The International Monetary Fund (IMF) issued new recommendations to Romania, among which is an increase in VAT, but also excise duties, dividend taxes, and the introduction of two income tax rates of 15% and 25%. At the same time, it recommends the reduction or elimination of the health insurance contribution, as well as a change in property taxation and lower threshold for microenterprises.
IMF says that these measures could generate revenues of at least 1.2% of GDP in 2025 and help lower the deficit. The proposals are part of the IMF technical assistance program requested by the Romanian Finance Ministry.
The IMF states that the tax burden on labor income in Romania, which includes personal income tax and mandatory social security contributions (pension and health insurance), is among the highest in the EU at lower income levels. At the same time, Romania’s tax burden at the average wage level is below the EU average.
The lack of progressivity in the tax burden across the entire income spectrum implies that the income tax system does not fulfill its key function as a redistribution tool, the IMF states.
To remedy this, the Fund proposes moving from the flat 10% income tax rate on labor income to a system with two marginal tax rates of 15% and 25%, the latter applying to the highest incomes (90th percentile).
On the other hand, if fiscal space allows, the issue of the tax burden on low incomes should be addressed by granting more generous allowances or introducing a workplace benefit program, the IMF states. The Fund also says that pension system contributions should either not be deductible or that pension income should be taxed.
The IMF also proposes changes to the taxation of capital income and property, saying that taxes on dividends distributed to individuals should be increased from the current 8% to 10%. This would increase revenues, reduce tax arbitrage opportunities, and improve progressivity, the institution states.
The main recommendations regarding property tax include merging land and building taxes into a single tax and reducing exemptions, while providing tax relief to vulnerable groups in other forms.
The Fund also believes that corporate profit taxation can be improved by eliminating 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, capped at 10% of the corporate income tax. The turnover threshold for the microenterprise regime should be substantially reduced from the current level of EUR 500,000, preferably by aligning it with the VAT registration threshold (EUR 88,500).
Finally, the IMF proposes changes to consumption taxes to increase revenues and create fiscal space for reducing the health insurance contribution rate. Its analysts say that reduced VAT rates should be raised to the standard rate, possibly with the exception of basic food.
Additionally, the standard VAT rate should increase from 19% to at least 20% in 2025 and later to 21% – close to the EU-27 average of 22%.
The IMF says that Romania’s medium-term fiscal framework provides for the deficit to gradually decrease from around 8% of GDP in 2024 to 7% in 2025 and to 3% (or less) by 2031. To that end, increasing state revenues is paramount. In the short term, Romania has agreed with the European Commission to undertake tax policy reforms to increase revenues by 1.1% of GDP in 2025.
At the moment, Romania’s major pro-European parties are in talks to form a new ruling majority and a government by June 15. During the talks, representatives of the parties have reportedly agreed on a short list of measures aimed at securing fiscal consolidation in line with the European Commission’s requirements and investors’ expectations. Decisions, however, were deferred until June 9.
Even without the IMF report, hiking the VAT rates is an almost certain ingredient of the consolidation mix, despite president Nicusor Dan’s promise to avoid such a decision. Romania must enact the fiscal plan by the end of the month, ideally before June 20, in order to prevent disciplinary measures from the European Union under the Excessive Deficit Procedure.
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