New Romanian government’s controversial fiscal policy reform sees replacement of tax profit

The government led by Mihai Tudose announced a tax overhaul for 2018 on Thursday, with plans to replace the 16 percent profit tax - which has attracted investment - with a differentiated tax rate based on turnover, according to the governing programme that was submitted to Parliament.

“We will introduce the taxation based on the revenues of all companies in Romania, (turnover tax) starting January 1 2018. This tax will replace the profit tax and will have two or three tax brackets,” the official document read.

The Romanina government said that it will implement the household tax from 2018 and will also amend the way in which the social contributions for employees are paid by companies. The contributions will be slashed by 4.25 percentage points to 35 percent. In addition, four of the six contributions paid today will be eliminated.

“Thus, we will end up with the health and social insurance contributions, owed by the employee, but which will continue to be paid by the employer to the state. To make this possible, at the end of 2017 the computation base for the gross wage will be changed by increasing it by 22.75 percent,” according to the document. It goes on to state that this measure will not generate an increase of wage expenses for employers, but will level the gross wage with the total expenses related to a salary.

Markets reacted badly, with stocks and the leu currency falling, and centrist President Klaus Iohannis strongly criticised the measures.

"We find the coalition with a new government, and surprisingly, a new governing program," Iohannis told the cabinet at its swearing-in ceremony.

"Such behavior certainly does not fall within what is fiscal-budgetary predictability and … certainly induces doubts within the business environment. In the name of Romanians, I ask you to stop this fiscal-budgetary hopping."

Parliament gave the cabinet of Prime Minister Mihai Tudose a vote of confidence on Thursday. Tudose replaces Sorin Grindeanu, who was ousted by the ruling Social Democrats (PSD) and junior coalition partner ALDE for failing to implement the governing program that helped win them a December election.

PSD leader Liviu Dragnea said the tax program had been re-worked to make up for delays. Former Finance Minister Darius Valcov, currently on trial for taking bribes, is one of its authors.

"I have no other objective than enforcing the governing program and recovering the delays," Tudose told lawmakers. "If we want campaign promises to become reality, we must forget the state of normality."

Loose fiscal plans have worried the European Commission and the International Monetary Fund over missing budget targets. The Commission expects Romania to run the EU's largest deficits this year and next.