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Romanian ruling coalition plans tax overhaul ahead of key parliament vote
June 29, 2017 / 7:11 AM / 6 months ago

Romanian ruling coalition plans tax overhaul ahead of key parliament vote

BUCHAREST (Reuters) - Romania’s ruling Social Democrats unveiled plans on Thursday to overhaul taxation from 2018, ditching a flat 16 percent tax on income and profit that has attracted investment into the European Union’s fastest-growing but least-developed economy.

Economy Minister Mihai Tudose, Romania’s ruling Social Democrats pick to replace the prime minister they ousted last week, talks with media in Bucharest, Romania June 26, 2017. Inquam Photos/Octav Ganea/via REUTERS

If implemented, the changes could throw tax collection into disarray in Romania, whose public administration is among the weakest in the EU, plagued by vague legislation, bureaucracy and corruption.

The tax changes would probably lead to less revenues for the state and bring unpredictability to the business environment in Romania as the plans had not been discussed with economic players, analysts said. Romanian stocks under-performed the region after the tax plans were unveiled.

Designated Prime Minister Mihai Tudose will ask for parliament’s vote of confidence later on Thursday, which he is likely to receive given the comfortable parliamentary majority held by the ruling Social Democrat Party (PSD) and its junior partner ALDE.

The ruling coalition toppled its own cabinet in a no- confidence motion last week, accusing their prime minister Sorin Grindeanu of failing to implement the ambitious governing programme that helped them win a December election.

A majority of ministers from the ousted cabinet feature in the new government, including Tudose.

PSD leader Liviu Dragnea said the programme had been re-worked to make up for delays. Former Finance Minister Darius Valcov, currently on trial for taking bribes and using the funds to buy art which he stashed away, is the programme’s author.

The tax overhaul includes changing the flat tax on income and profit, scrapping a dividend tax, cutting social security contributions, granting deductions to some categories, and additional levies for oil and gas companies.

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 at 3.5 percent and 3.7 percent of GDP.

The plans also mention introducing a “solidarity contribution” from 2018, without elaborating. The programme does not include an impact assessment.

It plans to replace the corporate tax on profit with a multi-levelled levy on turnover.

Income tax would fall to 10 percent, but revenue of less than 2,000 lei (387.7 pounds) per month will not be taxed.

Social security contributions will be cut by 4.25 percentage points to 35 percent but they will be paid solely by workers, not their employers.

Fiscal worries are likely to weigh on the leu currency, which fell to a five-year low this month but was flat on the day at 0830 GMT.

Reporting by Luiza Ilie, editing by Ed Osmond

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