The recent past Romania economic development has been impressive. It turned into one of the fastest growing countries in the European Union (EU) after a brief spell during the recession of the previous decade. However, the recent global financial meltdown and the consequent Great Recession not only reduced the potential for Romania to fulfill its growth prospects but also put in a brake on its overall economic performance. Now, looking ahead, the Romania government has taken certain measures to reverse the current negative trend and boost the economy.
One of the most important steps that the Romanian authorities are taking to reverse the trend and improve the economic performance is the introduction of several policies aimed at reducing the corporate tax burden. The current situation has forced multinational corporations to either choose the offshore option or stay within the jurisdiction where their legal domicile is. Both options carry significant tax burdens and are not ideal for any country trying to attract investments and jobs. Moreover, the Romanian authorities have repeatedly stated that they will not undertake a cut in the level of tax that companies in Romania pay. In fact, currently the government proposes to increase the tax rate only by 0.5% over the next three years. This will be spread out evenly across the different sectors and primarily affect medium and large businesses in order to give them a conducive environment for investment.
While the government may be reluctant to increase the corporate tax to a level that may cause too much harm to small and medium sized businesses, it does not mean that the government will not offer corporate tax breaks. There is a list of companies that are entitled to tax breaks under the law as prescribed by the Romanian Constitution and International Trade Organization (ITO). These include the foreign corporations that have its head offices in Romania. Furthermore, companies that employ over five thousand people can avail of a reduction in their overall taxation. These tax breaks are subject to the implementation of an annual consolidated company return.
The Romanian authorities have been successful in ensuring that a good percentage of the tax that is paid by multinational corporations stays in Romania rather than in other European countries such as Italy or Spain. This has been one of the primary reasons behind the very positive economic growth that the country has enjoyed in the past few years. This growth has mainly been facilitated through the liberalization of trade in the services sectors, liberalization of import and export of goods and favorable tax treatment of foreign investments.
The reduction in the corporate tax rate enabled businesses in Romania to benefit from the growth in the tourism industry. Tourism has always been a major contributor towards the economic development of any country. As the share of tourists in the total revenue of a country increases, the country's Gross Domestic Product (GDP) increases automatically. Romania has benefited greatly from the foreign direct investment (FDI) and the consequent rise in the number of tourists. This has helped in reducing the burden of the taxes on the Romanian economy.
Another very significant aspect of the Romanian economy is its high level of corruption. Most of the laws and the procedures followed by the government bodies, particularly the Romania's Tax Agency and the Romanian Revenue Service . . . . . . (RST), are known for their inefficiency and corruption. These agencies lack professionalism and are prone to mistakes. An increase in the internal competition has helped in reducing some of these shortcomings and corruption.
In fact, it was a concerted effort by the government, the private sector and the international community to provide efficient infrastructure and improved tax collection mechanisms. However, some of these steps have resulted in some sort of political reaction as some of these measures hurt the image of the Romania as a state in the eyes of the international community. Nevertheless, the overall impact of these reforms has been very positive for the country's economy. The high level of economic growth in recent years has made Romania a developed and potentially stable economy.
The most important element that has led to this positive economic growth is the considerable improvement in the efficiency of the internal governmental administration. In particular, the anticorruption drive and the financial sector reforms have played a key role. The improvement in tax collection has reduced the administrative cost, which has made businesses and other consumers more competitive. Moreover, the introduction of a European Union customs system has made goods imported from all over the world cheaper. The improvement in tax collection has made Romania a more attractive destination for investors.