TAX NEWS - 2010

Romania VAT: Romania Confirms VAT Hike

Determined to curb Romania budget deficit in order to receive a further instalment of vital aid from the International Monetary Fund (IMF), Romania's centre-right government has confirmed plans to increase value-added tax (VAT) by 5%, from 19% to 24%. Contained in emergency ordinance no. 58 of 2010, adopted by the government on June 26, the measure is one of several proposed amendments to Romania tax system.

Announcing the government's latest plans, Romania's Prime Minister Emil Boc emphasized the fact that under these conditions, the agreement with the IMF will continue, noting that a meeting with the IMF to discuss the aid package is now scheduled to take place on June 30.

The latest announcement follows a decision by the country's constitutional court to reject government plans to cut pensions by 15% as part of its austerity package, and the subsequent decision by the IMF to delay aid talks.

According to the Romanian Finance Minister Sebastian Vladescu, the rise in VAT will serve to generate in the region of between RON3bn and RON4bn (EUR700m and EUR940m) in additional revenue for the government in 2010. The VAT rise is due to be closely coordinated with the national bank of Romania in order to limit risks to inflation.

Other key measures contained in the government's ordinance include changes to both corporate taxation and indeed to individual income tax. Regarding corporate tax, the government has proposed that a new tax code is established pertaining to losses incurred by permanent establishments located abroad. Modifications to the code relating to taxes paid abroad have also been put forward, providing that these may be tax deductible in Romania in the case of a tax treaty.

The government also aims to levy a 16% tax on dividends distributed or paid out by one Romanian legal entity to another, up from the current 10%. Proposed changes to individual income tax include reconsideration of taxpayer's activities, and a reduction from 40% to 20% of permitted deductions of expenses relating to income from intellectual property. Other amendments include plans to introduce a standard rate of gambling tax of 25%, and plans to levy a 16% tax on income derived from both interest earned from bank deposits and on income from the transfer of securities.

Due to enter into force on July 1, the measures are designed to enable the Romanian government to honour its agreement with the IMF and the European Union (EU) to reduce its public deficit from 7.2% of GDP last year to 6.8%. In exchange, Romania will continue to benefit from international aid secured in 2009 to overcome its economic crisis.

The ordinance, and therefore the VAT rise, have yet to be adopted by Romanian parliament.