Tax Update, All Change – Perhaps?
The Romanian Government has done what very few Governments in the past have done and that is that they have united both employers and Unions in a common cause. They have done this by implementing the measures set out in Emergency Ordinance 79/2017 (“Ordinance “). This Ordinance was published on 10th November 2017 and has amended the Tax Code.
The Ordinance reduces the number of social contributions to be paid in Romania in respect of employment to only three. However, it has raised the amount of the contributions and placed the obligation to pay them on the employee, rather than on the employer as currently. One good aspect is that personal income tax is reduced from 16% to 10%.
The result is that the higher compulsory contributions to be paid by the employee will lead to a lower net salary for employees unless there are changes in their gross salary. Therefore, to maintain the current net salary level, an increase in the gross salary will be required. The increase in the public sector of the gross salary will be compulsory but for the private sector such an increase will be at the employer’s discretion. There is no clear consensus as to what will happen although the indications are that employers will in the majority of cases increase the employee’s gross salary to cover this additional cost.
In principle according to the Government the increase in the gross salary is to enable the employee to maintain their current net income is far as possible without any extra costs upon the employer. This is because the payment currently paid by the employers is to be transferred to the employee which will not affect the cost of the employee to the employer and will be equal to the amount of the social security payment now paid by the employer.
Such salary increase will however create problems in the employment field. The amount of the increase will have to be calculated for each employee separately. When calculating the amount necessary to increase the gross salary to maintain the net salary the employer will have to take into consideration both the actual salary and the personal circumstances of each employee.
For certain businesses, a cost-neutral increase is not possible at all. This concerns activities which are currently exempted from the payment of income tax. In these cases, the increased social contributions cannot be balanced by a lower tax. Therefore, it will be necessary to increase the gross salaries. In some cases, this could cause an increase of the employers’ total wage bill by a figure it has been calculated of about 6%.
The employers which will be affected by this will be those involved in IT-programming. IT R&D, employees with handicap and those involved in other activities such as seasonal workers. The Government is considering these cases particularly regarding IT where the reduced tax has been an incentive to encourage the development of the IT and R&D industry in Romania.
Following the recent amendments to the Labour Code, (August 2017) amendments and modifications to employment agreements must be concluded and registered prior to their implementation.
As the amendments must be registered in the so- called „Revisal“ at the latest one day prior to their entry into force – i.e. until 29th December 2017 one can anticipate major issues in this regard especially as the Government has become less lenient and enforces the law regarding registration as strictly as it can, to enable it to collect fines for breaches whether actual or perceived of this registration requirement. It is estimated that there are five million contracts which will have to be amended prior to this date. I make no comment as to the chaos that will be caused.
For Romanian Employment lawyers there will be another challenge. After entering into force, an Emergency Ordinance is followed by a law which either approves, modifies or rejects the Emergency Ordinance. It is therefore more than possible that within a few months the Ordinance will be modified or even completely annulled. if the Ordinance is annulled or cancelled then the Employer will again be liable to pay the current social security payments. If the Ordinance is annulled and the employer has already agreed an increase in the Gross salary and the employee does not have to pay the additional social security payment there will be an increase in the net salary of the employee. If this happens then there will be no obligation on the employee to agree a reduction in his salary unless agreed at the time of the variation of the employment contract.
If an employer has signed a simple agreement to increase the salary, then he will have no legal way to ask for the reduction in the net increased salary. That is why any agreement varying the salary because of the Ordinance needs to be carefully worded and drafted. The amendment must consider all possible eventualities including cancellation or variation of the Ordinance. Further what is to happen if at some time in the future the Government re-imposes the obligation on the employer to pay social security payments for the employees he employs?
In such case if the such consent to reduce the salary was denied, there would be no way the employee could claw back the amount and the staff would thus “win” the raised salaries.
In our view employers must do the following as a matter of urgency:
a) Calculate the amount required for each individual salary increase;
b) assessing if such increase should be cost-neutral for the employer or if the net salary should be maintained irrespective thereof;
c) whether and when salary increase shall take place;
d) make a decision regarding the documents to be drafted (collective or individual negotiation, manner of realising the salary raise, etc.) with a view to a possible later cancellation;
e) document drafting;
f) conclusion and Revisal.
Employers from the private sector are not compelled to raise salaries. Yet, given the situation on the labour market, even the reluctant ones will probably be obliged to do it for competitive reasons.
The changes will require administrative effort during the following weeks, which should only be implemented if the legal problems are resolved and clarification and decisions are taken.