One of the major proposals of the World Bank for the reform of the tax system in Romania is a balancing of the taxation of wage incomes with the taxation of independent incomes, so that there are no longer differences in treatment favoring salaried activity or independent activity. I discussed the effects of such a measure with Cristina Săulescu from Cabot Transfer Pricing.

The suggestion made in this regard by the representatives of the World Bank works as a good pretext for the Executive to flirt with the idea of ​​introducing progressive taxation (along with the elimination of the current tax exemptions). Thus, the Government is considering the option of reducing the basic quota by six to ten percentage points, for those with annual incomes below 50,000 lei, and increasing the basic quota by three to four percentage points, for those with annual incomes over 100,000 lei. Also in the case of progressive taxation, the elimination of the deductibility of contributions to pensions (CAS) and health (CASS) is being discussed.

The independent income obtained by self-employed persons who submit the annual single declaration is also brought into question. For them, the Government received the recommendation of the World Bank to remove the ceiling involving the payment of CAS and CASS, so that contributions are also owed by the self-employed, regardless of income level. As an alternative, the Executive is considering the application of a contribution ceiling for both employees and self-employed workers, but, in the case of this option, the implications on pension rights and the possible implementation of progressive taxation must be taken into account. In any case, the aim seems to be to standardize the tax treatment applied to employees and self-employed workers.

Today we are talking about all this with a specialist in domestic and international taxation and transfer pricing issues, Cristina Săulescu, Partner at Cabot Transfer Pricing.

1. Which option do you think would be more likely to become a reality – increasing the taxation of independent income or decreasing the taxation of wage income?

Cristina Săulescu: “As much as we would like it, lowering the taxation of salary income is not something feasible, considering the need to attract more money to the state budget. Beyond the desire to standardize taxation, the need to attract money to the state budget is greater. Therefore, I believe that increasing the taxation of independent income has a better chance of being implemented. A first step in this direction has already been taken, by changing the ceilings at CASS.”

2. What would be the impact of the proposal to increase the single tax rate on the income of the population from 10% to 13%?

Cristina Săulescu: “Obviously, net income would decrease. Already, in 2024, the net salary represents less than 60% of the gross salary. Therefore, a 3% tax increase, without other changes, would generate a net salary below 55% of the gross salary, according to the calculation mechanism.”

3. How might low and high income groups be affected by the proposed changes to the tax system, including lowering the basic rate for some and increasing it for others?

Cristina Săulescu: “It is assumed that the state budget would benefit, in a first stage. On the other hand, it depends on what exactly low income means, and it depends on what the minimum wage will be. Personal deductions must also be taken into account, which are granted according to the salary and which influence the taxable base. Thus, the higher the employment salary, the lower the level of personal deduction – therefore, the taxable base increases. If the tax rate on higher wages increases, the effective reduction in net income may be greater than the percentage increase in the tax rate.
Considering the fact that the tax is the compulsory collection of a part of the income or profit of natural or legal persons, without immediate or direct, non-refundable consideration, to satisfy general interests, I consider that the application of separate tax rates on those with low incomes and of those with high incomes would be an inequity, since the general interests remain the same. Establishing a so-called single quota, different for the two categories of people, low-income and high-income, would be even more harmful than establishing a progressive quota. The high salary/high income bracket, for example, can stretch a lot, causing those near the bottom of it to pay much more tax than those near the top of the income bracket considered small.”

4. What effects would such an approach have?

Cristina Săulescu: “First of all, I think we should think about the fact that overtaxing those with high incomes would generate a possible labor migration to the gray area, again. Considering the division into low and high incomes, there is a very high possibility, moreover, for employers to maintain the salary “on paper” at a level that falls into the category of low and find other ways to supplement the net amount that the employee his wins it.”

5. What would be the effects of eliminating the CAS and CASS deductibility under progressive taxation on Social Security and access to Medicare for taxpayers?

Cristina Săulescu: “If we talk about progressive taxation, it is obvious that the elimination of CAS and CASS deductibility leads to an increase in the tax base and the transition to another, higher tax range. As for access to medical services, it is not conditioned by the amount actually paid by each taxpayer, but only by his/her quality of insurance.”

6. What would removing the CAS and CASS payment cap for the self-employed mean and what would be the benefits, disadvantages and risks of such a measure?

Cristina Săulescu: “The benefits would only be in the calculation of the pension, where the insured amount counts. The immediate visible disadvantages are represented by the reduction of net income. We must think about this removal of the ceiling in the context in which it is also desired to remove the deductibility of these contributions to the calculation of the taxable base for income tax and an increase in the tax rate of those with “high” incomes. The effects on those affected would be catastrophic, leading to a drastic reduction in net incomes – and consequentially reduced purchasing power.”

7. What are and how could the potential implications on insurance rights be managed in the event of a contribution cap for employees and the self-employed?

Cristina Săulescu: “Considering the fact that the pension is calculated according to the insured amount, capping may generate a change in the pension in the future, if the taxpayers are also tempted to obtain higher incomes in the present, at the expense of incomes from future pensions, more big. However, let’s not forget that there is the possibility of insurance with private pension funds, for those who are interested in this aspect. In the short and medium term, the state budget would be negatively impacted, given that the pensions of current pensioners are paid from the contribution of current contributors. However, if those currently active will contribute less to the pension fund, the state will find itself in the situation of finding alternative sources of funds for the payment of pensions. Of course, the fastest way to get money, which the state has at hand, is to increase taxes and fees, and the surest way to attract more money would be to increase the VAT rate.”

8. What are the arguments for and against the standardization of tax treatment between employees and the self-employed, and how could this standardization be balanced in practice?

Cristina Săulescu: “A pro argument would be that perhaps fewer would be tempted to switch to salaried status. It would also reduce the risks of assimilation of the income obtained by the PFA as wages. The only difference would be the labor insurance contribution. As an argument against? Apart from the fact that an employee has more rights than a PFA and is more protected by law, it would also reduce their net income. Personally, I don’t think it’s a case of a balancing of a possible uniformity. To be fair, as we should be, I think a leveling would be good for the economy as a whole – in fact, the state budget.”

9. How might these proposed changes be implemented in terms of timing and legislative process, and what would be the major obstacles to their implementation? (The proposed implementation calendar is for the period January 1, 2025 – January 1, 2028. Regarding the elimination of the ceiling for the mandatory payment of CAS and CASS on independent incomes – the year 2023, but it must be emphasized that the World Bank report was drawn up at the beginning of 2023).

Cristina Săulescu: “The elimination of the CAS and CASS ceiling on revenues from 2023 does not seem correct to me. It’s income already made. Possibly, starting with revenues of 2024 at the earliest. Anyway, such changes, which have a major impact both on the state budget, but especially on the working population, the taxpayers, I think it would be best if they were made through a law, not through ordinances or ministerial orders. However, if 2025-2027 is considered for implementation, I think that would be enough time both to find the best way to change the legislation and for those directly affected to find the best solution to mitigate of their net incomes.”

10. What are the predictions regarding the market and the economy’s reaction to the proposed tax changes and how could any risks or uncertainties be managed?

Cristina Săulescu: “The reaction cannot be a positive one, for any of the changes brought into discussion. Who has ever enjoyed an increase in the tax burden? The risks, as I was saying, are that some of the declared work will return to the gray or black area, and this, unfortunately, has no other solution than an increase in the taxation of dividends – an increase which, by the way, we do not we want, although it was and is still “on the books”. Also, more controls in the area of ​​labor taxation.”

11. What are the possible alternatives or solutions for balancing the taxation of salary income and independent income in a sustainable and fair way for all taxpayers, given that the only real beneficiary of these measures seems to be the state budget?

Cristina Săulescu: “Directly, yes, the real beneficiary is the state budget, but indirectly, the beneficiaries are all of us, those to whom the state ensures access to its services, social insurance, health and more. Balancing the taxation of salary income and self-employment income cannot be achieved in any other way than by establishing the same tax rates and taxes, under the same conditions and with the same ceilings, if we are to have such a thing. It is not the first time that such a “balancing” of the taxation of the two large categories of income has been discussed, starting from the premise that if we have the same rights in terms of access to social services and pensions, both as employees , and as a PFA, why should we not have the same obligations?”

Article published in Avocatnet.ro