April 7, 2014 / 12:56 PM / in 3 years

INTERVIEW-Romania readies tax cuts to spur economy

5 Min Read

* Finance minister says to scrap tax on reinvested company profits

* Will also introduce lower income tax bands when time is right

* Says in talks with IMF over mineral resource royalties

By Radu Marinas and Matthias Williams

BUCHAREST, April 7 (Reuters) - Romania will scrap the tax on profits that companies reinvest in the country and cut some other levies to help create jobs and secure economic growth of around 3 percent this year, the finance minister said on Monday.

The government will also reduce firms' social security payments by 5 percentage points, slash value-added tax on certain foods and, once it can afford to, introduce a lower income tax rate for low earners, Ioana Petrescu told Reuters in an interview.

Romania is the European Union's second poorest state but its economy has outpaced most peers of late, thanks to a revival in exports and a stellar 2013 harvest that pushed growth to 5.4 percent in the fourth quarter.

While the tax cuts should help keep growth relatively high, Petrescu said they would be matched by deficit-reduction measures to ensure Romania met this year's fiscal targets.

"Either (there) needs to be more tax collection or a reduction in expenditures or freezing the expenditures for that particular period, so we certainly are committed to fiscal prudence," the minister said in her first interview with the foreign media since taking office in March.

She declined to go into specifics but said the government was in discussions with the International Monetary Fund about reviewing the royalties it charges firms to mine its natural resources.

Romania has an ongoing 4 billion euro ($5.48 billion) standby aid deal with the IMF, its third since a real estate bubble burst in 2009 and tipped the country into recession.

Capital Creation

Tax cuts could help shore up the popularity of Prime Minister Victor Ponta's leftist government, which faces European elections in late May ahead of a presidential ballot in November in which Ponta might run.

"I am optimistic that this year we'll also have an economic growth maybe around 3 percent, and I think this can be sustained by pro-growth fiscal policies," said Petrescu, a 33-year-old Harvard-educated economist who was previously an economic adviser to Ponta.

"... We intend to eliminate the provision to tax reinvested profit so hopefully that would spur more investment and more capital creation."

That measure was likely to be introduced in July, meaning it would have has a low impact on the budget of about 20-30 million lei ($6-9 million), she said.

As part of its agreement with the IMF, which is key to Romania's credibility with investors, the government has pursued deficit-cutting measures and economic reforms such as cleaning up inefficient state companies in order to spur growth.

It is targeting a fiscal deficit under IMF norms of 2.2 percent of economic output this year, compared with a goal of 2.5 percent in 2013.

There have been calls within the ruling alliance for Romania to exit such IMF agreements, but Petrescu said such a decision would depend on the economic climate in 2015, the year the current deal expires.

Petrescu's forecast for growth in 2014 is higher than the IMF's projection of 2.2 percent. She also forecast that inflation will quicken this year. It is currently at a record low of 1.1 percent, which prompted the central bank to end its run of rate cuts in March.

Romania, which is rich in natural resources including oil, gas, coal, salt and gold, is rethinking the level of royalties it charges for extraction - currently among the lowest such taxes in Europe and a boon for companies such as Austria's OMV , Chevron and Romgaz.

Petrescu said the government was looking at "redesigning" the royalty system while taking care to not make investment prohibitively expensive.

"We had extensive talks with the IMF officials (and)... we'll have more talks on this topic," she said. "We need to be careful because a lot of investments in this area are very risky at the very beginning so if we tax them too much they might just simply not do it." (Editing by John Stonestreet)

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