The National Confederation for Women’s Entrepreneurship (CONAF) warns that the draft Emergency Ordinance on measures to finance the budget deficit is a fiscal blow to small and medium-sized businesses, with negative effects on investment, jobs and the economy, while stimulating inflation.
“The government needs to take a hard look at Romania’s economic situation in the context of global tensions, persistent inflation and multiple uncertainties, where a fiscal blow to small businesses would not balance the country’s budget, as it would boost inflation, unemployment, bankruptcies and could slow down economic growth. The state could collect more if tax laws were simple and clear. Many would-be entrepreneurs give up starting a business because of the unpredictability of tax legislation and the complexity of the related rules,” observed Cristina Chiriac, PhD in economics, president of CONAF.
Taxation of micro-enterprises should support their activity, which is essential for balancing a modern market economy, but the latest tax changes already implemented have raised awareness among small businesses and the proposals on the government’s agenda could triple their tax burden, warns Mihaela Mitroi, Managing Partner Global Tax Advise, tax consultant, president of CONAF Bucharest Branch.
Tax increase from 1% to 3%
“From 1 January 2023 the threshold for classification as a micro-enterprise has been halved (€500,000 compared to €1 million) and with more restrictive conditions. We are now seeing even stricter conditions, namely an increase in tax from 1% to 3% for micro-enterprises earning more than 300,000 lei. Regardless of this ceiling for micro-enterprises operating in the IT area (publishing and software development, etc.), hotels, restaurants, legal activities, general medical or dental care, they will automatically pay a tax three times higher than at present for income up to €500,000”, warned Mihaela Mitroi.
Inflation will be a collateral consequence of this sharp increase in fiscal pressure, as entrepreneurs will make services more expensive to resist in the market. Under the pressure of the increased tax burden, profitable SMEs will reduce or even postpone their investments, observed Mihaela Mitroi.
Profitable micro-enterprises are penalized
“Companies with revenues above the threshold of 300,000 lei and with a rate of return above 30% will owe corporate income tax of 16% from the quarter in which this condition is met. In other words, profitable micro-enterprises are penalized, discouraging local entrepreneurs from making new investments,” said Mitroi.
Also, on the government’s agenda are measures that discourage multiple individual investments in multiple small businesses in a tax scheme that defies fiscal logic, Mitroi noted.
“Entrepreneurs with small but diversified businesses (in more than one micro-enterprise) will end up paying 16% corporate income tax if they own more than 25% of the share capital – until now, ownership in up to 3 microenterprises was allowed. In other words, they will be left with the micro-enterprise tax regime for only one business. At the same time, the same entrepreneurs with diversified businesses will also become liable for corporate income tax, even if they have a turnover of less than €500,000, if the cumulative income of the micro-enterprises they own exceeds this threshold and if they are considered related businesses, ending up in a situation where they will not be able to apply the micro-enterprise regime even for one company,” said Mitroi.
Advance tax payments
Last but not least, entrepreneurs could be forced to pay taxes in advance, by the end of the financial year, for the last quarter, as the tax payment date for micro-enterprises had recently been aligned with the tax payment date for other companies, i.e., 25 June of the following year, a measure that risks to drown small businesses in debt and even to throw them into bankruptcy, warns Mihaela Mitroi.
“Another additional burden for entrepreneurs operating as micro-enterprises is the advance payment of the tax for the last quarter of the year, i.e., by 25 December, by estimating December at the level of the previous one”, Mihaela Mitroi noted.
“All these measures affect the ability of micro-enterprises to continue running their businesses, because the sudden extraction of cash through taxes leads to their eventual inability to develop through investment, given the limited possibilities of sources of financing for them. We may thus witness a reduction in the number of micro-enterprises operating on the Romanian market with effects on the sustainability of the economic environment in Romania”, concluded Mihaela Mitroi.
The increased fiscal pressure on small and medium-sized businesses is already having a negative impact on the labor market: employment opportunities are reduced and the number of employees has shrunk as companies have reduced their investments and, in addition, adjusted their staffing needs, Cristina Chiriac observed.
“On the contrary, the increase in the tax burden on small and medium-sized businesses this year has already had a negative effect: the economy has slowed down and more than 160,000 people have withdrawn from the labor market,” adds Cristina Chiriac. “Moreover, under the pressure of excessive taxation the ability of entrepreneurs to access European money is drastically reduced. And then, a measure imposed by the need to consume European money turns out to be just another barrier to accessing European funds – a rebound effect that has probably not been taken into account.”
The National Confederation̆ for Women Entrepreneurship (CONAF) is the strongest confederation in Romania that unites the interests of entrepreneurs in the European spirit of gender equality and equal opportunities. CONAF has 2 federations, 9 employers’ associations, 15 associations, 26 branches and more than 4,000 companies, over 170,000 employees.