Gabriel Sincu, EY: the Government's greatest challenge as regards the Tax Code is to cover the budget deficit

The Government has released recently the new draft Tax Code which comprises several ultra-liberal measures, such as a diminution of the VAT, a reduced flat tax, the elimination of the tax on special construction, or lower social security contributions for both employers and employees, which would generate a gross budgetary deficit of over 16 billion lei.

Hence, the most difficult question to be answered by the Government concerns the sources to cover the deficit produced by these measures, believes Gabriel Sincu, Executive Director, Tax and Legal at EY Romania.

The EY specialist says that the deficit could be covered provided the authorities succeeded to reduce the size of the shadow economy and improve tax collection, however Sincu highlights that given the background with respect to tax evasion in the last 25 years, it remains to be seen to what extent it will be diminshed.

”The most interesting measure seems to be the one related to the elimination of the the tax on dividend payments, a real surprise to everyone. At first glance, it is a salutary idea, but the question is whether it will discourage investment in favor of decapitalization amongst companies. Also, since under the new rules APP systems become totally unattractive, the issue is whether they will generate a new trend in terms of avoiding payroll taxes, returning to the micro-enterprises trend as in early 2000s,”explained Gabriel Sincu.

Apart from these aspects, he considers that the elimination of tax on dividend payments could be a breath of fresh air for the capital market which will attract individual investors who will acquire shares, aiming to obtain non-taxable dividend income.