The promised tax cuts to come into force on January 1 2005 will be similarly followed by a tax increase. Starting next year, the dividend-related incomes made by individuals will be taxed at 10%, twice as high as the current level. Individuals will therefore pay the same dividend tax as companies do, which is supposed to go up to 15% for both taxpayer categories as of 2006, according to the Ministry of Public Finances' strategy for 2005-2007 agreed upon with the IMF experts.
Aside from the justification of a more equitable fiscal treatment, the doubling of the dividend tax paid by individuals is intended to discourage people from disguising their wages as dividends, which would cause the budget to lose a great deal of money.
The Ministry of Public Finances feels this is a more acceptable option compared with the prospect of adding the dividend-related incomes to those for which global income tax is paid. This step has been postponed for the next few years due to the need to first stimulate a capital market that is still very weak.
Profit tax will not go down by more than 2% in 2005, reaching 23%, although the Ministry had at some point suggested five percent as being the intended reduction. The reason for this decision is that the budget cannot afford any greater cut, since the revenue gain resulting from the dividend tax increase is not considered sufficient. In addition, the fiscal authority says the business environment is more interested in having taxes on reinvested profit dropped instead of the profit tax cut.
The fiscal strategy sees profit tax go down by a further two percent in 2006, only reaching 19% in 2007.
The reorganisation of the individual income taxation system entails replacing the five tax rates currently in place with three - 16%, 25% and 40%. This makes for a substantial reduction of the minimal tax rate, currently standing at 18%, though a 14% tax had even been suggested, being dropped on account of having too great an effect on the budget.
The cut in the number of tax rates from five to three also involves resetting the income brackets to which they apply. In an electoral year, this solution appears much more convenient than truly reforming the system by introducing the flat tax.
razvan.voican@zf.ro
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