Romania is sitting on a project that may finally lead to a significant cut in the infamous red tape. This project can give Romania more leverage in the competition with the neighbouring countries over foreign investments. The flat tax project for the incomes of natural persons may help reduce the appeal gap between Romania and the surrounding countries, which has widened in the past years because of the aggressive, tangled fiscal system, which worked against foreign investment.
Central and Eastern European countries are not idle when it comes to tax systems.
Russia, which introduced a single 13% quota both for natural persons and for companies two years ago, has seen its budget revenues soar 100%. Slovakia is preparing to follow its lead, as it will also introduce a flat tax on January 1, 2004. The flat tax will apply both to individuals and to companies and will amount to 19%, with a cut in VAT also being contemplated. Similar plans are being debated in Poland and the Czech Republic, whereas Hungary cut taxes for companies several years ago.
In the past 13 years, Romania has had numerous programmes and institutions aimed at attracting foreign direct investment. However, none of them actually worked. Now, it has to choose between being stuck with a system that has proved its inefficiency and testing a new formula, a simplified taxation system, which has been successfully implemented in other countries, which were facing similar problems - the tax authorities' administrative incapacity to raise revenues for the budget.
However, there is one obstacle. In fact, this obstacle has been around for years: trade union pressures, fighting change.
Just as any reform measure, replacing progressive tax with the flat tax will not yield results in the short term. Unions cannot be asked to think in perspective. But this perspective is of tremendous importance to the long-awaited investors. And unions can be at least persuaded to accept change.
"We are living in an ever-changing world and, if we get stuck in pre-historical systems and don't open up to opportunities, we shall never be able to reach our goals," says Victor Kevehazi, senior partner with KPMG Romania.
"A tax comparable with the neighbouring countries, such as Hungary, Russia, Poland, would increase Romania's competitiveness in attracting foreign direct investment," Ruxandra Stan, executive director of the Foreign Investors Council told Ziarul Financiar.
razvan.voican@zf.ro
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