Increased Value-Added Tax (VAT) and excise duties, along with the introduction of two income tax rates, proposed in the latest International Monetary Fund (IMF) report for Romania.

Romania's Fresh Financial Plan

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The International Monetary Fund (IMF) has served up a piping-hot financial plan for Romania, with a twist of increased VAT, excise duties, dividend taxes, and two income tax rates of 15% and 25%. But there's a catch: the Health Insurance Contribution could be on its way out, along with changes in property taxation and a lowered threshold for microenterprises.

Here's the skinny: this financial meal could collect at least 1.2% of GDP in 2025, helping to lower the deficit. These recommendations are none other than part of the shiny, new IMF technical assistance program that the Romanian Finance Ministry requested.

According to the IMF, the labor income tax burden in Romania, including personal income tax and mandatory social security contributions, hovers around the highest in the EU at lower income levels. However, Romania's tax burden at the average wage level is below the EU average. The IMF noticed that the lack of progressivity in the tax burden throughout the income range means the income tax system ain't doing its job as a redistribution tool.

To fix this, the IMF suggests replacing the flat 10% income tax rate with a system featuring two marginal tax rates of 15% and 25%, the latter smacking those with the highest incomes (90th percentile). If fiscal room is available, the IMF suggests providing more generous allowances or a workplace benefit program for those on the lower end of the income spectrum. The IMF also hints that pension system contributions should either not be deductible or that pension income should be taxed.

The IMF further lays out its concrete suggestions for capital income and property taxation, stating that dividend taxes distributed to individuals should be increased from the current scant 8% to 10%. This blunderbuss move would boost revenues, reduce tax arbitrage opportunities, and improve progressivity across the board, the IMF says.

As far as property tax recommendations go, the IMF advocates merging land and building taxes into a single tax, while reducing exemptions. However, they suggest offering relief to vulnerable groups through different means.

The IMF believes that the corporate profit taxation system can be streamlined by axing the tax credit for corporate sponsorships and replacing the tax exemption for reinvested profits with a tax credit of up to 50% for eligible investments, limited to 10% of the corporate income tax. The microenterprise threshold should be drastically reduced, hopefully to match the VAT registration threshold.

The IMF finally proposes tweaking consumption taxes to boost revenues and free up fiscal space for reducing Health Insurance Contribution rates. The IMF’s experts warble that reduced VAT rates should be cranked back up to the standard rate, possibly with the exception of necessities such as food.

Additionally, they suggest lifting the standard VAT rate from 19% to at least 20% in 2025, and later to 21%, making it almost neck and neck with the EU-27 average of 22%.

The IMF hints that Romania's medium-term fiscal framework is on track to steadily decrease the deficit from around 8% of GDP in 2024 to 7% in 2025 and eventually to 3% (or less) by 2031. Boosting state revenues is, well, a crucial, motherfreakin' priority, IMF says.

In the interim, Romania has struck a deal with the European Commission to embark on tax policy reforms designed to swell revenues by 1.1% of GDP in 2025.

The talking heads from Romania's major pro-European parties are currently haggling on forming a fresh ruling majority and a government by June 15. During negotiations, they reportedly agreed on a shortlist of measures to safeguard fiscal consolidation in line with the European Commission's requirements and the cosmic expectations of investors. However, decisions were delayed until June 9.

It's virtually certain that lifting VAT rates will be an essential ingredient in the consolidation mix, despite the earlier promise from president Nicușor Dan to hang a do-not-enter sign around that idea. Romania must approve the fiscal plan by the end of the month, ideally before June 20, to avert the harsh, punitive measures of the European Union under the Excessive Deficit Procedure.

The financial plan proposed by the International Monetary Fund (IMF) for Romania involves changes in business taxes, such as increased VAT rates and excise duties, which are intertwined with politics, as they require approval from the Romanian government.
The shortlist of measures agreed upon by the major pro-European parties in Romania, aimed at fiscal consolidation, includes certain general-news topics like tax policy reforms, particularly the potential increase in VAT rates, which have significant implications for the nation's finance and business sectors.

Increased Value-Added Tax (VAT) and excise duties, along with the introduction of two income tax rates, proposed in the latest International Monetary Fund (IMF) report for Romania.