The lump sum tax will bankrupt many IT entrepreneurs

Ana Zidaru

The Association of Producers and Distributors of IT and Telecom Equipment (APDETIC) sent an open letter to the Minister of Finance Gheorghe Pogea expressing its disagreement with the draft emergency ordinance meant to revise the state budget and the passing of several financial and fiscal measures. The members of the Association amount to 80% of the Romanian IT market.

APDETIC states, in a press release sent to our editors, that the application of a lump sum tax of 0.5% of a company"s turnover is unacceptable, because the competition in the IT segment, has compressed margins to less than 2%. Therefore, by applying a 0.5% tax on turnover, the real profit tax will be 30-40%, instead, of 16%. Given the estimated sales drop for 2009, which in an optimistic scenario will be 20-25%, the 0.5% turnover tax will cause many IT entrepreneurs to go bankrupt or to drastically cut back their activity. This will lead to a shrinking of the tax base.

The consequences of such a type of taxation, which does not exist in Europe for medium and large companies, will be a contraction of the companies" operations, the shrinking of the state"s VAT earnings, a reduction of the number of employees and essentially the increase of the price of IT products, according to the letter that APDETIC sent to the Minister of Finance Pogea. Companies operating outside Romania will receive an unfair advantage, as they will not be subject to the turnover based taxation. People working in IT distribution will lose their jobs, and there will be no profit tax left to pay.

The Association shows that the IT industry has features that make it far more vulnerable to the new tax regulations proposed by the Government. There is a high degree of qualification required for IT workers, meaning that there is a large need for employees with higher education and for continuous training expenses, and also there are high level of wages for employee retention, with the IT specializations being among the most sought after on the world market. In IT, competition is high, with most of the large multinational companies already present on the Romanian market. "Thanks to the nature of the market, most of the value added services, - design, installation, service - are included in the selling price of the goods. Given this situation, the companies are considered as operating in the category, which means they qualify for the lump sum tax paid based on company turnover", APDETIC officials said.

Concerning the restrictions on deducting operating, maintenance and repairs expenses, including those with car fuel and car fleets, IT companies operating in import and distribution, as well as those operating in the service sector, will find it practically impossible to operate anymore. Delivering goods at the office of the beneficiary and on-site activity of IT sellers and consultants, contribute to the increase of the companies" turnover, and therefore, to their profit. The decision that rules that transport and taxi companies are the only ones that can deduct their specific expenses will lead to the creation of an arbitrary economy, which inevitably leads to the shrinking of tax earnings and leads to job cuts, APDETIC estimates. Alternatives such as using rented taxis for the transportation of the merchandise, or specialized companies, will cut the profitability of companies and will cause costs to rise to an unbearable level.