Gabriel Biris

Gabriel Biriș, a lawyer, Partner at Biris Goran SPARL and a reputed tax expert, made at the invitation of Casino Inside magazine, an analysis of the Romanian economy, one internally swept by inflation, falling foreign direct investments, political unrest announced by the four rounds of elections, but subject at the same time to external actions such as the expected economic crisis at the level of the European Union or the war in Ukraine. We have approached issues such as inflation, last year’s tax increases and their impact on the economy, the 1% turnover tax (“IMCA”) on companies with revenues of over €50 million per year or the possible increase in the exchange rate above 5 lei/euro.

Gabriel Biris

What do you think about Romania’s economy at this moment, taking into account that 2024 is an election year?

As I said before, Romania’s economy seems to be doing well, but I am afraid that this is mainly due to the steroids administered to it, both by the Government, which is borrowing heavily to finance wage and pension increases that support consumption, and by the EU, which has allocated significant sums to Romania, sums that continue to allow many large infrastructure works, works that compensate for the decrease in private investments. 2024 will be a year in which I don’t think we will see any kind of correction of the big problems of the state (salaries, pensions, subsidies, etc.), problems that are increasingly weighing on the private economy, from SMEs to large and very large companies.

About last year’s economic measures, especially those on tax increases in the private sector. Have they had the desired effect for the government? As far as I can see, they’re still looking for 20 billion somewhere…

Successive governments in recent years seem to have given the impression that they can increase the deficit no matter what, that it will be all milk and honey for us. Let’s not forget that the onset of the pandemic found Romania in the position of the only EU member against which the excessive deficit procedure was initiated. First came the 2020 pandemic and the known excesses in terms of public policies, particularly in terms of budgetary impact. Then came the explosion in energy prices in the run-up to the war, and then the war started by Russia against Ukraine, both of which were the perfect excuse for huge deficits. It was only in the early summer of 2022 that we saw the first measures to correct previous fiscal excesses, clearly insufficient corrections, although the government boasts that it has found the solution to all the problems… Then came the budget crisis in the spring of 2023, a crisis that was not caused by a plague or any other cataclysm, but solely by the absurd way in which the 2023 budget was constructed, overestimating revenues and – consequently – inflating expenditure. As a result, we have had not one, but two major amendments to the Tax Code, Law No 296/2023 and then GEO No 115/2023, which changed almost all taxes and additionally introduced some new ones:

  • The minimum turnover tax (in reality on income) and additional taxes for banks (2% of the income) or oil and gas companies (0.5% of the income), both non-deductible, were introduced. Somewhat surprisingly, the list of oil and gas companies also includes traders (fuels wholesalers and retailers);
  • The tax loss recovery has been limited to 70% of profits and, in addition, the tax loss recovery period has been shortened from 7 to 5 years, although it costs nothing to lengthen it to 10 years, in fairness to compensate for the newly introduced limitation;
  • The income tax on micro-enterprises increased from 1% to 3% and new limitations were introduced, which are undeniably necessary to limit abuse;
  • The payroll tax has been increased by introducing meal vouchers into the tax base, the exemption from payroll tax has been limited also for IT, the CASS exemptions for employees in construction and agriculture have been removed;
  • VAT has increased for many of the goods and services for which we previously had reduced rates. For some, VAT increased from 5 to 9%, for others from 9 to 19% or even from 5 to 19%;
  • Excise duties on sweetened beverages have been introduced and the harmonised excise duties (petrol, diesel, tobacco, alcohol) have been increased.

In addition to the changes to the Code (tax increases or newly introduced taxes), we also had two other major changes in terms of reporting to NAFA. The first (E -Invoice), has already caused a lot of problems especially for small and medium sized taxpayers at the beginning of the year. The second, (RO E-Transport) I estimate will create even more chaos in the middle of the year.

Inflation, which remains a problem for the economy that impoverishes the population but is convenient for the authorities, remains at the forefront of the economy.

Yes, as I explained earlier, in 2022 and 2023 the government was clearly the big winner from the rise in inflation, especially the increase in gas prices, an increase from which the government effectively cashed in over 90%. In 2024 we have 4 rounds of elections, and the 2022 and 2023 advantage comes back like a boomerang. The pressure put on the budget to accept many of the budgeters’ demands, plus the incredibly high pressure put on the budget by the new pension law is very likely to worsen the budget deficit. What should really worry us is 2025. In 2024 “solutions” will be found, especially if the extremists take large percentages in the first round of elections. And this is very likely to happen, especially if the Euro-parliamentary elections are not merged with the local ones…

Will the 1% turnover tax (“IMCA”) on companies with revenues of more than €50 million a year lead to the break-up of companies? What will the government gain from this tax aberration?

Correctly said “aberration”…

Nowhere in the world is the turnover of a company taxed, but the profit.

Nowhere in the world does a company owe profit tax (because that’s the 1% minimum corporate income tax) when, for whatever reason, the company makes a loss.

I have said it and I repeat it: the minimum tax is – together with the VAT split – the most toxic measure adopted in the tax legislation since I have been working in the field (29 years). As the VAT Split (2017) didn’t get to come into force, IMCA will hold the absolute title in toxicity. Unlike the VAT Split which – if it came into force simply blocked everything and had to be corrected immediately – IMCA is a poison that won’t kill us instantly (you can see that already), but little by little. We will see how companies become smaller and smaller, how some will move to other countries, and we will be surprised that we will not see any new large investments in Romania. And in 2-3 years, when the decision-makers of that time (most likely the same ones as today) will realize what a mess the “wise men” whose advice they relied on when they introduced it (the same ones who were behind the VAT Split!) got us all into (including them), it will be quite hard to correct the effects…

What will the government gain? The Liberal finance minister has already told us: about €1 billion in 2024. That is, not even a tenth of the 12 billion euros (I say) that the VAT GAP will be in 2024…

At the moment there is a lot of talk of stagnation and even recession in our economic environment. What do you think will happen this year and where are we heading in 2025?

This year will be quiet, we have elections. In 2025 we will have a lot of noise. Or maybe not, we have no way of knowing today, there are too many variables. By the way, who will be President? We don’t even know who’s running, which is a bit strange…

The Euro will probably go over 5 lei, and credits are still too expensive. How will this affect the economy?

Euro over 5 lei will be the least bad news this year. Massive inflation in recent years, significantly higher than inflation in the Eurozone, coupled with a remarkably stable euro/leu exchange rate has actually caused our leu to appreciate massively against the euro. This is good for those who holiday abroad or import, but not for local producers, especially those who also export. For the latter, the depreciation of the leu would be good news. And I’m not talking here about an increase from 4.97 to 5.01, because such an increase means nothing, except maybe a lot of headlines in the media…