Tax measures imposed by Brussels: 19% VAT, progressive tax and 20% income tax

Marcel Boloş, the Minister of Finance, claims that the fiscal measures discussed by Prime Minister Marcel Ciolacu with the President of the European Commission, Ursula von der Leyen, in Brussels at the end of last week, must be implemented, because otherwise they face the risk of the European Council rejecting the modification of the target of budget deficit for the end of this year and for the end of next year.

"The government requested in Brussels that the budget deficit target be 5.5% of GDP for 2023. The deficit for 2024 will be 4.25% and, in 2025, the projection is that we can go below 3%. It is the projection of the Ministry of Finance, it must be approved by the governing coalition, and the Commission must submit it to the European Council for adjustment. It does not mean that he agreed with the Commission, it is only the projection of the Ministry of Finance. If these new deficit targets are not approved, we enter from January 1, 2024 with a deficit target of 3%, and that would mean a catastrophe for the country. We should reduce state budget expenses by 40 billion lei, which is not possible. It's unrealistic", warned Minister Marcel Boloş, in an interview for Libertatea, before last night he presented to the leaders of the PSD-PNL coalition the fiscal-budgetary measures for which the Government would assume responsibility in Parliament.

The Minister of Finance specified that, in addition to the measures proposed by the Ciolacu Cabinet, the representatives of the European Commission requested three structural measures with a long-term budgetary impact.

"The first measure requested by the European Commission is to abandon the reduced VAT rates of 5% and 9% and switch to a single VAT rate of 19%. Theoretically, this will happen from January 1, 2025, if they oblige us to comply with the World Bank report, which comes with recommendations in this field. It's one of the measures. The second is the transition to progressive taxation. The third is the unification of the income tax rate with the CASS rate, respectively reaching 20% and applying this rate to the gross income achieved, without deducting the part of social contributions, CASS and CAS. It is an increase in taxation", said, for the quoted source, Minister Marcel Boloş.

The government must cover a hole of 47 billion lei, by implementing the package of fiscal measures.

"Just to reduce the budget deficit in the coming years, we need 20-21 billion lei annually. The reform of general pensions has an impact of 15 billion lei, and the reform of the single salary of 10 billion lei. (...) There are financial difficulties", stated Marcel Boloş.

In addition to the three additional measures, European Commission officials expect, as Prime Minister Marcel Ciolacu said at the end of the meeting with Ursula von der Leyen, administrative reform and the fight against tax evasion, which is estimated to have reached 10% of the Gross Domestic Product , i.e. over 100 billion lei.

It is certain that there is currently no agreement with the European Commission regarding the measures that the Government must implement, nor regarding the proposal that Ursula von der Leyen will address to the European Council regarding the budget deficit target for our country. The technical discussions with the European Commission continue these days and, probably, only next week will an agreement be reached, according to last Friday's statement by Prime Minister Marcel Ciolacu.

The Head of Government specified: "The European Commission is not the one that approves a new inclusion in the budget deficit target. It is obvious that, as a result of Romania's effort to support Ukraine and Moldova, we have a negative influence on the budget, influence that comes from insurance and loan interest because we are a high-risk country due to the conflict in the neighboring state. The Commission understood all this context and this is the main argument for setting a new deficit target. We have already, for several years, been in an agreement regarding the reduction of the budget deficit and there is flexibility following the arguments brought forward to come up with a new plan regarding Romania's deficit. Following the reforms we will implement in the country, the Commission will propose to the Council a new target regarding Romania's deficit. Things move to the technical area to find the best solutions. By the end of the year we will have a decision of the European Council regarding the new deficit target".

Prime Minister Marcel Ciolacu admitted that during the meeting with Ursula von der Leyen, more was discussed on principles, and the Government's position was that the VAT should not increase above 19%.

VAT is not increased above 19% and VAT is not changed for food products and medicines. If clubs no longer have a 5% VAT and it is 19%, I think it is not a misfortune, said the head of the Government, who did not show that the VAT increase measure will have a major impact on HoReCa, one of the most affected sectors of the national economy along those two years of the Covid-19 pandemic.

Therefore, the Government wanted other solutions, and the European officials drew the attention of the representatives of the authorities in Bucharest that there are aspects in commercial matters that violate the rules of competitiveness and fair competition.

"We want to raise the level of the fight against tax evasion, which has reached 160 billion lei, and for VAT alone it has reached 20 billion lei, and we want to remove some tax exceptions and establish social equity, including regarding the pension law. Small pensions will definitely increase and there will be a differentiated approach according to income," said Marcel Ciolacu.

With regard to the taxation of micro-enterprises, for which the Government proposed to reduce to 300,000 euros the turnover set as the taxation threshold by only 1%, after this threshold was previously lowered from 1 million euros to 500,000 euros, the Prime Minister Marcel Ciolacu said:

"We will see what the solution will be regarding the taxation of micro-enterprises. It's hard to explain when you see a turnover of over 270 billion euros and a direct profit of 15 billion euros, on which a tax of only 1% is paid and some have even benefited from exemptions of 20%".

Regarding this aspect, sources from the entrepreneurial environment claim that the amounts presented by Marcel Ciolacu for micro-enterprises do not correspond to reality at all, being lower than those expressed by the prime minister. Moreover, HoReCa sources claim that they requested the Prime Minister before he left for Brussels that the VAT remain in this 9% field of activity, but it seems that the Head of Government did not receive the approval of the European Commission to maintain the status quo in this economic sector.

In conclusion, there will be several goods and services for which the VAT will increase to 19%, among them are catering and restaurant services, the construction of residential buildings with areas smaller than 120 square meters and whose value is less than 450,000 lei (including the land), the construction of buildings for town halls, as well as some traditional products or from the mountain area, but which do not fall into the category of food products.

What is certain is that the final list of fiscal measures accepted by the European Commission will be established only at the end of this week, even if it will be previously approved by the governing coalition.

As for the measures proposed by the Government, they are not accepted by the main opposition parliamentary party, USR.

"The current political class tells us that there is no money and we have to raise taxes. This while they are also setting up all kinds of new agencies and increasing state spending. For them it is always money. For taxpayers, never. (...) The reason why they want to increase VAT is because VAT applies to everyone. And to the elderly who receive a pension. And to children who receive allowance. And those who receive social assistance. We will all have higher prices and through them the state will take more taxes from us. All this because expenses have increased: special pensions, new agencies, countless raises and tens of thousands of new state employees. (...) Spending cuts are nothing anymore. The tax increases, on the other hand, are significant. Those who are not the traditional PSD and PNL voters lose. That is SMEs and private workers. (...) Additional bureaucracy, the continuation of the destruction of micro-enterprises and another invention of the Romanian state, unique in the world: the "fiscal adjustment". That is, a minimum tax combined with a tax on losses. Let's see now what investors will flock to Romania", states on the official Facebook page, deputy Claudiu Năsui, former Minister of Economy, Entrepreneurship and Tourism in the Cîţu government.

In fact, the president of USR, Cătălin Drula, announced that his political formation will initiate a motion of censure against the Ciolacu government, if it will assume responsibility in Parliament on the package of tax changes.