About Romania’s fiscal turmoil and its adjustment to the Industrial Revolution 4.0

About Romania’s fiscal turmoil and its adjustment to the Industrial Revolution 4.0

Interview with Gabriel Biris, Managing Partner, Biris Goran

Q: First of all, we would like to ask you what’s your opinion about the fiscal turmoil of 2017- 2018 and what are the effects we are seeing in 2018?

Gabriel Biris: We had a lot of changes, which is not at all helpful for the much needed predictability for all businesses. The number of changes and the magnitude of some of them is difficult to understand taking in consideration that the actual Fiscal Code was passed in 2015 by the same people that changed in 2017 and 2018. Even now, the minister of finance (same as in 2015) announced that they will come with a new set of changes in autumn, to bring stability and predictability to the fiscal legislation…

Just to make a summary of some of the most important changes:

A. In January 2017 entered in force a much needed provision to cap the base of calculation for the contribution to the health fund due by employees. One month later, not only that this cap was eliminated, but they also eliminated the cap for the contribution at the pension fund, which led to an increase of taxation, despite the fact that we have all explained how destructive this measure is.

B.The threshold for micro companies was first increased to 500.000 euro and later to 1.000.000 euro and the possibility to opt for tax on profit was eliminated starting January 2018. Later, starting April 2016, this possibility was reintroduced; otherwise Romania would have been erased from the map by new investors.

C. Split payment for VAT was introduced for all tax payers through Ordinance no. 23, despite the opposition of all businesses (small, large, Romanian or foreign). None of the arguments of the business environment were heard by the Government, but fortunately the Parliament listened to us and significantly amended it before entering in force at 1st of January 2018, otherwise we would have encountered severe problems, both the tax payers and ANAF.

D. ATAD (Anti Tax Avoidance Directive) was implemented ahead the schedule (2018, instead of 2019), thus creating a competitive disadvantage for Romania in the review; it was introduced without a proper analysis of the impact. Our thin capitalization rules – which offered a very efficient tool against profit shifting, were replaced with a new rule, capping the deductibility of interest to 200.000 euro (which includes interest paid to local banks and financial leases), thus affecting companies that use bank loans to develop or to finance their working capital. This limitation is severely damaging to Romanian companies and creates a huge competitive disadvantage for Romania when competing with countries in the region for new investments.

E.The so called “fiscal revolution”, i.e. the shift of social contributions (health and pension) from the employer to the employee also created chaos – millions of additional documents to the employment contract had to be signed in a very short period of time. I personally consider that this was basically a good measure; the way it was implemented was however very poor. This measure was in fact proposed by me while serving as state secretary in September 2016, but for completely other reason.

What I wanted to achieve with this was to be able to cap the base of calculation for social contributions based on the sum of all incomes, so that the total fiscal burden depended only on the amount earned and not on the type of income. Now, the discrepancies are even higher than before.

F. The new tax introduced for income obtained from offshore exploitations, which most likely will postpone investments in the Black Sea because the stability clause (GEO 160/1999) was abolished, thus removing any guarantee for investors of having predictability for their business plans. To add to the problem, the law is so poorly drafted that even its author, Mr. Dragnea, declared that it needs to be amended.

We also had some weird discussions on other measures, such as household tax and tax on turnover for all companies, which fortunately were aborted by the government. However, these also added on the nervousness of the investors, spreading lack of trust in the ability of the new government to properly handle the fiscal policy. The result of this fiscal turmoil is evident: no new significant investments in Romania were announced, and the level of new direct investment by existing companies is also quite low, despite the optimism generated by the record level of the GDP growth in 2017. This growth is mainly due to the increased consumption as a result of highly procyclical policies of the Government (higher wages in the public sector, higher pensions, and lower VAT rate).

Q: You have both private and governmental experience. In this context, what technological changes for workers, companies and governments would you predict?

Gabriel Biris: Technology offers a lot of new tools for both companies and governments, tools that can help increase both the productivity of companies, but also the quality of public services offered by the government to its citizens/taxpayers. Unfortunately, our decision makers are not very keen to use technology at a larger scale. The most evident example is ANAF, were there is almost no investment in the IT systems, despite a program financed by the World Bank. The introduction of the new cash register was postponed for almost 2 years, and when it was finally implemented this year, the measure was crippled by eliminating the on-line communication between the cash register and ANAF’s servers.

Q: What’s the impact of Industry 4.0 in the Legal World?

Gabriel Biris: The legal market is constantly evolving to accommodate its clients’ needs. I expect that AI will be able to help lawyers to offer better services or to improve the administration of law firms. As a matter of fact, the law profession already changed as a result of the internet and Google, who made all kind of information widely available. Now, nobody is paying to receive information anymore, clients come to lawyers to receive solutions.

Q: How soon will Romania face the consequences in employment due to transition to smart factories or self-learning robots? And how do you see the current scare of workforce capacity in Romania?

Gabriel Biris: When you look to the structure of production in Romania, you will see that many are in the work intensive areas, where robots are not yet available or are too expensive. Thus, in my opinion, Romania is more endangered here by the lack of skilled personnel in sufficient number than by the robots.

However, Romania has to understand the evolution and to prepare for the future, especially when it comes to its education system. To cope with changes, we have to invest much more in the education of the future work force, and we have to start from the foundation, with early childhood education (nurseries, kindergartens). A first step was already done with Law 201/2018, but serious investment in this domain has to be made in the years to come.

Q: Can you please give us some arguments about why the technological developments should be followed closely by lawyers? Should the law follow and adapt to developments in a specific way? How do we create legal infrastructure for something that is so new and complex as the Industrial Revolution 4.0?

Gabriel Biris: It is obvious that technological changes have a significant impact on our lives, as well as on the way businesses are conducted. The laws have to adapt accordingly and here I will give only two examples.

One refers to how the tax systems (both on corporate tax, but also VAT) have to evolve to fit the new paradigm. Companies no longer need a physical presence to sell goods in a specific country, neither to sell services, and the tax legislation was not fit for the new landscape. This led to exaggerations on both sides: companies used the legislative gap to shift their profits in low tax jurisdictions and governments started to revise their policies, even retroactively. It is only recently that law makers started to pay attention to the topic, thus, now we have specific regulations to electronic sales of goods and services.

The other refers to privacy. Technology started to interfere a little bit too much with our lives, which led to the need of new regulations in the field. This is why the GDPR appeared and led to a new specialization for the legal profession.

Both the legal infrastructure and the legal profession will have to evolve to cope with the challenges posed by new technologies.

Q: What are the drivers of change in 2018 for business law and for the professional services industry?

Gabriel Biris: The most important driver of change is, of course, the introduction of GDPR. This Regulation introduced new compliance procedures for business, and, of course, new opportunities for lawyers and other providers of professional services, such as IT, HR, sales, etc.

Q: What are the most important threats and opportunities for the Romanian business environment in 2018?

Gabriel Biris: The biggest threat for Romania comes from its policy makers. While salaries in the public sector and pensions are heavily increased, investment in infrastructure decreased significantly. The budget deficit is expected to sky rocket in 2019-2021, when pensions will almost double. Add the demographic crisis and we have a recipe for a financial disaster… Higher deficits will also mean higher financing costs, higher inflation, and this will only harm investors and consumers.

Opportunities are, as well, abundant, mainly due to the increased consumption. Hopefully, new opportunities will come as a result of new investments in education, health and infrastructure.