## 1rouea2022002

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### PREFACE — Mission and engagement and executive summary
- Mission: IMF Fiscal Affairs Department remote mission to Romania during May 9-19, 2022, at request of Ministry of Finance.
- Mission team: Shafik Hebous (mission head), Jean-Francois Wen (FAD), Philippe Wingender (RES), Naomi Feldman (FAD expert).
- Meetings: Ministry of Finance (Minister Adrian Câciu; Mr. Alin Chitu; Mr. Dan Matei), National Agency for Fiscal Administration, Ministry of Labor, Ministry of Agriculture and Rural Development, Fiscal Council (Chairman Daniel Dăianu; Deputy Chairman Bogdan-Octavian Cozmâncă), Working Group members (Gabriel Biriș, Delia Florina Cataramă, Ionuț Dumitru).
- Key contextual statistics and highlights:
  - Total tax-GDP ratio in Romania is 12 percent.
  - Budget deficit reached 6.8 percent of GDP in 2021.
  - Romania aims under the RRF to raise its tax-GDP ratio by 3 percentage points, with 0.5 and 2.5 points from policy and administrative measures, respectively.
  - Gini coefficient in Romania was 34.8 in 2019 versus EU average 30.2.
  - Romania’s PIT revenue at 2.4 percent of GDP is the lowest in the EU.
  - Historical PIT rates: prior to 2005 top PIT rate was 40 percent; flat PIT at 16 percent introduced in 2005; lowered to 10 percent in 2018.
  - Combined PIT and employee SSC rate is 41.5 percent; employee social insurance contribution is 25 percent and employee health insurance contribution is 10 percent. Employer work insurance 2.25 percent of gross labor earnings.
  - No in-work benefits; net take-home pay example: couple (no children) earning the average wage has net take-home pay equal to 58.5 percent of gross earnings — the lowest in the EU.
- Executive-summary diagnosis:
  - Romania has one of the lowest revenues in the EU and a projected budget deficit exceeding 7 percent of GDP.
  - Current policy mix: flat PIT rate of 10 percent combined with the highest social security contributions (SSCs), disincentivizing formal labor supply, creating arbitrage opportunities, and generating pressures for exemptions.
  - PIT provides little income support at the bottom and income inequality is relatively high.

### Recommended PIT reform package (illustrative, guided by optimal taxation analysis)
- Introduce a higher top PIT rate for high earners while keeping 10 percent for the rest:
  - Illustrative example: introduce a 20 percent top PIT rate on the top decile while keeping 10 percent on the rest — raises revenues by 1 percent of GDP and leaves the majority of taxpayers unaffected.
- Eliminate PIT exemptions in IT and construction sectors and the planned PIT exemption for the agriculture sector:
  - Existing PIT exemptions cost about 0.6 percent of GDP annually; new agriculture exemption would increase tax expenditures.
  - Sectoral exemptions are strongly discouraged on grounds of horizontal equity, efficiency, and revenue leakage.
- Improve bottom support via an income tax credit phased out with earnings:
  - Income tax credit is conditional on earnings and more generous than existing guaranteed minimum income.
  - Example: if the income tax credit costs about 0.5 percent of GDP, then combined with the 20 percent top rate and eliminating exemptions it would still raise PIT revenue by about 1 percent of GDP.
  - Implementation requires strong administrative capacity.
- Harmonize taxation of capital income:
  - Harmonize the tax rate on interest income, royalties, and all capital gains at least at 10 percent.

### Taxation of self-employed and microenterprises — recommendations (summary)
- Freelancers:
  - Require SSCs on total net income, possibly up to a cap (expressed as multiple of minimum wage); could raise SSC revenues by 0.4 percent of GDP.
- Microenterprises:
  - Adopt one simplified turnover tax regime for ‘microenterprises with employees’ below a turnover threshold (ideally around the VAT threshold).
  - Set uniform turnover tax rate at 1 to 2 percent; implement anti-splitting measures.
  - Require ‘legal entities without employees’ to be under the CIT or be transparent entities taxed under the PIT.
  - Reducing simplified regime threshold (for example to 250,000 RON as upper bound cutoff) and migrating microenterprises without employees to income tax would raise revenue by about 0.3 percent of GDP and close loopholes.
- Administration:
  - Upgrade ANAF administrative capacity in income taxation and other taxes to complement policy reforms.
  - Authorities could seek further policy and legal advice to follow up on findings.

*Source: PREFACE and EXECUTIVE SUMMARY of the IMF mission report on Romania personal income taxation (May 9-19, 2022).*

### A. Distributional analysis, data, and key facts
- Data and method:
  - Main data: 2019 Romanian Survey on Income and Living Conditions (SILC), inflated to 2021 nominal values.
  - Microsimulation: EUROMOD with tax and transfer system of 2021.
  - Analysis: descriptive statistics on wages, average tax rates, METRs; comparison with optimal designs; revenue-raising scenarios.
- Earnings and distributional facts:
  - 57 percent of individuals earn the average wage or less (4, 640 RON per month).
  - Around 10 percent of workers earn below the minimum wage (2,300 RON per month).
  - Median monthly wage: around 4,050 RON.
  - Large share of reported earnings for agricultural workers: around 80 percent is below the minimum wage.
  - Agricultural sector: almost a quarter of employment; majority self-employed.
- Summary statistics (annual, selected):
  - Individual earnings percentiles (annual): Mean 55,699; 10th 29,797; 25th 35,085; Median 48,642; 75th 66,843; 90th 91,729; 95th 108,628.
  - Household income percentiles (annual): Mean 98,758; 10th 35,607; 25th 54,394; Median 86,253; 75th 126,884; 90th 178,171; 95th 210,782.
  - Note: Sample includes individuals aged 18 to 60 and excludes students and retirees and agricultural sector workers.

### A. Progressivity, METRs, transfers, and implicit welfare weights
- Progressivity and average tax rates:
  - Average tax rate reaches the top marginal rate of 41.5 percent for married couples with no children at about 35,000 RON of income, then remains flat.
  - Married couples with children receive family benefits that lower tax burdens at lower incomes; phase-out causes steep increases then slower growth thereafter.
  - Conclusion: over a large range of incomes, the PIT is relatively flat and lacks progressivity.
- METR and participation findings:
  - METRs: mildly progressive at the bottom, rather flat at higher incomes.
  - Slight progressivity partly arises from excluding self-employed earnings (annual earnings below “12 × the monthly minimum wage”) from mandatory SSCs and from phasing-out low-income transfers.
- Transfers and out-of-work support:
  - Out-of-work benefits amount on average to 17 percent of median household income, well below the OECD average of 40 percent of median household income.
  - Low-income transfers provide little income support at the bottom.
- Implicit welfare weights inferred:
  - Derived implicit welfare weights generally decline in income but increase below the 10th percentile and above the 95th percentile.
  - Example implication: government would rather give an additional leu to someone at the 10th percentile than someone at the 1st percentile; marginal consumption of top incomes is valued more than that of upper middle-income workers.

### Benchmark welfare-weight specifications used in analysis
- Isoelastic welfare function with estimated coefficient of inequality aversion γ = 0.94:
  - Implies society values additional consumption of someone at the 10th percentile 3 times more than someone at the 90th percentile; alternative calculation (85,000/25,000)^0.94 = 3.2 for the 10th and 90th percentiles.
- Combination function:
  - Average of implicit policy welfare weights and isoelastic welfare weights; ensures strictly decreasing welfare weights in incomes and gives more weight to lowest earners than Derived weights curve.

### B. Revenue-neutral optimal-design features (illustrative outcomes)
- Optimal reform departs from flat tax and introduces a U-shaped schedule of marginal tax rates.
- Three key features:
  - Introduce an in-work tax credit to support low incomes (conditional on labor force participation).
    - Simulation suggests optimal in-work tax credit around 12 to 15 percent of median earnings for the very lowest earners.
  - Target the in-work transfer to low-income earners via steep phase-out:
    - Isoelastic preferences: earnings cutoff for PIT exemption 16,791 RON; around 5 percent of earners receive the credit.
    - Combination preferences: in-work credit around 26,000 RON; exempting bottom 11 percent of earners.
  - Higher tax at the top: raise marginal tax rates for top earners to finance relief for lower-income earners.
- Selected exact parameter comparisons (Table 2 excerpts):
  - Out-of-work benefit (RON): Current 1,537; Isoelastic 1,537; Combination 1,537.
  - Out-of-work benefit (percent median income): 3.1, 3.1, 3.1.
  - In-work tax credit (RON): Current -313; Isoelastic 6,208; Combination 7,695.
  - In-work tax credit (percent median income): Current -0.6; Isoelastic 12.3; Combination 15.6.
  - PIT-exemption earnings cutoff (RON): Current 23,342; Isoelastic 16,791; Combination 25,964.
  - PIT-exempted workers (percent of total): Current 8.3; Isoelastic 4.8; Combination 11.2.
  - Marginal effective tax rates (percent) — selected percentiles (Current / Isoelastic / Combination):
    - 1st percentile: 28 / 57 / 73
    - 10th percentile: 10 / 6 / 22
    - 25th percentile: 10 / 11 / 16
    - Median: 10 / 21 / 3
    - 75th percentile: 10 / 4 / 11
    - 90th percentile: 10 / 15 / 11
    - Top rate: 10 / 29 / 17
- Aggregate effects (Table 1 excerpts):
  - Net revenues (percent of earnings): Current 37.2; Isoelastic 37.1; Combination 37.4.
  - Total earnings change (percent): Current -0.3; Isoelastic -0.6; Combination -0.3.
  - Total hours change (percent): Current -0.4; Isoelastic -0.5; Combination -0.4.
  - Employment rate: Current 79.8; Isoelastic 79.8; Combination 80.0.
  - Welfare gains (percent of earnings; equivalent variation): Current -0.06; Isoelastic 0.06; Combination 0.03.

### C. Revenue-raising reforms — increase PIT revenue by 1 percent of GDP (selected scenarios and exact figures)
- Reform objective: raise total PIT revenues by around 1 percent of GDP while strengthening progressivity and limiting efficiency losses.
- Scenarios compared (selected columns from Table 2):
  - (1) Current
  - (2) Isoelastic revenue-raising optimal
  - (3) Combination revenue-raising optimal
  - (4) Flat 15 percent rate
  - (5) 10 percent below 10,000 RON / 20 percent above
  - (6) 10 percent below 13,600 RON / 25 percent above
- Selected exact parameter values across scenarios:
  - Out-of-work benefit (RON): 1,537 across all columns.
  - Out-of-work benefit (percent median income): 3.1, 3.0, 3.1, 3.1, 3.2, 3.2.
  - In-work tax credit (RON): Current -313; Isoelastic 4,694; Combination 6,153; Columns (4)-(6) -313.
  - In-work tax credit (percent median income): Current -0.6; Isoelastic 9.3; Combination 12.4; Columns (4)-(6) -0.6, -0.6, -0.7.
  - PIT-exemption earnings cutoff (RON): Current 23,342; Isoelastic 12,855; Combination 18,611; Column (4) 17,706; Column (5) 23,426; Column (6) 23,342.
  - PIT-exempted workers (percent of total): Current 8.3; Isoelastic 3.3; Combination 5.6; Columns (4)-(6) 4.8; 8.6; 8.3.
  - Marginal effective tax rates (percent) — selected percentiles (Current / Isoelastic / Combination / Flat15 / 10/20 / 10/25):
    - 1st percentile: 28 / 75 / 57 / 22 / 7 / 22
    - 10th percentile: 10 / 5 / 20 / 15 / 20 / 10
    - 25th percentile: 10 / 11 / 15 / 20 / 25 / 25
    - Median: 10 / 21 / 3 / 15 / 20 / 25
    - 75th percentile: 10 / 4 / 11 / 15 / 20 / 25
    - 90th percentile: 10 / 15 / 11 / 15 / 20 / 25
    - Top rate: 10 / 30 / 18 / 15 / 20 / 25
- Policy implications:
  - Feasible to raise PIT revenues by around 1 percent of GDP while:
    - Preserving targeted in-work support for low-income workers.
    - Increasing progressivity by raising top marginal tax rates and retaining low marginal rates for most workers.
    - Maintaining steep phase-outs to focus in-work transfers on low earners.
  - Simpler reforms (uniform rate increases or second brackets) are viable alternatives with differing incidence and METR profiles.

### Stepwise parametric PIT reforms — design, comparisons, and illustrative two-bracket reform
- Parametric reforms considered (columns 4-6 in Table 4):
  - (i) flat marginal tax rate schedule with a uniform rate of 15 percent.
  - (ii) keep 10 percent rate for earnings below 10,000 RON and introduce second bracket 20 percent above 10,000 RON.
  - (iii) introduce second bracket 25 percent above 13,600 RON.
- Comparisons with optimal reforms:
  - Optimal reforms yield continuous tax rates; stepwise reforms have discrete brackets.
  - Optimal reforms maintain lower marginal tax rates for most workers; stepwise scales come closest to optimal at the top.
  - Efficiency-equity of stepwise scales can be enhanced by introducing an income tax credit.
- Key finding on revenue and labor supply:
  - Optimal reforms (Isoelastic and Combination) lead to higher total earnings and hours worked by promoting labor supply on intensive and extensive margins.
  - A stepwise PIT that keeps 10 percent for the majority can be efficient while increasing top rates.
- Illustrative two-bracket reform (10 percent / 20 percent):
  - New top rate of 20 percent on the top decile while maintaining 10 percent up to top decile would leave the majority unaffected.
  - Roughly 5.6 million taxpayers—out of 6.25 million PIT taxpayers—would not pay higher taxes.
  - Representative household incomes (Table 5):
    - Minimum wage: 30,407 RON
    - Median income: 49,933 RON
    - 90th percentile: 94,248 RON
    - 95th percentile: 176,012 RON
  - At the top:
    - Average tax rate would increase by about 5 percentage points (for singles or married with two children).
    - Household at 90th percentile: increase in tax burden about 8,231 RON annually or 4.7 percent of gross income.
    - Reform would raise PIT-GDP revenue ratio by 1 percentage point (ignoring cost of income tax credit).

### In-work tax credit effects (illustrative)
- Introducing in-work tax credit lowers average tax rate at bottom; example:
  - Income tax credit phased out by the minimum wage: household earning 10,610 annually would receive additional 4,031 RON refund, or 38 percent of its gross income.
- Reform scenario impacts:
  - No impact on average tax rate between the 10th and 90th percentiles.
  - Decrease for the lowest 10th percentile.
  - Increase for those above the 90th percentile.
- Caveats:
  - High numbers of taxpayers around minimum wage partly due to microenterprise regime (~1 million labor agreements in microenterprises) increasing cost of income tax credit.
  - Static analysis does not capture dynamic labor market entry effects that could lower net budgetary cost.
  - Abolishing sectoral PIT exemptions would increase number of taxpayers contributing and raise potential revenue.

### Sectoral PIT exemptions and CIT R&D incentives
- Sectoral PIT exemptions:
  - Romania exempts IT, construction, and (from July 2022) agriculture from PIT.
  - Budgetary cost (excluding planned agricultural sector) about 0.6 percent of GDP.
  - Construction (and from July 2022 agriculture) exempts qualified employees from health contributions and reduces social insurance rate from 25 to 21.25 percent; subject to sunset clause 31 December 2028.
  - Concerns: erode tax base, shift burden, violate horizontal equity, introduce enforcement challenges and loopholes.
  - Recommendation: use well-designed R&D CIT incentives rather than sectoral PIT exemptions to support R&D and demand for qualified experts.
- CIT R&D incentives (existing and recommendations):
  - Existing incentives:
    - Additional deduction of 50 percent of qualified expenditures.
    - 10-year holiday for ‘R&D companies’.
    - Exemption for reinvested profit in ‘technological equipment’.
  - Issues and suggestions:
    - Last two incentives are ill-designed; cost-based incentives (super deductions, tax credits) are more efficient than profit-based incentives.
    - G20-OECD Pillar 2 (global minimum corporate tax 15 percent) reduces effectiveness of tax holidays for in-scope companies.
    - Consider abolishing tax holiday and exemption for reinvested profit and adopt an R&D tax credit (for instance 50 percent), while considering lowering generosity of R&D super deduction.
  - Estimated forgone revenue in CIT from these measures: 0.4 percent of GDP in 2021.
- Progressive PIT with bottom tax credit would make sectoral exemptions redundant by extending “no-PIT payment” to all low earners including agriculture and construction.

### Tax administration, neutrality, and effective tax rates (ETRs)
- Annual PIT and reconciliation:
  - Progressive marginal rates may require end-of-year reconciliation between withheld tax and tax due/refunded based on self-declarations.
  - Romania collects employee taxes through employer withholding; reconciliation requires unique taxpayer IDs (social security numbers are a candidate).
  - Moving to annual PIT is a limited technical burden; withholding can continue with end-of-year declarations.
- Tax neutrality and capital income:
  - Current differences in statutory tax rates, SSCs, and microenterprise regimes create arbitrage opportunities.
  - Top PIT rate should equal the combined rate on CIT and dividends; top PIT rate of 20 percent would roughly match existing corporate and dividend rates.
  - Uniform tax on all individual capital income recommended; all capital gains (including improvable property gains) should be taxed at 10 percent.
  - If dividends tax increased from 5 to 10 percent, corresponding top PIT rate should be 24.4 percent.
- ETR gaps and examples (selected exact ETR values from Table 4 / Table 6):
  - Corporation: 20.2
  - Freelance (natural person), profit margin 30%, turnover 150,000: 14.3
  - Microenterprise tax, with owner-employee, profit margin 30%, turnover 150,000: 14.0
  - Microenterprise tax, without employees, profit margin 30%, turnover 150,000: 15.9
  - Microenterprise tax, without employees, profit margin 15%, turnover 150,000: 26.7
  - Microenterprise tax, with owner-employee, profit margin 15%, turnover 150,000: 23.0
  - Example: ETR for wage work is 45 percent.
  - Freelance example: at profit margin 30 percent and turnover 150,000 Euro, ETR is 14.3 percent.
- Policy proposals to address ETR gaps:
  - Freelancers pay SSCs on total net income, possibly with a cap (e.g., 3 times the annual minimum wage), to reduce arbitrage and raise 0.4 percent of GDP.
  - Adopt single simplified regime for microenterprises with employees under turnover threshold (ideally around VAT threshold); set turnover tax at 1 to 2 percent.
  - Legal entities without employees should be taxed under CIT or deemed transparent entities taxed under PIT.
  - Apply administrative rules against company splitting and exclude certain professionals (lawyers, accountants, physicians) from simplified regimes.

### Microenterprise regime, thresholds, and revenue implications (selected quantitative observations)
- Microenterprise tax threshold in Romania: 1 million EUR.
- Romania VAT registration threshold: EUR 88,500 (also referenced as 88,000 EUR elsewhere).
- Comparative country thresholds and turnover tax rates: thresholds cited (France 176,200 EUR trading / 72,000 EUR other; Armenia 116,000 EUR; Georgia 160,000 EUR; Uzbekistan 86,000 EUR; Kazakhstan 192,000 EUR); turnover tax rates range 1 percent to 4 percent.
- Impact of reducing microenterprise threshold to 250,000 EUR:
  - Eliminate about 33,500 companies from microenterprise regime.
  - Reduce microenterprise tax revenues by about 175 million EUR or 33 percent of microenterprise tax revenues in 2019.
  - Compensated by higher profit tax revenues: estimated CIT and dividend tax gain close to 580 million EUR, net increase in tax revenue about 400 million EUR.
  - Eliminating enterprises without employees from simplified regime would generate additional CIT ~200 million EUR.
- Microenterprise regime structure and ETR drivers:
  - Current microenterprise without employees: turnover tax 3 percent + 5 percent dividend tax on distributions; owners pay health insurance up to cap of 12 times monthly minimum wage, but no pension contributions.
  - Microenterprise with employees: turnover tax 1 percent + 5 percent dividend tax on distributions; PIT and full mandatory SSCs apply to owner-employee wages.
  - ETRs for microenterprises: with employees often lower than without employees except at modest turnover or low profit margins.
- Sector counts and metrics:
  - Around 350,000 microenterprises with employees, compared to about 250,00 without employees.
  - Only in lowest turnover band—0 to 245,000 RON (52,000 Euro)—is majority of microenterprises without employees.
  - Overall average profit margin: about 12 percent for microenterprises with employees, about 20 percent for those without employees.
  - Slightly more than half of microenterprises with employees are in lowest turnover band.
  - Almost 90 percent of microenterprises without employees are in lowest turnover band.
- Agricultural facts (Box 1):
  - More than one fifth (22 percent) of workforce employed in agricultural related activities.
  - 84 percent of agricultural employment is self-employed.
  - 68 percent of farms have areas of less than two hectares; Romania average landholding about 3.8 hectares.
  - About 10 percent of workforce is exempt from PIT due to structure of agriculture sector.
  - 2016 Farm Structure Survey: more than 50 percent of agricultural workers work in exempt farms.
  - Tax administration statistics: less than 10 percent of self-employed agricultural workers are registered under the PIT.
- Policy recommendations for microenterprise regime:
  - Set uniform turnover tax rate 1 to 2 percent for simplified regime with employees.
  - Align microenterprise threshold with VAT threshold (EUR 88,500) or slightly higher but below 250,000 EUR.
  - Remove eligibility for entities without employees; require such entities be taxed under CIT or PIT.
  - Exclude certain professionals (lawyers, accountants, physicians) from simplified regime.
  - Apply SSCs to freelancers’ entire net income, possibly with cap.
  - Apply administrative anti-splitting rules.

*Source: IMF staff analysis using the Romanian Survey of Income and Living Conditions, and IMF mission materials (May 9-19, 2022).*

### PREFACE ___________________________________________________________________________________________________ 6

### PREFACE

### Mission and engagement
- At the request of Ministry of Finance, a team headed by the IMF Fiscal Affairs Department conducted a ‘remote’ mission to Romania during May 9-19, 2022, to assist the authorities in reviewing personal income taxation.
- Mission team: Shafik Hebous (mission head), Jean-Francois Wen (FAD), Philippe Wingender (RES), Naomi Feldman (FAD expert).
- Meetings held with Ministry of Finance (Minister Adrian Câciu; Mr. Alin Chitu, Secretary of State; Mr. Dan Matei, Director General), National Agency for Fiscal Administration, Ministry of Labor, Ministry of Agriculture and Rural Development.
- Consultations with the Fiscal Council (Chairman Daniel Dăianu; Deputy Chairman Bogdan-Octavian Cozmâncă) and Working Group members (Gabriel Biriș, Delia Florina Cataramă, Ionuț Dumitru).
- Acknowledgements: Ms. Carmen Balasoiu and Mr. Elian Diculescu for organization and facilitation; Mr. Liviu Voinea (Senior Advisor to Executive Director at the IMF).

### Executive summary — key messages
- Romania has one of the lowest revenues in the EU and a projected budget deficit exceeding 7 percent of GDP; an array of tax (policy and administration) instruments should be used to mobilize revenues.
- The PIT plays an integral role in balancing revenue, efficiency, and distribution objectives; the fiscal system provides little income support at the bottom of the income distribution and income inequality is relatively high (Gini coefficient 34.8 in 2019).
- Current policy mix: a flat PIT rate of 10 percent (lowest in the EU) combined with the highest social security contributions (SSCs) — this combination disincentivizes formal labor supply, creates tax arbitrage opportunities, and generates pressures for exemptions and preferential treatments.

### Recommended PIT reform package (guided by optimal taxation analysis)
- Introduce a new employment income bracket with a moderate top PIT rate; illustrative example: introduce a 20 percent top PIT rate on the top decile while keeping 10 percent on the rest — this combination raises revenues by 1 percent of GDP and leaves the majority of taxpayers unaffected. Other PIT scales could also be feasible.
- Eliminate PIT exemptions in the IT and construction sectors and the planned PIT exemption for the agriculture sector. Existing PIT exemptions already cost about 0.6 percent of GDP annually; new agriculture exemption would increase tax expenditures. Sectoral exemptions are strongly discouraged on grounds of horizontal equity, efficiency, and revenue leakage.
- Improve support at the bottom via an income tax credit that phases out as earnings increase. Compared to the existing guaranteed minimum income, the income tax credit is (i) conditional on earnings and (ii) more generous. Example: if the income tax credit costs about 0.5 percent of GDP, then combined with the 20 percent top rate and eliminating exemptions it would still raise PIT revenue by about 1 percent of GDP while making the system more equitable and encouraging labor market participation. Implementation requires strong administrative capacity.
- Harmonize the tax rate on interest income, royalties, and all capital gains at least at 10 percent.

### Taxation of self-employed and microenterprises — recommendations
- Freelancers should pay SSCs on their total net income, possibly up to a cap (expressed as a multiple of minimum wage); this would reduce tax-arbitrage incentives and could raise SSC revenues by 0.4 percent of GDP.
- Adopt one simplified turnover tax regime for ‘microenterprises with employees’ below a specific turnover threshold (ideally around the VAT threshold). Set a uniform turnover tax rate at 1 to 2 percent. Implement anti-splitting measures to prevent artificial fragmentation to benefit from the regime.
- Require ‘legal entities without employees’ to be under the corporate income tax (CIT) regime or be a transparent entity where the beneficial owner is taxed under the PIT. Under a top PIT rate of 20 percent, the owner would be tax-indifferent between PIT and CIT. Reducing the simplified regime turnover threshold (for example to 250,000 RON as an upper bound cutoff) and migrating microenterprises without employees to the income tax would raise revenue by about 0.3 percent of GDP and close loopholes.

### Administration and follow-up
- Upgrade ANAF’s administrative capacity in income taxation and other taxes to complement policy reforms.
- Authorities could consider seeking further policy and legal advice to follow up on findings.

### Illustrative contextual and statistical highlights
- Total tax-GDP ratio in Romania is 12 percent—the lowest in the EU; budget deficit reached 6.8 percent of GDP in 2021.
- Under the Recovery and Resilience Facility (RRF), Romania aims at raising its tax-GDP ratio by 3 percentage points, with 0.5 and 2.5 points from policy and administrative measures, respectively.
- The PIT covers: i) employment income, ii) capital income of individuals (dividends, capital gains, interest), and iii) business income of the self-employed and small/micro businesses.
- Gini coefficient in Romania was 34.8 in 2019 versus EU average 30.2.
- Romania’s PIT revenue at 2.4 percent of GDP is the lowest in the EU.
- Historical PIT rates: prior to 2005 top PIT rate was 40 percent; flat PIT at 16 percent introduced in 2005; lowered to 10 percent in 2018.
- Capital income exceptions: dividends taxed at 5 percent; capital gains generally at 10 percent except improvable property gains at 3 percent and sales of government bonds (exempt).
- Combined PIT and employee SSC rate is 41.5 percent; employee social insurance contribution is 25 percent and employee health insurance contribution is 10 percent. Employer must pay 2.25 percent of gross labor earnings as additional work insurance.
- No in-work benefits in Romania; net take-home pay example: a couple (no children) earning the average wage has net take-home pay equal to 58.5 percent of gross earnings — the lowest in the EU.
- In 2017, PIT-GDP revenue ratio was 3.6 percent (before the 2018 cut to 10 percent), below OECD/EU averages of about 8 percent.
- Microenterprise tax details:
  - Microenterprises without employees: turnover tax 3 percent + 5 percent dividend tax on distributions. Owners pay health insurance up to a cap of 12 times the monthly minimum wage, but no pension contributions. ETRs: 33.5 percent and 14.5 percent for profit margins of 10 and 30 percent, respectively.
  - Microenterprises with employees: turnover tax 1 percent + 5 percent dividend tax on distributions. PIT and full mandatory SSCs apply to owner-employee wages. ETRs: 14.5 percent and 8.2 percent for profit margins of 10 and 30 percent, respectively.
- Freelancers: pay 10 percent tax on profits computed on a cash-flow basis; freelancers pay SSCs only on income up to 12 times the monthly minimum wage (wage workers do not have this cap).

### Rationale for reform emphasis
- Low revenues, high income inequality, and pervasive loopholes and non-neutralities in the current PIT design motivate comprehensive reform aimed at raising revenue, improving equity, and limiting distortions while considering administrative feasibility.

*Source: PREFACE and EXECUTIVE SUMMARY of the IMF mission report on Romania personal income taxation (May 9-19, 2022).*

### 12.      This section uses distributional analysis with microdata from a nationally

### 12.      This section uses distributional analysis with microdata from a nationally representative household survey to shed light on effective labor income taxation and optimal reform scenarios

### A. Implications of the Current PIT — The PIT reflects very little redistribution
- Data and method
  - Main data: 2019 Romanian Survey on Income and Living Conditions (SILC), inflated to 2021 nominal values.
  - Microsimulation: EUROMOD with the tax and transfer system of 2021.
  - Analysis components: (i) descriptive statistics on wages, average tax rates, and the marginal effective tax rates (METRs); (ii) contrast of existing system with an “optimal” one (revenue taken as given); (iii) discussion of an optimal tax reform that raises revenues.

- Earnings and distributional facts
  - 57 percent of individuals earn the average wage or less (4, 640 RON per month).
  - Around 10 percent of workers earn below the minimum wage (2,300 RON per month).
  - Median monthly wage: around 4,050 RON.
  - Large share of reported earnings for agricultural workers: around 80 percent is below the minimum wage.
  - Agricultural sector: almost a quarter of employment; majority self-employed.

- Summary statistics (annual figures; excerpts)
  - Individual earnings percentiles (annual): Mean 55,699; 10th 29,797; 25th 35,085; Median 48,642; 75th 66,843; 90th 91,729; 95th 108,628.
  - Household income percentiles (annual): Mean 98,758; 10th 35,607; 25th 54,394; Median 86,253; 75th 126,884; 90th 178,171; 95th 210,782.
  - Note: Sample includes individuals aged 18 to 60 and excludes students and retirees and agricultural sector workers.

- Progressivity and average tax rates
  - Average tax rate quickly reaches the top marginal rate of 41.5 percent for married couples with no children at about 35,000 RON of income, then remains flat.
  - Married couples with children receive family benefits that lower tax burdens at lower incomes; phase-out causes steep increases then slower growth thereafter.
  - Conclusion: over a large range of incomes, the PIT is relatively flat and lacks progressivity.

- Labor supply incentives: METRs and participation tax rates
  - Two margins: intensive (hours) — affected by METR; extensive (participation) — affected by participation tax rate.
  - METR findings:
    - Mildly progressive at the bottom of the distribution, rather flat at higher incomes.
    - Slight progressivity arises partly from excluding self-employed earnings (annual earnings below “12 × the monthly minimum wage”) from mandatory SSCs and from phasing-out low-income transfers.
  - Participation tax rates and METRs are used to infer implicit welfare weights.

- Transfers and out-of-work support
  - Out-of-work benefits amount on average to 17 percent of median household income, well below the OECD average of 40 percent of median household income.
  - Low-income transfers provide little income support at the bottom.

- Implicit welfare weights inferred from current policy (Figure 9 conclusions)
  - Two notable features:
    - Derived implicit welfare weights generally decline in income: current policy places more weight on marginal consumption of lower income workers than on better-off workers.
    - However, policy values the marginal consumption of the very lowest earners less than some higher percentiles: derived weights increase below the 10th percentile and above the 95th percentile. Example implication: government would rather give an additional leu to someone at the 10th percentile than someone at the 1st percentile; marginal consumption of top incomes is valued more than that of upper middle-income workers.

- Benchmarking redistribution objective
  - Two benchmark welfare weights used to guide reform:
    - Isoelastic welfare function with estimated coefficient of inequality aversion γ = 0.94 (implies society values additional consumption of someone at the 10th percentile 3 times more than someone at the 90th percentile; alternatively calculated as (85,000/25,000)^0.94 = 3.2 for the 10th and 90th percentiles).
    - Combination function: average of implicit policy welfare weights and isoelastic welfare weights; ensures strictly decreasing welfare weights in incomes and gives more weight to lowest earners than Derived weights curve.

### B. Illustrative Scenarios Based on Optimal Taxation Principles — Current PIT is far from optimal (revenue-neutral reforms)
- General optimal-design features (revenue-neutral)
  - Optimal reform departs from flat tax and introduces a U-shaped schedule of marginal tax rates.
  - Three key features of the optimal schedule:
    - Introduction of an in-work tax credit to support low incomes (transfer conditional on labor force participation).
      - Contrasts with current small penalty of 313 RON for joining the labor force (result of means-testing).
      - Simulation suggests optimal in-work tax credit around 12 to 15 percent of median earnings for the very lowest earners (Table 2).
      - In-work credit significantly reduces participation tax rates and promotes labor force participation.
    - Targeting the in-work transfer to low-income earners via steep phase-out (high METRs at the bottom).
      - Under Isoelastic preferences: earnings cutoff for PIT exemption 16,791 RON; around 5 percent of earners receive the credit.
      - Under Combination preferences: in-work credit around 26,000 RON; exempting bottom 11 percent of earners.
    - Higher tax at the top: optimal reform raises marginal tax rates for top earners to increase redistribution and partly finance relief for lower-income earners.

- Table 2 (Tax and Benefit Parameters: Current and Optimal Reforms) — selected exact figures
  - Out-of-work benefit (RON): Current 1,537; Isoelastic 1,537; Combination 1,537.
  - Out-of-work benefit (percent median income): 3.1, 3.1, 3.1.
  - In-work tax credit (RON): Current -313; Isoelastic 6,208; Combination 7,695.
  - In-work tax credit (percent median income): Current -0.6; Isoelastic 12.3; Combination 15.6.
  - PIT-exemption earnings cutoff (RON): Current 23,342; Isoelastic 16,791; Combination 25,964.
  - PIT-exempted workers (percent of total): Current 8.3; Isoelastic 4.8; Combination 11.2.
  - Marginal effective tax rates (percent) — selected percentiles (Current / Isoelastic / Combination):
    - 1st percentile: 28 / 57 / 73
    - 10th percentile: 10 / 6 / 22
    - 25th percentile: 10 / 11 / 16
    - Median: 10 / 21 / 3
    - 75th percentile: 10 / 4 / 11
    - 90th percentile: 10 / 15 / 11
    - Top rate: 10 / 29 / 17

- Distributional and welfare impacts (revenue-neutral)
  - Net gains from optimal reform:
    - Lowest-income workers benefit most from in-work tax credit.
    - Under Isoelastic preferences lower in-work credit and higher phase-out can leave workers near the bottom with higher tax bill than current system.
    - Upper middle-income workers are second-largest beneficiaries; highest incomes see large drops in net income.
    - Combination preferences yield mostly flat pattern above lowest earners.
  - Aggregate effects (Table 1. Economic Impacts of the Optimal Reforms)
    - Net revenues (percent of earnings): Current 37.2; Isoelastic 37.1; Combination 37.4.
    - Total earnings change (percent): Current -0.3; Isoelastic -0.6; Combination -0.3.
    - Total hours change (percent): Current -0.4; Isoelastic -0.5; Combination -0.4.
    - Employment rate: Current 79.8; Isoelastic 79.8; Combination 80.0.
    - Welfare gains (percent of earnings; equivalent variation): Current -0.06; Isoelastic 0.06; Combination 0.03.
  - Notes: Equivalent variation defined as lump-sum amount to make social welfare under current system same as under optimal reform.

### C. Revenue-raising reforms — PIT revenues can be increased while strengthening progressivity and without jeopardizing efficiency
- Reform objective and approach
  - Examine reforms that increase total PIT revenues by around 1 percent of GDP.
  - Consider Isoelastic and Combination preference functions and simpler alternatives: uniformly higher PIT rates or introducing a second bracket at 20 or 25 percent.

- Key features of revenue-raising optimal reforms
  - In-work tax credit is maintained but slightly reduced and more targeted:
    - In-work tax credit declines to 9 and 12 percent of median earnings under the two optimal revenue-raising reforms (Table 4; presented in text).
    - PIT-exempted workers fall to 3.3 percent under Isoelastic and 5.6 percent under Combination (contrast with 4.8 and 11.2 percent in revenue-neutral reforms).
  - Phase-out rates remain steep; METRs at the 1st percentile are very high:
    - METR at 1st percentile: 87 percent under Isoelastic revenue-raising reform; 75 percent under Combination revenue-raising reform.
  - METR at median under Combination reform: 10 percent.
  - Full marginal tax schedules remain the same as under revenue-neutral reforms previously considered.

- Table 2 (Reforms to Increase Revenues by 1 Percent of GDP) — selected exact figures across scenarios
  - Scenarios columns: (1) Current; (2) Isoelastic; (3) Combination; (4) Flat 15 percent rate; (5) 10 percent below 10,000 RON / 20 percent above; (6) 10 percent below 13,600 RON / 25 percent above.
  - Out-of-work benefit (RON): 1,537 across all columns.
  - Out-of-work benefit (percent median income): 3.1, 3.0, 3.1, 3.1, 3.2, 3.2.
  - In-work tax credit (RON): Current -313; Isoelastic 4,694; Combination 6,153; Columns (4)-(6) -313.
  - In-work tax credit (percent median income): Current -0.6; Isoelastic 9.3; Combination 12.4; Columns (4)-(6) -0.6, -0.6, -0.7.
  - PIT-exemption earnings cutoff (RON): Current 23,342; Isoelastic 12,855; Combination 18,611; Column (4) 17,706; Column (5) 23,426; Column (6) 23,342.
  - PIT-exempted workers (percent of total): Current 8.3; Isoelastic 3.3; Combination 5.6; Columns (4)-(6) 4.8; 8.6; 8.3.
  - Marginal effective tax rates (percent) — selected percentiles and scenarios (Current / Isoelastic / Combination / Flat15 / 10/20 / 10/25):
    - 1st percentile: 28 / 75 / 57 / 22 / 7 / 22
    - 10th percentile: 10 / 5 / 20 / 15 / 20 / 10
    - 25th percentile: 10 / 11 / 15 / 20 / 25 / 25
    - Median: 10 / 21 / 3 / 15 / 20 / 25
    - 75th percentile: 10 / 4 / 11 / 15 / 20 / 25
    - 90th percentile: 10 / 15 / 11 / 15 / 20 / 25
    - Top rate: 10 / 30 / 18 / 15 / 20 / 25
  - Notes: All reforms in table increase tax revenues by 1 percent of GDP. Columns explained in table notes.

- Policy implications from revenue-raising exercise
  - It is feasible to raise PIT revenues by around 1 percent of GDP while:
    - Preserving targeted in-work support for low-income workers.
    - Increasing progressivity by raising top marginal tax rates and retaining low marginal rates for most workers.
    - Maintaining steep phase-outs that keep in-work transfers focused on low earners.
  - Simpler reforms (uniform rate increases or second brackets) are alternative ways to raise revenues but differ in incidence and marginal rates across the distribution.

*Source: IMF staff analysis using the Romanian Survey of Income and Living Conditions.*

### 26.      Stepwise parametric PIT reforms

### 26.      Stepwise parametric PIT reforms

### Summary of proposed parametric reforms
- Three parametric reforms considered (columns 4-6 in Table 4):
  - (i) flat marginal tax rate schedule with a uniform rate of 15 percent.
  - (ii) keep 10 percent rate for earnings below 10,000 RON and introduce a second bracket with a marginal tax rate of 20 percent for incomes above 10,000 RON.
  - (iii) introduce a second bracket with a marginal tax rate of 25 percent for incomes above 13,600 RON.
- For these reforms, low-income benefits are kept at their current levels (no in-work tax credit in these three parametric variants).

### Comparisons with optimal reforms
- Optimal reform scenarios give continuous tax rates; stepwise PIT scales have discrete income brackets.
- Compared to stepwise parametric PIT reforms, optimal reforms maintain lower marginal tax rates for most workers.
- Stepwise PIT scales come closest to the optimal taxation at the top of the distribution (Figure 12).
- The efficiency-equity feature of a stepwise PIT scale can be enhanced by introducing an income tax credit.

### Key finding on revenue and labor supply
- Optimal reforms (Isoelastic and Combination) lead to higher total earnings and hours worked by promoting labor supply along the intensive margin and along the extensive margin for low-income workers.
- A stepwise PIT scale that maintains the statutory flat 10 percent for the majority of taxpayers can be mindful of efficiency while increasing top rates.
- Income tax credit is more progressive than a tax deduction or a zero rate because its value does not depend on the marginal tax rate the taxpayer faces.

### Illustrative two-bracket reform (10 percent and 20 percent)
- A new top rate of 20 percent on the top decile (maintaining 10 percent up to the top decile) would leave the majority of taxpayers unaffected.
- Roughly 5.6 million taxpayers—out of the universe of 6.25 million PIT taxpayers—would not pay higher taxes.
- Representative household incomes and effects (Table 5):
  - Minimum wage: 30,407 RON
  - Median income: 49,933 RON
  - 90th percentile: 94,248 RON
  - 95th percentile: 176,012 RON
- At the top of the income distribution:
  - Average tax rate would increase by about 5 percentage points (for singles or married with two children).
  - For a household with wages at the 90th percentile, the increase in the top marginal tax rate increases this household’s tax burden by about 8,231 RON annually or 4.7 percent as a fraction of gross income.
- The reform would raise the PIT-GDP revenue ratio by 1 percentage point (ignoring the budgetary cost of the income tax credit and in line with the results in Table 4).

### In-work tax credit effects (illustrative)
- Introducing an in-work tax credit would lower the average tax rate at the bottom of the income distribution.
- In illustrative calculations (Table 5), the income tax credit is phased out by the minimum wage.
  - A household earning 10,610 annually would receive an additional 4,031 RON refund, or 38 percent of its gross income.
- The reform scenario has:
  - No impact on the average tax rate between the 10th and 90th percentiles,
  - A decrease for the lowest 10th percentile,
  - An increase for those above the 90th percentile.
- The income tax credit requires strong administrative capacity.
- Appendix 2 offers an alternative scenario phasing out at 24,000 RON (less redistributive at the lower end and less incentivizing to work).

### Caveats on cost and behavioral effects
- High numbers of taxpayers around the minimum wage partly reflect the microenterprise regime; data suggest about 1 million labor agreements in microenterprises—this increases the cost of the income tax credit in Table 5.
- Static analysis in Table 5 does not model dynamic effects: one important goal of the income tax credit is to induce individuals to enter the labor market, generating revenue not modeled in Table 5.
- Abolishing sectoral PIT exemptions would increase the number of taxpayers contributing to the system, raising potential revenue from illustrative reforms.
- A well-designed in-work income tax credit encouraging labor supply can have a lower budgetary cost than suggested by the static numbers.

### Sectoral PIT exemptions and alternatives
- Romania exempts three sectors from the PIT: IT, construction, and agriculture (the latter starting from July 2022).
- The budgetary cost of these PIT exemptions (excluding planned agricultural sector) is about 0.6 percent of GDP.
- Construction (and from July 2022 agriculture) exempts qualified employees from health contributions and reduces the rate of social insurance from 25 to 21.25 percent (in contrast to the standard combined SSC rate of 41.5 percent), subject to a sunset clause for 31 December 2028.
- Concerns with sectoral PIT exemptions:
  - Erode the tax base.
  - Shift tax burden onto non-exempted sectors, violating horizontal equity.
  - Selection of sectors is problematic and administratively challenging; exemptions introduce enforcement challenges and loopholes.
- If the policy objective is R&D and demand for qualified experts, better to use well-designed R&D CIT incentives rather than sectoral PIT exemptions.

### CIT R&D incentives (recommendations)
- Existing CIT incentives in Romania:
  - Additional deduction of 50 percent of qualified expenditures.
  - 10-year holiday for ‘R&D companies’.
  - Exemption for reinvested profit in ‘technological equipment’.
- The last two incentives are ill-designed; cost-based incentives (super deductions, tax credits) are more efficient than profit-based incentives.
- The G20-OECD Inclusive Framework global minimum corporate tax of 15 percent (‘Pillar 2’) reduces the effectiveness of tax holidays for in-scope companies.
- One avenue: abolish the tax holiday and the exemption for reinvested profit in technological equipment and adopt an R&D tax credit, for instance of 50 percent, while considering lowering the generosity of the R&D super deduction.
- The estimated forgone revenue (tax expenditures) in the CIT (mainly driven by the above three measures) is 0.4 percent of GDP in 2021.

### Progressive PIT and redundancy of PIT exemptions
- A progressive PIT with a tax credit at the bottom would extend the “no-PIT payment” to everyone with low earnings, including in agriculture and construction, making sector-specific exemptions redundant.
- PIT exemptions do not necessarily lower wage cost and are ill-targeted for redistribution or encouraging labor demand.

### Tax administration, neutrality, and effective tax rates (ETRs)
- Progressive marginal rates may require end-of-year reconciliation between withheld tax and tax due/refunded based on self-declarations.
- Romania currently collects taxes on employees through employer withholding; reconciliation requires unique taxpayer identifications assigned to individuals (social security numbers are a candidate).
- Moving to an annual PIT should represent a limited technical burden; withholding can continue with end-of-year declarations.
- Tax neutrality issues:
  - Current differences in statutory tax rates and SSCs and microenterprise regimes create arbitrage opportunities.
  - Top PIT rate should equal the combined rate on CIT and dividends; a top PIT rate of 20 percent would roughly match existing corporate and dividend rates (Figure 4).
  - A uniform tax should be imposed on all individual capital income; all capital gains (including gains from the sales of improvable properties) should be subject to a tax of 10 percent.
  - If the statutory tax rate on dividends is increased from 5 to 10 percent, the corresponding top PIT rate should be 24.4 percent.
- ETRs reveal gaps in taxation of self-employment/small enterprises:
  - Example: ETR for wage work is 45 percent.
  - Freelance example: at a profit margin of 30 percent and a turnover of 150,000 Euro, ETR is 14.3 percent (Table 6).
  - Proposal: freelancers should pay SSCs on total net income, possibly with a cap (e.g., 3 times the annual minimum wage). This would reduce arbitrage and increase revenue by 0.4 percent of GDP.
- Turnover/microenterprise regimes:
  - A microenterprise can have an advantage over corporations. At a profit rate of 30 percent and turnover of 150,000 EUR, entrepreneur can claim microenterprise status to reduce ETR to 14.0 percent versus corporation ETR of 20.2 percent.
  - At a profit margin of 15 percent, ETRs for microenterprises with employees are close to the ETR for CIT at the 150,000 EUR turnover.

### Selected ETR values from Table 4 (effective tax rates under alternative organization forms)
- Corporation: 20.2
- Freelance (natural person), profit margin 30%, turnover 150,000: 14.3
- Microenterprise tax, with owner-employee, profit margin 30%, turnover 150,000: 14.0
- Microenterprise tax, without employees, profit margin 30%, turnover 150,000: 15.9
- Microenterprise tax, without employees, profit margin 15%, turnover 150,000: 26.7
- Microenterprise tax, with owner-employee, profit margin 15%, turnover 150,000: 23.0
(Note: entries are reported as Effective Tax Rates (%).)

*Source: IMF staff analysis using the Romanian Survey of Income and Living Conditions, from 26.      Stepwise parametric PIT reforms.*

### 48.      Microenterprises with employees have a lower ETR than those without employees,

### Microenterprises with employees have a lower ETR than those without employees

### ETR comparisons and drivers
- Microenterprises with employees generally have a lower ETR than those without employees, except at modest turnover or low profit margins.
- At a profit margin of 30 percent, beyond turnover of about 100,000 EUR, the reduction in the microenterprise tax from 3 percent to 1 percent more than compensates for the mandatory social contributions and the PIT on the owner-employee’s wage income.
- Only at smaller turnover levels is the ETR lower when the microenterprise has no employees.
- At low turnover levels, the SSCs have greater relative impact on ETRs.
- Under a top PIT rate of 20 percent, the legal entity would be indifferent between being taxed under the PIT or the CIT.

### Quantitative observations and sector statistics
- Microenterprise tax threshold in Romania: 1 million EUR.
- Romania VAT registration threshold: EUR 88,500 (also referenced elsewhere as 88,000 EUR).
- Examples of other countries’ turnover thresholds and ranges:
  - France: 176,200 EUR (trading) and 72,000 EUR (other commercial/industrial activities).
  - Armenia: about 116,000 EUR.
  - Georgia: 160,000 EUR.
  - Uzbekistan: 86,000 EUR.
  - Kazakhstan: 192,000 EUR.
- Turnover tax rates in these countries range between 1 percent and 4 percent.
- Reducing the microenterprise threshold to 250,000 EUR would:
  - Eliminate about 33,500 companies (with and without employees) from the microenterprise regime.
  - Reduce microenterprise tax revenues by about 175 million EUR or 33 percent of microenterprise tax revenues in 2019.
  - Be compensated by higher profit tax revenues: estimated gain from the CIT (and the tax on dividends) close to 580 million EUR, yielding a net increase in tax revenue of about 400 million EUR.
- Eliminating enterprises without employees from the simplified regime would generate further revenue by collecting additional CIT of approximately 200 million EUR.
- Current Romanian microenterprise tax regime for microenterprises with employees: 1 percent turnover tax + 5 percent dividend tax + 10 percent PIT on wages (as referenced in footnote 13).
- Appendix 3 sector counts and metrics (as reported):
  - Around 350,000 microenterprises with employees, compared to about 250,00 without employees.
  - Only in the lowest turnover band—0 to 245,000 RON (52,000 Euro)—is the majority of microenterprises without employees.
  - Overall average profit margin: about 12 percent for microenterprises with employees, about 20 percent for those without employees.
  - Slightly more than half of microenterprises with employees are in the lowest turnover band.
  - Almost 90 percent of microenterprises without employees are in the lowest turnover band.
- Box 1 agricultural facts:
  - More than one fifth (22 percent) of the Romanian workforce is employed in agricultural related activities.
  - 84 percent of agricultural employment is self-employed.
  - 68 percent of farms have areas of less than two hectares; Romania average landholding is about 3.8 hectares.
  - About 10 percent of the workforce is exempt from the PIT due to the structure of the agriculture sector.
  - According to the 2016 Farm Structure Survey, more than 50 percent of agricultural workers work in exempt farms.
  - Tax administration statistics: less than 10 percent of self-employed agricultural workers are registered under the PIT.

### Policy analysis and rationale
- The precise purpose of the microenterprise tax regimes in Romania is unclear and warrants reconsideration.
- Simplicity should be the main aim of a turnover tax regime that targets small businesses:
  - A turnover tax is simpler than the CIT, reducing taxpayer compliance costs and tax administration costs, which tend to be high for smaller businesses relative to their turnover.
  - Non-deductibility of costs helps generate tax revenues even when companies are making losses.
- To safeguard revenues, an alternative minimum tax regime for the corporate sector (conceptually different from a simplified regime) could be combined with the CIT.
- Romania’s current turnover threshold of 1 million EUR is among the highest in the world and suggests many legal entities under the microenterprise tax have capacity to satisfy filing obligations.
- A common practice is aligning the microenterprise threshold with the VAT registration threshold; Romania’s VAT threshold of EUR 88,500 would be a reasonable level for the microenterprise tax.
- Progressive PIT reform that reduces the marginal tax rate at the bottom end would tend to close ETR gaps in the first tranche of turnover.

### Specific policy recommendations and eligibility rules
- The turnover tax rate should be uniform and set at 1 to 2 percent.
- Legal entities without employees should be obliged to be under the CIT or possibly deemed as transparent entities taxed under the PIT.
- Specific businesses and professionals should not be eligible for the simplified regime:
  - Lawyers, accountants, physicians, and similar professionals should operate within the CIT or PIT regime even if they fall below the turnover threshold, because they typically have high educational attainment and often high profit margins and can comply with filing requirements.
- Applying SSCs on the entire total net income of freelancers, possibly with a cap.
- To close revenue leakages, simplify, and improve tax neutrality between different legal forms, Romania should consider:
  - Adopting one simplified regime for those microenterprises with employees and turnovers below a threshold, ideally around the VAT threshold (or slightly higher but below 250,000 EUR).
  - Taxing microenterprises without employees and professionals under the CIT (or PIT).
  - Applying SSCs on the entire total net income of freelancers, possibly with a cap.
- Supplementary measures to limit abuse:
  - Eliminate eligibility of entities without employees from the simplified regime to reduce opportunities to avoid the CIT.
  - Apply administrative rules against company splitting to close loopholes.

*Source: IMF staff analysis.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1rouea2022002.pdf_