1% Solidarity Tax? May I Suggest a Better 1% for Romania

Recently, the 1% solidarity tax on the turnover of companies with annual revenues above €100 million has been brought back into discussion.

This is an old topic. The tax has been suggested before and that was it.

I will skip the introduction and reveal, very bluntly, the answer to the question in the title.

Romania has at least one better alternative to this tax: to improve its tax collection by just 1% of GDP, i.e. 1 p.p. more than it currently collects.

Romania's tax collection rate is among the lowest in the EU, at 27.3% of GDP in 2021. Only Ireland has a lower collection rate, but that is an artificial level, so with or without Ireland, Romania stands at the bottom of EU.

To put it in context, the average fiscal collection rate of EU countries is at 41.7% of GDP, also for the 2021 fiscal year.

Analysed by country, the ratio of tax revenue to GDP, also in 2021, was highest in Denmark (48.8% of GDP), France (47.0% of GDP) and Belgium (46.0% of GDP), followed by Austria (43.7% of GDP), Italy (43.6% of GDP), Sweden (43.5% of GDP) and Finland (43.1% of GDP); the lowest shares were recorded in Ireland (21.9% of GDP), Romania (27.3% of GDP), Bulgaria (30.7% of GDP), Latvia (30.8% of GDP), Malta (31.2% of GDP) and Lithuania (32.6% of GDP), as well as Switzerland (28.0% of GDP).

Coming back to the solidarity tax of 1% (of turnover), the tax would apply to around 400 companies, companies that meet the criterion - annual turnover of more than €100 million.

The consolidated revenue of the target companies in the 2021 tax year was around 750 billion RON.

Also, the tax would operate as a minimum threshold, i.e. the tax paid by companies would still be 16% of profits, but no less than 1% of turnover.

The target is actually companies with profit margins below 6% and those with losses, which normally pay corporate profit tax below the 1% of turnover threshold.

Nota bene, why the 6% threshold?

Because: if the turnover is 100, the profit is 6, and the tax is 6x16% = 0.96, i.e. about 1.

Taking the calculation further, according to ZF, among the 400 companies above mentioned, there would be around 200 companies with margin below 6% and another 50 or so on loss.

Taken together these companies would generate around 3.5 billion RON in additional tax (1% of turnover minus what they currently pay).

We do not know how the business of these companies will evolve in 2023, but, assuming the same values mentioned above, and compared to the estimated GDP for 2023 of about 1600 billion RON (source: CNP), we are talking about 0.22% of GDP extra, going into the state budget.

At the beginning of this article, I mentioned that a better option would be to improve collection by a mere 1 p.p. That is 28.3% of GDP instead of 27.3% of GDP. Not by 14 p.p. as the difference with the EU average, but only by 1 p.p..

In this case we are talking about 16 billion RON more to the budget, almost 5 times more than from the solidarity tax.

Another dimension I would bring up is inflation. It is clear that the vast majority of companies will pass the additional tax onto prices, thus generating higher prices and inflation. We are talking about companies in sectors with a large share in the daily consumption basket: retail, food, agriculture, gas stations etc.

Whereas better collection does not have this effect.

On the other hand, if we still want more money in the budget, one item that should be a priority now is the NPRR, which Romania cannot afford to miss. It is essential to absorb all the money and put it to work in the economy (not in NBR accounts), in order to generate second round effects as well. This way more taxes will contribute to the budget.

The interest rates on the money from the NPRR are zero for grants and between 0-1% for loans, whereas Romania borrows on the financial markets, in RON, at 5-7%, depending on the maturity.

In conclusion, improving fiscal collection by just 1% of GDP is almost 5 times better than applying a solidarity tax of 1% on corporate revenues.