Romania's Development to a Low-Tax Country: Effective Corporate Tax Burden in Romania from 1992 to 2010 and Romania's Current Ranking Among the Eastern European Member States

Among the Member States of the European Union, Romania is considered to be a low tax country. This is mainly due to the fact that the Romanian corporate income tax rate of 16 per cent currently undercuts the average corporate income tax rate in the Member States of the European Union by more than six percentage points. Yet, the corporate income tax rate does not give the whole picture as the reduction of corporate income tax rates in many longstanding EU and OECD Member States has in many cases been accompanied by a broadening of the tax base. Further important determinants of the tax burden of corporations that have been affected by tax reform measures implemented in the EU Member States comprise depreciation allowances, rules that restrict the deductibility of interest, and tax provisions that govern the treatment of losses.

Hence, the objective of this paper is to firstly investigate the development of corporate tax law in Romania from 1992 to 2010 in order to highlight the main structural changes of the Romanian company tax system. Secondly, we want to investigate whether these changes are in line with the trend of tax-rate-cut-cum-base-broadening reforms, which has been identified for other Member States of the EU and the OECD.

The descriptive analysis of the development of corporate taxation in Romania from 1992 to 2010 shows that the significant decrease of the corporate income tax rate from 45 per cent in 1992 to 16 per cent since 2005 has been accompanied by a great variety of reform measures pertaining to the tax base of corporate income tax. The most important changes concern the features of corporate tax systems already mentioned above, namely the depreciation allowances, provisions that restrict the deductibility of interest, and the treatment of losses.

Overall, the decrease of the Romanian corporate income tax rate has not been accompanied by a broadening of the corporate income tax base. Compared to the year 1992, the rules currently governing the depreciation allowances for tax purposes, the treatment of dividends and the inter-temporal loss offset are more generous from the perspective of the tax payer. Hence, with respect to the overall picture, the development of corporate taxation in Romania does not fit in with the trend of tax-rate-cut-cum-base-broadening reforms.

Our analysis of corporate taxation in Romania is not limited to a comprehensive description of the development of corporate taxation in Romania, but goes on with a numerical analysis of the tax burdens at different periods of time which constitute milestones in the development of corporate taxation in Romania. The calculations are based on the methodology of the European Tax Analyzer, which has been used in a wide variety of international tax burden comparisons. This paper provides the first application of the European Tax Analyzer in an analysis of the development over time of a transition economy’s tax system, namely Romania.

The results confirm the expected long-term downward trend of the effective tax burden. Overall, the company tax burden decreased by EUR 29,282,603 (equalling 182.89 per cent relating to the benchmark tax regime 2010) from EUR 45,293,505 under the tax code in effect in 1992 to EUR 16,010,902 in 2010.

The results moreover show that the corporate income tax generally constitutes the main share of the overall tax burden. Accordingly, the impact of non-profit taxes, i.e. the building and land tax, on the overall tax burden is relatively low. The striking decline is, therefore, mainly attributed to the continuous tax rate cuts over the last decades starting from 45 per cent in 1992 to a uniform rate of 16 per cent, which was introduced in 2005 and is still in place today. Furthermore, the quantitative analysis based on the model company confirms the first impression of the qualitative analysis that the reduction of the corporate income tax rate has not been accompanied by a broadening of the corporate income tax base.

When corporations which are characterised by specific sets of financial ratios representing different industries are considered, the results for the base case are generally confirmed. Irrespective of the industry, the findings reveal the general downward trend of the effective tax burden over the last two decades.

In order to assess the attractiveness of Romania as an investment location from a tax point of view, we finally compare Romania’s tax regime in an international context. Focusing on the Central and Eastern European EU accession countries, our analysis reveals Romania's advantageous position in the country ranking. Only Bulgaria provides a significant lower tax burden of EUR 9,961,865, which is mainly due to its significantly lower statutory tax rate of ten per cent and the beneficial depreciation allowances for buildings and machinery. We eventually analyse possible reform options. Assuming that all other jurisdictions do not amend their tax system, a corporate income tax rate of approximately 9.5 per cent would not only place Romania ahead of Bulgaria but also on top of the overall European country ranking.

Spengel, Christoph, Sebastian Lazar, Lisa Evers and Benedikt Zinn (2012), Romania's Development to a Low-Tax Country: Effective Corporate Tax Burden in Romania from 1992 to 2010 and Romania's Current Ranking Among the Eastern European Member States, ZEW Discussion Paper No. 12-003, Mannheim.