For Romania’s IT sector, an end to tax exemptions offers cause for concern

The days of tax-free salaries for Romanian IT workers appear to be coming to an end. The country’s IT industry association says the impact could be ‘deep and long-term’. 

Romania’s government is desperate to balance the books. In June, the European Commission reportedly warned the country that it needed to reduce its budget deficit—5.7 per cent in 2022—or else lose out on European Union funding.  

In December, the government set a deficit target of 4.4 per cent for 2023 but has in recent weeks been speaking openly of merely reducing the deficit to “under five per cent”. On August 2, the financial daily Ziarul Financiar suggested that the EU had agreed to the new target. 

With budget revenues in 2023 so far well below expectations however, meeting even the new, more modest target will be tough unless the Bucharest government can find ways of filling the holes in its budget. For the past two weeks it has been doing just that, floating several ideas—most of which involve raising taxes. 

Measures which the government intends to implement through an emergency ordinance, applicable from September 1, include a 25 per cent increase in the rate at which dividends are taxed, from eight per cent to ten per cent, and the introduction of a new tax on owners of multiple properties. Small business will be hit with higher profit taxes, while self-employed Romanians will also find themselves stung for more cash, following an increase in their health and social security contributions. 

In all, there are 50 measures, which on August 2 Prime Minister Marcel Ciolacu said represent “the first real reform” of the country’s budgetary system.

“I genuinely believe that all of these measures are correct,” he said, adding that they were “essential” in order to avoid the EU blocking funding. In May, however, Ciolacu (at the time parliamentary speaker—he became PM only in June) promised Romanian entrepreneurs that taxes would not be increased.

Incentives work

Perhaps the most controversial move is a proposal to end tax breaks for IT workers. First introduced in 2001 for employees with an eligible bachelor’s degree working directly on software development, then expanded in 2013 to include a wider range of degrees, IT workers are exempt from income tax (the current rate is 10 per cent) although they are liable to pay health and social security contributions.  

Around 104,000 workers—more than half of the country’s IT staff—currently benefit from the exemption. 

A 2021 academic study looking at the effectiveness of the policy (ironically available on the Romanian Finance Ministry’s website) stated that it had supported the development of the country’s IT sector – a sector seen as key to the transition to a knowledge economy.  

“Moreover, the policy reallocated resources towards a ‘good jobs’ (high-skill/high-wage) sector, a policy priority in both developed and developing countries,” the study’s authors, Isabela Manelici and Smaranda Pantea, concluded. 

Mihai Matei, the president of ANIS, Romania’s IT industry employer’s association, believes that the removal of the tax exemption for IT workers would put a brake on the country’s development as a regional hub of innovation and digital transformation. 

“It will have long term repercussions, particularly in the absence of other measures to develop this strategic sector. It constitutes an error in economic policy and is a huge step backwards in the development of the Romanian economy,” he said in a statement

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Less in haste 

There was a similar statement from the Romanian Game Developers Association (RDGA), which warned that Romania’s small, independent studios were already struggling in a highly competitive global market.

“[Tax increases] will have a big, negative impact on the industry,” it said. According to its director, Andreea Medvedovici-Per, the video game industry is vital for creative industries in general owing to its talented workers and potential for export. “The industry should be promoted and supported,” she said.

Mihai Matei of ANIS also criticised the speed with which the new rules will be implemented. 

“These fiscal measures, applicable in a short space of time, cannot be absorbed so quickly by IT firms active in Romania. This will have a negative impact on local companies in urban centres such as Cluj-Napoca, Timișoara, Iași, as well as Bucharest.” 

In July, the American Chamber of Commerce (AmCham) in Romania also warned the government against the hasty implementation of “insufficiently analysed” measures. 

“Although generating budget revenues in the short-term, [these measures] can have direct or secondary negative effects on the medium and long term, including on economic growth. In other words, let’s not sacrifice long-term economic growth for short-term gains,” AmCham said

The average salary in the Romanian IT sector is forecast to be 2,577 euros in 2023, almost double the average salary for the country as a whole. IT exports amounted to seven billion euros in 2021, almost three per cent of GDP. Value added to the economy by the IT sector reached almost seven per cent. 

Romania ranked sixth in the latest edition of Emerging Europe’s Future of IT report.

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