Transition to Market

Chapter 6 Romania: Assessment of Turnover and Income Taxes

Vito Tanzi
Published Date:
June 1993
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P. Gandhi Ved and Leif Mutèn 

Two major taxes in Romania’s tax system have been the turnover tax and wage fund tax. The turnover tax accounted for about 26 percent of general government revenue (over 9 percent of GDP) in 1991, while the wage fund tax, including small taxes on nonwage incomes, contributed less than 25 percent of general government revenue (about 8 percent of GDP) in the same year.1 Profit remittances, though not labeled as enterprise profit tax until mid-1990, contributed about 15 percent of total government revenue, while social insurance fund contributions accounted for over 26 percent of total government revenue (Table 1).

Table 1.Romania: General Government Revenue(In billions of lei, unless otherwise noted)
Turnover tax161.6178.2160.0148.9150.6101.2182.1
(In percent of total
Wage fund46.046.647.
(In percent of total
Profit remittances72.377.798.979.988.762.2105.7
(In percent of total
Social insurance
fund contributions46.147.849.550.753.963.0185.0
(In percent of total
(In percent of total
Total revenue399.4416.6425.4384.6408.0325.9699.6
Sources: Budget documents, various issues.

Includes various user fees, fees for medical care, rental income from state housing, post office revenue, fines, and penalties.

Sources: Budget documents, various issues.

Includes various user fees, fees for medical care, rental income from state housing, post office revenue, fines, and penalties.

This chapter makes an appraisal of Romania’s turnover tax and income taxes on individuals and enterprises. It also highlights issues in, and the scope of, reform of these two taxes.

Turnover Taxation

Prior to November 1, 1990, as in other centrally planned economies, the turnover tax in Romania was simply calculated as the difference between the producer price and the retail price (net of the trading margins, if any). Since both prices were set by the Government, the turnover tax was nothing but a price differential, intended to transfer funds from a particular sector to the Ministry of Finance. The rate of turnover tax on each product was therefore specified as a fixed sum per unit and, in effect, there were as many tax rates as product categories or items. No turnover tax was payable when an item was sold by one manufacturing or service enterprise to another, all enterprises being owned by the state anyway. This meant that all intermediate and capital goods were exempt from turnover tax and only goods sold to consumers bore the tax. Sales to the Government and exports were tax exempt. Most services sold to consumers were also tax exempt.

With effect from November 1, 1990, with price liberalization, the old turnover tax based on controlled prices obviously became obsolete and the authorities introduced a new tax. Executive Order No. 1109, which describes the new tax, was enacted on October 18, 1990. For the first time, ad valorem tax rates were applied to the sale of domestically produced goods and selected services, based on manufacturing or selling prices, and to imports of goods, based on customs values.

Assessment of the New Turnover Tax

In assessing the new turnover tax, the following features need to be noted. Some of these are positive, while others can be considered negative.

Positive Features

It appears that three structural features of the new tax would facilitate the introduction of a value-added tax (VAT) in due course, and hence can be considered positive.

First, the coverage of the tax has been broadened. All goods are covered, except unprocessed food, salt, agricultural raw materials, mining products (other than crude oil and natural gas), electricity, and thermal power. The list of services subject to tax has also been expanded to cover certain forms of construction and transportation, hotels and restaurants, casinos and night clubs, car repairs, laundry and dry cleaning services, barbers and hairdressers, and a few others.

Second, the rates of tax, which previously used to be specific (they represented the difference between the state-established wholesale prices and the producer prices), have now become ad valorem. The new rates are to be applied to the production (ex factory or manufacturer's) price in the case of domestic products, and the sale price in the case of services.

Third, the number of turnover tax rates has been reduced drastically. Executive Order No. 1109 initially contained 20 rates. Most raw materials, intermediate goods, and capital goods, as well as services, are taxed at rates ranging between 2 percent and 5 percent, while most consumer goods are taxed at rates between 5 percent (salt, milk, edible oils, meat, and fish, and their preparations) and 20 percent (clothes and footwear). As illustrations, furniture and other household articles are taxed at 7 percent, cosmetics, selected fruits, and nuts at 10 percent, sugar products and soft drinks at 15 percent, and cars at 17 percent. Luxury products, such as crystal, leather clothes, furs, and jewelry are subject to higher rates of 45 percent or 50 percent. Typical excisable items are also subject to high rates. These include plum brandy (35 percent), spirits (40 percent), cigarettes and coffee (50 percent), wines, champagne, and beer (60 percent), and crude oil (65 percent). Imported products sold in foreign currency are subject to half of the normal rates.

Beginning in 1992, the number of turnover tax rates has been reduced to five, and what could be termed as high-rate excises were imposed on alcoholic beverages, tobacco products, and gasoline.

Negative Features

However, the new turnover tax seems to have certain structural defects, particularly when compared with a VAT.

First, the goods subject to taxation include raw materials, intermediate goods, and capital goods. Taxes on these goods, even though low, contribute to some cascading in the pricing structure and distort producer choices.

Second, under any multistage turnover tax that has no system of input tax credits, the country’s exports can be unduly placed at a disadvantage in world markets.2 This occurs because the exports are still taxed as a result of the built-in cascading of the tax on inputs at earlier stages of production. No scheme seems to exist in Romania for the refund or drawback of turnover taxes on inputs that have entered into the cost of exported items.

Third, the new turnover tax, which is applied at the manufacturing stage, can distort consumer choices beyond what is the result of tax cascading. Since wholesale and retail margins are excluded from taxable value, and since these margins differ markedly among commodities, the share of the turnover tax in retail prices differs significantly from one commodity to another.

Fourth, on imported goods, the tax is levied on the cost plus insurance and freight (c.i.f.) value of goods, without including customs duties. Thus, the new turnover tax fails to recognize the protective role of customs duties in influencing the level and structure of domestic production. On the contrary, higher taxation of imported goods (say, cosmetics, at 30 percent) than their domestically produced counterpart (cosmetics are taxed at 10 percent) gives the turnover tax a protective role that should actually be fulfilled by the customs tariff.

Fifth, the coverage of the new turnover tax, though fairly wide, is far from complete. Purchases by the Government for defense purposes and stockpiling, for example, are exempt, as are many important services, such as water supply, electricity, telephone and telecommunications, and the construction of new houses.

Sixth, the new law contains no provision for exempting even the smallest of small businesses. This means that all businesses in Romania, irrespective of the size of their turnover, will be subject to tax. As the number of taxpayers subject to the new turnover tax will increase considerably, the difficulties of administering the tax will also grow.

Finally, there is at present no tradition of voluntary compliance with any tax in Romania, and all taxpayers other than state enterprises are audited every year by tax officials. As a result, large numbers of staff are required to administer the tax. In other countries, with reliance on voluntary compliance, modern management, processing and audit techniques, and proper computer support, sales taxes tend to be effectively administered with far fewer staff.

Case for Value-Added Tax

In their Reform Program of August-September 1990, the authorities announced that they will gradually phase out the turnover tax and replace it by a VAT used in the European Community (EC), and the current plan is to introduce a VAT in January 1993. This is to be welcomed because a properly designed VAT offers many advantages.

First, a VAT, especially if it is a uniform rate VAT, does not distort producers’ choices and resource allocation in the economy; it is also neutral between various forms of economic organization, technologies of production, and the number of stages of production and distribution before an item finally reaches the consumer. Second, with an inbuilt system of input tax credits and zero rating of exports, it enables exports to leave the country free of tax. Third, by taxing, equally and on the same footing, domestic production and imported supplies of goods and services consumed in the economy it becomes a major and stable source of government revenue. Finally, a VAT based on a system of sales invoices, showing the amount of taxes actually paid, and allowing input tax credits on the basis of verifiable sale invoices, facilitates tax administration; it also automatically sorts out the end use of a product (that is, whether it is a production input or a consumer good), converts traders into tax collectors, and creates an audit trail.

The Romanian economy will obviously enjoy the advantages of a VAT once a suitably designed VAT has been legislated and a well-functioning VAT administration is in place as and when that occurs. Price liberalization as well as privatization (or, at least, a great deal of enterprise autonomy) will obviously be the two most crucial prerequisites for ensuring that the full efficiency effects of the VAT are realized.

Strategy of Transition from Turnover Tax to VAT

A strategy of replacing the turnover tax by a VAT can consist of:

  • (1) converting the present turnover tax into a tax resembling VAT and

  • (2) instituting an adequate system of excise duties.

On the policy front, this will call for aligning the coverage, base, and rate structure of the present turnover tax to that of a VAT, as well as identifying the items to be subject to excise duties and determining the tax rates to be imposed on them. These policy changes will perhaps need to be carried out in such a way that, at each step, the revenue losses from the adopted measures are, as far as possible, offset by revenue gains from other measures undertaken simultaneously. In this way, the Government’s budgetary needs in the period of transition from a centrally planned to a market economy will continue to be met as the turnover tax system is restructured and the efforts directed at macroeconomic stability will not be thwarted.3

As noted above, the present turnover tax has a number of flaws. Some will be eliminated only when the tax is replaced by an appropriate VAT; for these there are no easy solutions in the transition period. Two flaws of the present turnover tax that fit this description are the tax cascading created by the taxation of intermediate goods and capital goods, instead of consumer goods only, and the levy of the tax at the manufacturer-importer level, instead of the retail level. Complete removal of tax cascading will require a full-fledged system of tax credits, while the inclusion of wholesale and retail margins will require the levy of tax at the retail level. None of these actions is administratively easy in the rapidly changing price and business conditions of the type that exists in Romania.

First Step

Three flaws of the present turnover tax, however, can be readily removed, and the authorities can do this as a first step. First, the coverage of the turnover tax can be expanded to include additional services that would be taxable under the future VAT. The services that can be brought into the tax base are construction of new residential houses, water supply, electricity, telephone and telecommunications, car rentals, leasing and letting of movable properties, and entertainment services (this will require adjusting or removing the separate entertainment tax that exists at present). The coverage of the present turnover tax can also be expanded to include all government purchases, including those for stockpiling by the state and purchases for military purposes, as they will be fully taxable under the VAT, as and when that is adopted.

Second, while the levy of turnover tax on exports has recently been eliminated, ways will still have to be found to reduce, if not completely eliminate, the element of tax that can be attributed to intermediate and capital goods used in exported products. One way to do this in the transition period would be to estimate the share of taxed inputs in exports from the latest input-output table, apply an “average” input tax rate, and give tax refunds to exporters based on these calculations. This is obviously not a perfect solution (VAT alone offers such a solution), but it is administratively feasible since exporters in Romania are likely to be large, although few in number, at this stage of the reform process.

Third, an appropriate small business exemption can be established. This should facilitate the administration of the present turnover tax without much loss of revenue and pave the way for the VAT.

None of the three measures of the reform of turnover tax described above has yet been implemented. The first measure will be greatly revenue enhancing, especially as the service sector becomes dynamic. The last two measures, on the other hand, will be somewhat revenue losing.

Second Step

Further alignment of the present turnover tax to a system of VAT and the adoption of excises can be carried out next, as follows. First, the number of turnover tax rates on all taxable consumer goods and services can be reduced to one or two, at say, about 15 percent, whereas selected consumer items, such as alcoholic beverages, tobacco products, petroleum products, cars, sugar, and soft drinks can additionally be taxed under separate excise duties. Designing the rates of excise duties on these items can take into account their present tax rate, the rates prevailing in neighboring countries, and the revenue needs of the Government. Second, the turnover tax can be applied to the c.i.f. value of imported goods plus customs duties and excise duties, if any, on such goods and at the border instead of at the first point of domestic sales. This can be done because this will be the base on which VAT will be levied on imports in due course.

The first measure recommended above would be revenue neutral, or even somewhat revenue losing, if a few tax rates higher than 15 percent are reduced. However, the second measure would certainly be revenue enhancing and by a substantial amount.

The transitional two-step strategy can help transform Romania’s turnover tax structure into a modern system of VAT and excises.

Transitional Issues

A major transitional policy issue that will arise as the present turnover tax is converted into a VAT needs to be noted. It relates to the deductibility from future VAT liabilities of the turnover tax that may have been paid on the inventories of finished goods held by enterprises.

At the date of changeover from the turnover tax to the VAT, some traders will obviously hold tax-paid stocks of finished goods. When those finished goods are subsequently sold, the VAT may also be chargeable, but there would be no automatic deduction for prior turnover tax payments.

This can lead to three possible problems:

  • An equity issue, as there would be double taxation of the available stocks of finished goods, which may vary from one enterprise to another.

  • A pricing difficulty, as traders may adjust prices on the introduction of VAT, on the basis of the old tax-inclusive cost; thus, permanently overstating the price.

  • Reduced production, if businesses attempt to reduce inventories in anticipation of the VAT, in order to reduce their overall tax liability.

A few countries adopting VAT in recent years have permitted traders to claim a full or partial deduction of the amount of the replaced tax in their first (or early) VAT returns while other countries have chosen not to allow any such deduction.

The most relevant points in considering whether a similar deduction need be permitted in Romania are whether:

  • The turnover tax liability can be regarded as being broadly equivalent to the VAT liability.

  • The trader can easily calculate and substantiate the claim for deduction and, thus, whether the VAT office can enforce compliance.

  • Significant amounts of turnover tax are involved.

On the first point, the present turnover taxes effectively incorporate what, in a more traditional tax system, would be excise duties. This has been achieved by applying the tax at high rates on selected consumer goods. The excise component is normally not creditable, but then, there is no way in which it could be separately identified.

Regarding the second point, the method of calculation of the turnover tax prior to and even after November 1, 1990 has been such that the tax content of the purchase price has rarely been shown as an “explicit” part of the cost. Therefore, it will be difficult to calculate the deduction in relation to stock acquired under the old tax regime which is still held. Besides, recording systems are unlikely to be able to identify which stock was purchased under which tax regime; therefore, there would be no way in practice to calculate a credit.

On the third point, the introduction of an export drawback scheme for intermediate and capital goods entering into exports would mean that the issue arises only in relation to domestically held retail stocks, which, at this stage, are very low. Unless this changes significantly, the element of double taxation, through the nonallowance of any credit, will be very minor.

Thus, no deduction need be allowed against the VAT for any turnover tax.

Concluding Remarks

Reform of the present turnover tax, to orient it toward a VAT, is a matter of some urgency in Romania. Multiple rates of taxation, tax cascading, and taxation of selected exports are perhaps its three worst features. Removal of these features, accompanied by a further expansion of the tax base, is necessary to ensure the revenue productivity of the present tax while it is being transformed into a full-fledged VAT. However, all this cannot be done without making preparations for implementing the new tax which must include drafting legislation and regulations, designing tax returns and related instructions, training tax staff, registering and educating taxpayers, preparing appropriate procedures for tax filing, payments, refunds, and computerizing return processing and audits, as Romania does not yet have a formal organizational structure to administer the turnover tax which can handle all these quickly. The authorities should pay adequate attention to these aspects of tax reform.

Income Taxation4

After the Romanian revolution in December 1989, the new Government inherited an income tax system that was fairly typical of those in the East European countries. This section briefly describes this system, and then discusses the progress that has been made in income tax reform over the last two years and the issues facing the Romanian authorities.

Pre-Reform System of Income Taxation

Taxation of Individuals

Wages and salaries were subject to taxation through a payroll tax on the total wage fund of the enterprise. Social security contributions were made through a separate payroll tax.

Other categories of income earners were subject to progressive schedular taxes, depending on the source of the income. On literary, artistic, and scientific incomes, the rate schedule was open ended, the marginal rate moving from 7 percent to 24 percent at yearly incomes of lei 2,400 and lei 120,000, respectively, and increasing by 1 percent for each additional lei 30,000. On handicraft and trade activities, the rates were stiffer, from 10 percent on the first lei 1,200 to 42 percent for income above lei 50,000, and then growing by 2 percent for each additional lei 15,000, up to an average rate of 45 percent for individuals and 60 percent for legal entities.

Income taxes levied on individuals contributed remarkably little to total revenue. This was, of course, a reflection of the almost total absence of a private sector in the Romanian economy. It is particularly interesting that the largest share of taxes paid by individuals until 1989 was the “bachelor tax,” or the tax levied on all individuals above 25 years of age who were not parents.

Taxation of Business Profits

Prior to 1990, the profit remittances, which can be seen as the counterpart of taxation of business profits, were a direct transfer and had two forms: transfer of planned profits and transfer of profits in excess of the plan.

In addition, a host of miscellaneous transfers from enterprises are informative about the accounting practices used in Romania. Each enterprise had an investment fund and was required to allocate money to this from several sources. One source was “surplus depreciation” that arose as each real asset was depreciated by a straight-line method and a given lifetime. If the asset was still in use after having been written down, the enterprise was required to continue to depreciate it at the same rate as before, but now could apply this amount as a credit toward the investment fund. If the enterprise did not use all of these credits for investment purposes in a given year, it had to transfer the surplus depreciation to the state budget. The effect of these provisions was that taxation cut into the substance of most enterprises.

In a similar fashion, each enterprise had certain plan targets for inventories, bonuses to workers, and “balance in regulation funds” for stimulating exports. If the actual amounts of any of these accounts did not conform to the plan targets (for example, if the actual inventories were higher, paid bonuses were lower, or the balance in regulation fund was higher), the excess had to be transferred to the state budget.

Other Incomes

For agricultural income, the existing law was not widely applied. Rental income, however, was subject to tax at marginal rates, from 11 percent to 91 percent at lei 300 and lei 70,000, respectively, with a ceiling of 75 percent for the average tax. Very restrictive rules applied to cost deductions.

Issues of Income Tax Reform

The Government firmly intends to introduce a global income tax as soon as is feasible. It is certainly an established assumption that such a system best fulfills its purpose of taxing on the basis of ability to pay. Furthermore, a global income tax, combined with a VAT, clearly constitutes the tax system that best will facilitate Romania’s ambition of a closer economic integration with countries in Western Europe.

During the transition to this new tax system, the Government has wisely followed a gradual approach, focusing its tax policy efforts on the wage and salary tax and the profits tax, while taking the first steps toward establishing a modern tax administration.


The change to a market economy will imply that a new tax administration will have to be built up almost from scratch. The tax administration that now exists is primarily charged with enforcement and collection activities related to small, individual taxpayers. Collection of wage and profits taxes is done entirely through the banking system, with only minimal enforcement by the tax administration. Several considerations are therefore important.

One is the need to economize scarce administrative resources. A global income tax will increase the number of taxpayers from the thousands to the millions, and the emergence of a private sector will open avenues for tax avoidance and tax evasion that simply have not existed before. Several steps should therefore be taken to keep administrative procedures as simple as possible. The number of files and the amount of paperwork have to be kept at a minimum. This can be done by keeping the tax on wages and salaries final for the majority of taxpayers, by establishing reasonable threshold amounts for minor taxes on income, and by avoiding excessive reporting from taxpayers subject to the obligation of filing returns. The administrative resources can be expanded by moving staff from those offices previously dealing with the major government enterprises to the tax administration. Also, redundant staff previously engaged in price control could, with limited retraining, be used in the tax administration.

Second, computerization of the operation will, in the longer run, be crucial for efficient control of taxpayer filing status, return processing, audit selection, development of management statistics, and so forth. In the short run, the status of the telephone system is not conducive to any advanced system of on-line connections across the country. There will, however, be room for less ambitious computer systems in local use, which can gradually be networked as the infrastructure improves.

Third, the administrative system about to be built in Romania should be conceived with long-term objectives in mind. For instance, even if taxpayer returns and the number of taxpayer files are held down, long-term planning, say, for taxpayer identification numbers, should be done with the perspective of a later system including a larger number of taxpayer files.

Taxation of Wages and Salaries

The tax reform in 1990 included, as a first step, a withholding tax on wages and salaries of the simple type, establishing a final monthly payment. The “bachelor tax” was replaced with a tax credit of 20 percent for all individuals who have children. The rate schedule was quite progressive; 13 brackets with tax rates ranging from 6 percent to 45 percent. Owing to the inflationary conditions in Romania in 1991, this rate schedule was changed three times that year, effectively indexing the brackets.

For the time being, there is good reason to keep a modified version of this system. The combination of tax credits and cash benefits for children should be removed, and the principle of separate taxation of husbands and wives should be maintained. Moreover, given the difficult situation of the tax administration, the principle of final withholding at source should be kept.

A drastic increase of the social security contributions, from 14 percent to 20 percent, was necessary to make up for part of the loss of the wage fund tax.

Business Profits

In 1990, the system of profit transfers was replaced with a more regular tax on profits, which still, by Western standards, brought in a surprisingly high share of government revenue (19.1 percent). This was achieved partly because the tax base was substantially wider than international accounting practices would allow. The statutory tax rate ranged between 54 percent and 58 percent and was applied to the rate of profitability, denned as the relation between the taxable profit and the total production and distribution expenses. The taxable profit in turn represented the difference between the receipts from the total activities and the expenses referring to them. A further deduction could be made from the receipts for the amounts that were paid directly from the financial result. The effective marginal rate could reach 100 percent when gross profits exceeded 10.5 percent of production and distribution expenses.

This profit tax law was provisional and was superseded by the new law on profit tax adopted by parliament in December 1990. The new law covers not only state-owned corporations, but virtually all other legal entities. It is levied according to an extremely detailed and highly progressive rate schedule, going all the way from 0 percent to 77 percent on the margin. The tax was imposed on the net profit determined as the difference between the collected revenues and the expenses listed in an annex to the law. However, this legislation was rather incomplete, as it contains no references to depreciation allowances, stock valuation, loss carryover provisions, or other factors.

This system was drastically simplified from the beginning of 1992, when the detailed rate schedule was replaced by a two-rate structure of 35 percent and 45 percent. Also, new and more liberal depreciation allowances were introduced, allowing enterprises to choose between a new declining-balance scheme and the old straight-line scheme.

The rules for foreign-owned enterprises and joint ventures have, in general, been superseded by the new profit tax law for foreign enterprises established after January 1, 1990. However, the 30 percent tax rate and the special tax incentives stipulated in Decree-Law No. 96 of March 14, 1990 were maintained for foreign enterprises established before 1990. A new foreign investment code was enacted on April 10, 1991.

While these are important steps toward improving taxation of business profits in Romania, a number of important issues remain to be addressed before a global income tax can be introduced.

The first objective must be to establish a coherent system of taxation of different types of enterprises. The present distinction between “juridical” and “physical” persons based on the number of employees outside the owner’s family is incompatible with the market economy. Enterprises should not feel prevented from expanding just because the legal form they have chosen is connected with such a limitation.

Second, a decision has to be made whether Romania, in the long run, should adhere to the idea of a unified business profits tax, that is, a “fence system,” making the tax system the same for corporations, partnerships, and proprietary firms, as long as the profit is kept in the business, and imposing a tax (with credit for all or part of the business tax already paid) on profits taken out of the business and given to the owner. It seems as if Romania is not choosing this road, but rather intends to apply a standard European system of company law, with separate tax systems for different legal forms of enterprises. This should be a reasonable policy to follow, not least given the fact that Romania wants to open up to foreign investment and has a natural interest in being assimilated into tax systems prevailing in countries from which prospective investments will emanate.

Third, some issues outside the tax area are crucial to effective enforcement of a business profits tax. Modern business accounting principles will have to be introduced to allow a more realistic measurement of taxable profits. Furthermore, existing bankruptcy legislation should be used effectively to instill financial discipline and accountability in enterprises.

Agricultural Income

Few countries succeed in effectively taxing agricultural income, particularly the income of smallholders. The current draft law on taxation of agricultural income in Romania, which follows a presumptive model, but provides for a detailed calculation of income based on such factors as crops and numbers of cattle, seems overambitious. A far more reasonable approach would be to tax agricultural income in an indirect fashion, based on relatively rough assumptions of the productive value of the land. For the time being, the most important task for the administration should be to establish a properly functioning profit tax system for the major agricultural enterprises.

Rental Income

It is urgent to establish a less-than-confiscatory tax on rental income by making the deductions from gross income realistic, and by reducing the top rate. As a next step, measures could be taken to assimilate the taxation of landlords with those of businesses, and in the long run, taxation of rental income would form part of a global income tax system. Some countries have successfully established withholding tax systems for rental income, but it is unlikely that the situation in Romania would improve very much by adding the number of persons liable to tax in this way.

Income from Capital

At the present time, there are far-reaching reliefs from tax on interest income. In the longer run, interest income should be part of the total income taxable under a global system. This might well have to take some time, given the inflation experience. There is little point in a schedular system for taxing interest income that in real terms is no income at all. Once real interest rates are consistently positive, however, fairness requires some taxation, albeit for technical reasons initially only in the form of final withholding tax.

On the question whether dividends should be taxed in full, it would seem desirable not to get out of line with the European development. A partial integration might be a long-term objective. For the sake of simplicity, however, a low final withholding tax on dividends should be the immediate solution, and this is the system presently chosen.

With respect to capital gains, the principle that they should be taxed is no longer contentious. The problem is the definition of basis, the indexation, and the control of assessments. In these respects, the Romanian situation is not favorable for the immediate implementation of a taxation of private capital gains. What would be realistic is a simpler approach. One element would be a clear definition of business profits to include all profits realized on business assets at the time of their sale, the withdrawal of them from the business, or their removal outside the Romanian tax jurisdiction. Another would be a registration duty for real estate transactions.

In the long run, it might be possible to establish either a cost basis for owners of capital assets, or a “D-Day” valuation, offering a new basis for the taxation of future capital gains. Experience shows that capital gains taxation is never an important revenue raiser. The reason for capital gains taxation is fairness. If capital gains taxation cannot be implemented in a fair and equitable manner, it should rather be omitted.

Ved P. Gandhi is Assistant Director in the Fiscal Affairs Department. At the time the chapter was written, Leif Muten was Senior Advisor in the same department. Mr. Gandhi is the author of the first part of this chapter, and Mr. Muten is the author of the second part. The terms “turnover tax” and “wage fund tax” should be interpreted with some caution.

The terms “turnover tax” and “wage fund tax” should be interpreted with some caution. These are not really comparable to taxes in a market economy. In an environment in which both quantities of inputs and outputs and their prices were under government control, they had more the character of transfers to the government.

Initially, exports of domestically produced items that were in short supply were to be subject to turnover tax rates ranging between 1 percent and 10 percent. These included construction materials (woods, glasses, tiles, bathroom fittings), natural woods and fibers, matches, and school supplies. The authorities have now exempted all exports from turnover tax.

The administrative front will also require changes, that is, the Tax Department will need to develop the appropriate organizational structure and procedures necessary to implement the reform process.

Erik Offerdal has made many useful comments on this part of the chapter.

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