Unclear issues in government programme: tax base expansion and payment of income tax at tax domicile

Publish date: 19-12-2008
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Evening out the taxation base for calculating contributions and the base used to calculate salary tax, together with the allocation of the 47% quote that goes to the local budget depending on the tax domicile of the taxpayer, not of the employer are two of the proposals included in the interim governing programme that analysts deem unclear.

"Regulating the social security contributions (CAS - social security contributions, CASS / health care, unemployment, work-related accidents and occupational diseases) by the Fiscal Code and evening out the taxable base set for the calculation of contributions and the base used to calculate the salary tax," says one of the articles of the taxation chapter of the governing programme.

Analysts say that this step can be interpreted in a number of ways, including an increase in taxation for individuals and add that clarifications are needed.

"It may be about adding CAS to other incomes that had not been subject to the global income taxation before. That is having CAS paid for part of such incomes, such as royalties," stated Liviu Voinea, chief executive of the Applied Economics Group.

"The step can also be seen as an increase of the base used to calculate salary tax. Social contributions are deducted from the gross salary and the rest is subjected to a 16% tax. Evening out the taxable base would mean applying the 16% to the initial amount," Voinea explained.

On the other hand, Alex Massaci, income tax and tax advisory services director of PricewaterhouseCoopers say that he does not think there will be any changes in terms of principle, of the taxation method.

"This is not a major change. They've tried it before. They want to use the same taxation base used by the Fiscal Code for the salary tax. Social contributions will be calculated as a part of all that is fiscally taxable," Massaci said.

He explained the novelty was the intention to include this matter in the Fiscal Code, which is now regulated by the pension and health insurance's own legislation.
The real change would be the modification of the Fiscal Code so as to have all social contributions no longer tax deductible.

Social contributions are the biggest part of taxation levied on labour, as Romania is one of the few countries in the region that does not cap social security and health contributions so that regardless of how high the salary of an employee is, they account for a fixed percentage of it. The steps to reduce the CAS by six percent this year were almost cancelled out by another step of the Government that increased the calculation base, in effect since the beginning of 2008.

The first effects of the wider salary tax base showed in 2008 after the elimination of the contribution cap previously set at five gross average salaries, through the pension increase law enacted by Parliament in July 2007.

As for the allocation of 47% of the income tax to the local budget depending on the tax domicile of the taxpayer, instead of the employer's, the general consensus is that it will be quite difficult to enforce.

Ziarul Financiar

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