|
Introduction |
 The new centrist government of Prime Minister Calin Popescu Tariceanu
acted quickly and decisively in its first days in office to enact
Emergency Ordinance No.138/2004 (hereinafter referred to as “the
Ordinance”) creating a 16% flat tax on personal income and company
profits effective as of January 1, 2005. The move is designed to spur
investment and draw much of the country's sizeable black economy -
estimated at 40-50% of the real economy - into the legal ambit. The new
flat 16% tax rate replaces personal income tax brackets that ranged from
18-40% and the corporate income tax of 25%. The International Monetary
Fund approved the move and called it "good fiscal policy." Experts say
that the Ordinance has made the Romanian fiscal structure one of the
“least burdening” systems in the region. |
|
[ Up
to Contents ] |
|
Impressive Double Tax Cut |
|
The
Ordinance is actually a double tax cut: the corporate profit tax was
diminished from 25% to 16% and the progressive personal income tax,
which ranged from 18% to more than 40%, was replaced by a flat tax of
16%. The corporate tax cut is meant to encourage both foreign and local
investments on the theory that companies will have more money left at
the end of their fiscal year, while the individual income tax cut should
increase personal consumption and investment. Some analysts fear that an
increased demand for consumer goods could lead to higher inflation
because domestic production would need to be supplemented by imports
which would cause higher prices. The pace in the growth of industrial
output is much lower than that of people's consumption (over 9% for the
first nine months), and also below the GDP growth (plus 8.1% for nine
months). This trend shows that imports remain the underlying factor for
economic growth. Indeed, by November 2004, the trade deficit had reached
6.2bn euros, 688 million euros higher than the entire last year's figure
and 1.5bn euros higher than in the first 11 months of 2003. But a lower
personal income tax will, in the short term, favor only those persons
who have medium to high income. The average Romanian with a low income
will experience the “trickle down” effect of the tax cut as the general
state of the national economy improves. In addition, the many employees
who negotiated their salaries as net amounts – the custom in Romania --
will not gain anything from the tax cut, leaving the extra money with
their companies. Although the International Monetary Fund characterized
the tax reform as “good fiscal policy,” it also warned Romania to be
careful not to increase the budget deficit. Indeed, the tax cut is
expected to remove almost US $1 billion from the state budget. As a
remedy for this, the Ordinance includes several other measures meant to
compensate for the expected budget losses. |
|
[ Up
to Contents ] |
|
Fewer Deductions Allowed |
|
In
a few cases, the state will recover lost revenue from the tax cut by
increasing the tax base as several types of deductions have been
eliminated or reduced. For example, there will no longer be supplemental
annual deductions for private health insurance and household insurance.
Additionally, for some categories of income, the expense deduction
threshold has been lowered. For the rent tax, the maximum percentage of
deductions that can be taken into consideration when assessing the tax
base will be of 25% instead of 50%. Also, the expenses deducted from
copyright income cannot exceed 40% (instead of 60%) or, in some cases,
50% (instead of 70%). |
|
[ Up
to Contents ] |
|
Income Tax Deducted at Source |
|
Until now, all taxpayers had to submit two statements to the fiscal
authorities annually setting forth their global income: an estimated
statement, which had to be filed at the beginning of the fiscal year,
and a final statement, filed at the end of the fiscal year. In order to
reduce the administrative costs of this procedure, the Ordinance
requires that the tax be deducted at the source of the income for most
revenues (salaries, pensions, investment income, gambling income, etc.).
The persons for whom the tax income is deducted at the source will no
longer have to file any statement of income. When the income tax cannot
be deducted at source, taxpayers still have to provide the fiscal
authorities with the two statements of income. With respect to income
derived from abroad, taxpayers will only have to file the final
statement. |
|
[ Up
to Contents ] |
|
Several Categories Hit by Higher Taxes |
 The prior provisions of the Tax Code related to income tax had
established lower taxes for several categories of revenue. By
implementation of the flat tax, these revenues will be taxed at higher
rates. For example, the copyright income tax went from 15% to 16%. The
rent tax has been increased from 15% to 16%. Agricultural income will
also be taxed at 16% instead of 15%. The prize tax made the highest
vault, going from 10% to 16%. Also, the flat tax of 16% is not
applicable to the dividend tax paid by natural persons, which has been
doubled from 5% to 10%. At the same time, the tax on gambling income has
been set at 20%. |
|
[ Up
to Contents ] |
|
Small-sized Enterprises Face Delicate Choice |
|
Until now, small-sized enterprises (hereinafter referred to as “SSEs”)
had the choice between the 25% corporate profit tax and a 1.5% turnover
tax. Under the Ordinance, the SSEs who had previously opted for the
turnover tax will be allowed to reverse their choice until January 31st
of the fiscal year following the one for which the turnover tax is owed.
The Ordinance has increased the turnover tax to 3% and, as the corporate
profit tax was decreased to 16%, this makes the choice quite difficult
for SSEs. Indeed, the main difference between the two taxes lies in the
possibility to deduct income-related expenses from the tax base in the
case of the profit tax. Relating to the turnover tax, though a few
categories of income are not taken into consideration when calculating
the tax base, no deduction of expenses is allowed. |
|
[ Up
to Contents ] |
|
Social Contributions Reform Postponed |
|
Under the Tax Code, employers’ contributions to health and pension
founds should decrease this year from 49.5% to 47.5%. Although such
employers contributions have always been a main concern for investors,
they will not be lowered until 2006, in order to reduce the impact of
tax cuts on the state budget. However, by the year 2009, such
contributions will go down to 39.5%. |
|
[ Up
to Contents ] |
|
Conclusion |
|
Romania cannot afford to exceed the 1.5% GDP deficit level in 2005 if it
wants to ensure that it meets its inflationary and current account
deficit targets. The Tariceanu Government knows that implementing such a
farsighted and competitive tax policy is only a first step. For the flat
tax to work and not destroy Romania’s budget, the government needs to
dramatically reduce tax fraud and greatly improve tax collection. If the
government expects ordinary folks to obey the nation’s tax laws, it will
have to show them that everyone in Romania now plays by the same set of
rules on a fair and level playing field. Only significant action against
tax cheats will satisfy the Romanian people, as well as foreign
investors, that the country is serious about enforcing its tax laws.
Newly elected President, Traian Basescu, has assailed the cushy
relationship between official corruption and large-scale tax evasion.
His unwavering resolve to combat large scale corruption should result in
major prosecutions for tax fraud in Romania. If Traian Basescu is true
to his words, then those persons in the former political and business
elite who milked Romania dry through 15 years of corrupt practices will
find, like the American gangster Al Capone, that their haughty belief in
their own invulnerability was just misplaced arrogance. |
|
[ Up
to Contents ] |
|
Administrative Acts
Subject to Judicial Review |
 Pursuant to Article 52 (1) of the Romanian Constitution, as revised in
2003, “Any person aggrieved in their legitimate rights or interests by a
public authority by means of an administrative act or by the failure of
a public authority to resolve their application within the lawful time
limit, is entitled to the acknowledgement of their claimed right or
legitimate interest, the annulment of the act and reparation for the
damage.” According to the second paragraph of this article, “The
conditions and limits on the exercise of this right shall be regulated
by an organic law.” On January 4th, 2005, Law 554/2004 regarding
administrative acts (‘the Law’) became effective, replacing prior Law
29/1990 regarding the same. In line with the above-mentioned
constitutional provisions, the Law regulates judicial control over
administrative acts that can damage a right or legitimate interest. The
Law has somewhat improved the system which was previously enforced by
Law 29/1990. |
|
[ Up
to Contents ] |
|
Right to Contest Administrative Acts |
|
Persons who have been prejudiced in their rights or legitimate interests
can contest the administrative act that caused such prejudice. An
administrative act is any unilateral regulatory or individual act of a
public authority issued in the enforcement of a law, which creates,
modifies or terminates a legal relationship. Besides aggrieved persons,
the Law allows other interested parties (Ombudsman, prosecutors, County
Prefects and the Public Servants National Agency) to contend against
damaging administrative acts in the courts. According to the Law, when
the Ombudsman or a prosecutor initiates an action against a prejudicial
administrative act, the persons who have been prejudiced by the same act
become plaintiffs by law in the case. This is contrary to a fundamental
principle that regulates Romanian civil proceedings, according to which
any person is free to decide upon the initiation or termination of an
action. The Law should be modified so that a person who has incurred
damages caused by an administrative act can choose whether to become a
plaintiff or not, without being forced to become a plaintiff against his
will. |
|
[ Up
to Contents ] |
|
Legitimate Interests |
|
According to the Law, any administrative act that is prejudicial to a
person’s right or legitimate interest can be contested in court. Under
the terms of the Law 29/1990, only the infringement of a right could
have justified an action in court against an administrative act said to
have caused the damage. The legitimate interest was first added by the
amendments to the Constitution and can be either private or public. The
Law provides that administrative acts can be contested not only when
they are harmful to already achieved rights, but also in those
situations where they prevent a person from achieving a right that can
be reasonably deemed achievable in the absence of the administrative
act. |
|
[ Up
to Contents ] |
|
Administrative Contracts Included as Administrative Acts |
 As administrative acts are essentially unilateral, the inclusion of some
administrative contracts for the purpose of the Law, as administrative
acts, was rather surprising. In fact, the Romanian administrative law -
inspired by the French administrative law- makes a fundamental
distinction between administrative acts and administrative contracts,
each of the two being subject to different rules. Basically,
administrative acts are the result of a single subject’s will, while
administrative contracts are born from the agreement of at least two
parties, as the confluence of these parties’ joint will. Still,
according to the Law, any administrative contract having as its object
the exploitation of the public property, the completion of public works,
the rendering of public services, and public procurements, may be
contested in court by any person aggrieved in a right or legitimate
interest by such contract. Thus, for example, public-private partnership
agreements and concession agreements can be contested by aggrieved
persons not otherwise parties to the agreement. Furthermore, the Law
states that when solving claims related to administrative contracts,
judges must observe the rule according to which public interest prevails
over the freedom of contract. Hopefully, the Romanian judiciary will be
up to the task of parsing out the nuances of conflicting claims in major
contractual situations such as infrastructure redevelopment projects. |
|
[ Up
to Contents ] |
|
Alternatives for the Court |
|
In regard to administrative acts, the court may annul totally or
partially the act or it may force the public authority to affirmatively
take an action to which the plaintiff is entitled including the issuance
of a certificate or any other document. With administrative contracts,
the court may annul the contract totally or partially, or may force the
public authority to conclude the contract to which the plaintiff is
entitled, or impose on one of the parties the fulfillment of a certain
obligation. The Court in such case may also replace and supplement the
consent of a party, when the public interest demands it, and it may
impose the payment of damages. |
|
[ Up
to Contents ] |
|
Conclusion |
|
All in all, the Law has brought some considerable innovations to
administrative litigation to protect citizens against the abuses of the
state. It is one of those steps in the transition from a totalitarian
regime to a democratic one that particularly stands out. But as
significant as it may be, the main problem remains the ability of
Romania’s judges to unravel the complexities that form the balance
between individual rights and the common good. |
|
[ Up
to Contents ] |
Editors Note: It is our policy not to mention our clients by name in
The Romanian Digest™ or discuss their business unless it is a matter of
public record and our clients approve. The information herein is correct
to the best of our knowledge and belief at press time. Specific advice
should be sought from us, however, before investment or other decisions
are made.
Copyright 2005 Rubin Meyer Doru & Trandafir, societate civila de avocati.
All rights reserved. No part of The Romanian Digest™ may be reproduced,
reused or redistributed in any form without prior written permission
from the publisher.
|
RUBIN MEYER DORU & TRANDAFIR
societate civila de avocati
Str. Putul cu Plopi, Nr.7, Sector 1
Bucharest, Romania
Tel: (40) (21) 311 14 60
Fax: (40) (21) 311 14 65
E-Mail:
office@hr.ro
VISIT OUR WEB SITE:
http://www.hr.ro
The Romanian Digest Archive
|
AFFILIATED WITH:
Herzfeld & Rubin, P.C.
125 Broad Street
New York, NY, 10004
Tel: (212) 471-8500
Fax: (212) 344-3333
http://www.herzfeld-rubin.com
Herzfeld & Rubin LLP
1925 Century Park East
Los Angeles, California 90067
Tel: (310) 553-0451
Fax: (310) 553-0648
Herzfeld & Rubin
Brickell Bayview Centre
80 Southwest 8th Street
Miami, Florida 33130
Tel: (305) 381-7999
Fax: (305) 381-8203
Chase, et al.,Herzfeld & Rubin, LLC
5N Regent Street
Livingston, New Jersey 07039
Tel: (973) 535-8840
Fax: (973) 535-8841
Israeli Affiliated Law Firm
Balter Guth Aloni & Co.
Textile Center, 2 Kaufman Street, 68012
Tel Aviv, Israel
Tel: (972)-3-5111-111
Fax: (972)-3-5102-166 |
 |
|
New York — California — Florida — New Jersey — Romania |
|
To have
your e-mail address removed from the distribution list for The Romanian
Digest, please send to
Romanian.Digest@hr.ro a blank e-mail with
UNSUBSCRIBE in the subject line. |
|
