Radical Tax Reforms See Romania Introduce Flat Income Tax

by Ulrika Lomas, Tax-News.com Brussels

04 January 2005

Romanian’s new centrist government ushered in radical tax reforms last week that will see both company and personal income tax levied at a flat rate of 16%.

Introduced on January 1, the new system was adopted through an emergency decree by Prime Minister Calin Popescu Tariceanu's cabinet last Wednesday in an attempt to bolster foreign and domestic investment and improve tax collection and compliance.

As a result of the new measure, the existing progressive taxation scheme, under which income tax ranged from 18% to 40%, was swept aside, while the new flat tax system means an effective cut in corporate tax by 9% from 25%

Commenting on the move, Tariceanu hailed the step as a “very important for the development of Romania's economy."

However, in order to counter an expected $1.1 billion shortfall in tax revenues, the government is also looking to introduce new measures to combat tax evasion and generally tighten tax compliance, which finance minister Ionut Popescu expects to be in place by the end of January.

Moreover, in order for Romania to meet a fiscal budget target agreed with the International Monetary Fund, the government will also bring in a series of additional revenues raisers through the VAT system, in addition to a postponement in social security tax reductions and the sale of state assets through the stock exchange.

Furthermore, it is thought likely that a turnover tax paid by small and medium-sized firms will be doubled to 3%.

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