumption to wait for the cutting of the taxes starting in January (...) I hope that the by the end of May-the beginning of June, the codes (ed. note: the Fiscal Code and the Civil Procedure Code) will be passed by the Parliament and not be fundamentally changed".

The authorities want Romania to exceed the EU GDP per capita average in the next 12 years, said Darius Vâlcov, who mentioned that the 3% average of the last few years is not enough to help overcome the gap.

This can be done among other things, by creating new jobs, as well as by creating domestic equity, to allow recouping the economic gaps through a sustained growth.

One of the very important measures which the government intends to take in that regard is the creation of a new fiscal foundation, which is why, last Monday, he rewritten drafts of the two codes were presented in the government meeting.

Speaking about the Fiscal Code, Darius Vâlcov said: "What I have announced yesterday (ed. note: February 18th) in the Government meeting is not just a set of measures, it is a well structured 5-year plan, which will bring in 9 years, by 2020, in the real economy".

Darius Vâlcov said that currently, approximately 1-1.1 million Romanians work without legal employment contracts. "We want these contracts to be brought to the surface, to bring money to the state budget and to give the youth a chance to have a pension a few years from now", he said, and he mentioned: "We think that within two years, the two codes, that need to be complemented with other government measures, will reposition Romania so that we know which way we're headed".

The Fiscal Procedure Code contains 320 changes and additions, the minister announced, and he stressed that these bring about conditions that would convince investors that it is profitable to do business in Romania.

"It takes two partners - the state and civil society. Through me, the state holds out a hand to the business sector", said Darius Vâlcov.

In this context, he estimated that by the end of the first semester of 2015, a new bank for development bank will start functioning, within Eximbank, and CEC Bank and Eximbank will operate as much as possible on the entrepreneurs segment.

• Romania will see an economic growth of 4.3-4.4%, in 2016

Romania will see an economic growth of 4.3-4.4%, in 2016, the Minister of Public Finance said, and he explained that the forecasted level of 2.6%, agreed with the international financial institutions, will see a 1.7% boost, which will come from the fiscal easing measures stipulated in the draft Fiscal Code.

The economic growth will help the authorities to recoup some of the revenues lost by the budget as a result of the application of the measures of cutting and eliminating taxes, and other revenues will be recouped through the actions of the National Tax Administration Agency (ANAF).

According to Mr. Vâlcov, for 2015, the ANAF has budgeted an additional 8 billion in revenues, and in January, the ANAF collected an additional 640 million lei, more than the budgeted level of 500 million lei.

The rewritten draft of the Fiscal Code stipulates, among others, that VAT will reach 18%, in 2020, and the flat tax rate would decrease to 14%, and the dividend tax and the "pole tax" (special construction tax) would be eliminated. Social Security contributions would also drop from 15.8% to 13.5% for employees and from 10.5% to 7.5% for employers.

The tax breaks stipulated in the new Fiscal Code will lead to the creation of 325,000 new jobs next year, and are set to lead to a 1.7% increase of the GDP but also result in a 37 billion lei decrease in budget revenues, over four years, but half of that amount would be recouped from the positive effect recorded in the economy, according to the Government's estimates.

According to the minister of finance, the tax cuts will become applicable through the freezing of budget spending in 2016 to the 2015 level, and starting in 2017, approximately 40% of the budget impact of the GDP increase will go towards fiscal easing and 60% - towards budget expenditures.

The new Fiscal Code: the building tax - will it increase or decrease?

The draft fiscal Code announced by the Government last Wednesday will give plenty to do to every consultant, analyst and taxpayer interested in seeing the changes that have occurred and where the future taxes will go. One first beneficial thing is that the entire Code has been rewritten. It is now more consistent and easy to understand.

One of the chapters that has undergone significant changes in the draft Fiscal Code is the one concerning the building tax. One first conclusion is that the proposed amendment takes into account the drawbacks of the prior version and deserves support. Before issuing an opinion in response to the question in the title, I would emphasize the major improvements that the Fiscal Code brings when it comes to building taxes.

• Essential reparations

The first "reparations" is that the discrimination between individuals and companies has been eliminated, when it comes to the calculation of the taxes on non-residential properties (offices, hotels, retail spaces). In the old Code, in fact, the one that is still in effect, the difference between the taxes paid for the same non-residential buildings depending on the type of owner could be huge, as a legal entity could end up paying as much as 15 times more than an individual, for a building where the taxation rate was 0.1% for individuals and 1.5% for legal entities, assuming an approximately equal taxable value (because their calculation base was different).

A second "reparation" is in the area of the taxable base for legal entities, which no longer have to book the results of the assessment for taxation. In other words, the fiscal value has been disconnected from the book value.

• First "what for", and then "for whom"

The idea that the new methodology for calculating the building tax is that it will no longer be determined based primarily on the owner as the main criterion for the classification of the tax (meaning individuals or legal entities), rather, their purpose of the property: residential and non-residential. There are, certainly, some areas that that will be clarified in the coming period, after a more careful analysis, so that the final provisions will be clearly applicable and easy to understand, by taxpayers as well as by the local authorities, and, of course, by the authorized evaluators - when their involvement is necessary. In a future article, I will be speaking about the implications that the proposed amendment of the building tax has brought for the local authorities, the taxpayers and the certified evaluators.

• The mixed use of buildings leaves room for interpretation

Until then, I would like to add that an area that is not yet completely clear in the current proposal is that where the existence of buildings that have a mixed use has been admitted. Meaning both residential and non-residential. Multiple such examples exist: apartments which serve as offices for companies or Certified Individual Professionals (PFA), apartments which stores have been set up in, houses which were initially built for living and which host restaurants or office spaces, etc. The articles in the Code try to take into account every possible situation, anticipating the most difficult, namely, the one where it is impossible to delimit clearly how much of the surface of the apartment is used for living and how much for the company's offices. Under these circumstances, the proposed Code suggests for the calculation methods to be different if the headquarters serves for activities or not and, if the answer is yes, and, if the expenses pertaining to the building are the responsibility of the individual conducting economic activities. Considering that, in most cases, it will be very difficult to identify the surfaces which used jointly, the tax will most likely be calculated, in the two cases, depending on whether economic activities are conducted in the building in question or not.

One of the main drawbacks that I can find at this moment is that there is no clear stipulation of what "expenses pertaining to the building mean". These usually are the building tax, insurance and maintenance. Electricity, gas and so on, are not usually related to the building, and it needs to be very clearly specified what types of expenses we are talking about.

Another source of questions comes from the fact that, for legal entities which are assumed to be able to own buildings that share mixed uses, the applied treatment is not similar to that stipulated in the case of individuals, meaning that the situation where the surfaces that are used for mixed purposes can not be clearly delimited. I think that this is another area where the differences or discriminations between individuals and legal entities should be eliminated, because once again, we are talking about office buildings, commercial areas and other spaces which other economic activities are conducted in.

• Duties versus taxes

Another area which I feel needs additional attention is that of the building tax. At first glance, it would appear unclear why the notions of building duties and building taxes exist separately. Upon "a second look", it is seen that the building duty pertains to the buildings that are public or private property of the state or of its administrative-territorial units which are rented, leased or which have had their management or rights of use transferred to third parties, as the case may be. In this case, the connection between the accounting value and the tax value has been maintained, which, on one hand, will allow the existence of two different systems at the same time (for private and state owned buildings) and on the other hand will create difficulties in selecting the taxable value. The "value booked in the owners' accounting records" will need to be defined and it will have to be explained what kind of value it refers to and what are the means that the lessor has available to avoid paying higher taxes, unless the owner reevaluates the buildings every three years.

I have reminded these aspects simply to create a foundation for discussion and to anticipate the analyses that we will be conducting from now on. We want to come up with constructive solutions for improvement, which we will send directly to the initiator of the draft law, with one goal in mind: for the provisions of the Code to be applied and understood uniformly by every player involved. Before we send in our suggestions, I want to reiterate that, when it comes to the building tax, the proposed Code represents a major step forward.

As for the question in the title, I don't think that the proposed amendments will tip the balance decisively towards a hike or a decrease of taxes. There will definitely be, on specific items, increases as well as decreases, but I think that overall the building tax has been set on a more transparent and solid foundation.

(ADRIAN VASCU PRESIDENT OF ANEVAR; Translated by Cosmin Ghidoveanu)