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04/12/2016

Romania’s taxing problem will trouble incoming government

Social Europe & Jobs

Romania’s taxing problem will trouble incoming government

Victor Ponta [Partidul Social Democrat/Flickr}

Every morning, hundreds of traders pour into a cheap wholesale market in a northern suburb of Bucharest. But if the tax inspector calls, the bustle stops, shutters are quickly pulled down and the place falls silent.

Tax dodging remains rife in Romania, despite demands for improvement from the European Union, which it joined in 2007, and the International Monetary Fund, which provided aid after the financial crisis.

Untaxed, undeclared activity amounts to more than 28 percent of national output, putting Romania second only to Bulgaria in the EU for the size of the black economy as a proportion of GDP, a study by consultancy AT Kearney found.

One in three workers pays no income tax and has no pension, according to the Fiscal Council, a Romanian watchdog set up under the IMF deals.

“It was the only job I could find,” says one of those, a vendor at the Bucharest market. He earns 1,000 lei (€226.237) cash a month – just above the minimum wage – and has no job security.

“If I complain, I’m afraid my boss would replace me.”

Tax evasion in Romania amounted to 16.2 percent of GDP last year, about 22 billion euros, almost doubling from 9.1 percent in 2000, the Fiscal Council estimated.

>> Read: Romania introduces flat tax rate

That eats into government revenues, pushing successive administrations to squeeze honest workers and businesses with new taxes to fill the gap, and leaving little cash to invest in a country with the worst motorway infrastructure in Europe and where 40 percent of households do not have indoor bathrooms.

“We continue to see a very high level of tax evasion from certain private companies … They distort competition,” said Mihai Bogza, the head of Romania’s foreign investors’ council, , whose members account for two-thirds of all foreign investment in the country.

“Taxes not collected from these companies will ultimately be raised by hiking taxes for contributors in good standing.”

That situation could worsen after a presidential election that runs from Sunday to Nov. 16.

The leftist prime minister and front-runner, Victor Ponta, has announced tax cuts and a list of spending pledges in the run up to the poll, without spelling out how they would be paid for.

Ponta has already cut value added tax on certain foods, such as bread, reduced social security tax, reversed wage cuts introduced by his predecessor and has promised to hike the minimum wage from next year.

If he wins the election, his Social Democrat Party would have a greater hold on power, without the brake often applied by his bitter rival, outgoing President Traian Basescu.

And, on top of that, under an EU fiscal treaty, Romania must lower its budget deficit next year to 1.4 percent of GDP from this year’s 2.2 percent target, which means raising taxes, cutting spending or chasing the tax dodgers.

Hard to pay

Tax evasion goes far beyond small traders.

Eight soccer club owners and officials, including a former deputy prime minister, were jailed this year for corruption and tax dodging. Anti-corruption prosecutors are investigating several members of parliament.

Bad behaviour by the rich and powerful is hardly an encouragement for the average Romanian to pay up, but even if they want to, the system does not make it easy, with long queues at tax offices and time-consuming bureaucracy.

“It’s hard to pay taxes here; it took so many papers and trips to register and it’s not like others are paying,” said one building contractor, who used to work in Spain. He advertises by posting flyers in mailboxes and pays two workers off the books.

>> Read: Romania becomes first country to introduce junk-food tax

Romania has started tackling the problem. The World Bank is helping its tax authority adopt processes that should see collection rise by at least three percentage points in relation to GDP by 2018, according to Alberto Leyton, a public sector expert at the World Bank.

The authority has merged tax collection and customs offices. In 2014, the government scrapped or merged 92 tax payments, to reduce bureaucracy. The finance ministry has passed legislation to cap cash payments in an economy where few people use credit cards and is working on enabling taxes to be paid online.

But the lack of predictable fiscal policies and the risk of sudden tax changes could remain a deterrent for investment.

“When I talk to British companies working in Romania, they often raise the unpredictability of the legislative and fiscal environment, particularly due to the widespread use of emergency ordinances,” said British Ambassador Paul Brummell.

“British businesses tell me that they would be more likely to invest if the legislative environment were more stable.”