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UPDATE 1-Romania's government approves tax overhaul despite widespread criticism
November 8, 2017 / 1:34 PM / in a month

UPDATE 1-Romania's government approves tax overhaul despite widespread criticism

* Government pushes through plan by emergency decree

* Tax cut, social insurance burden moved to employees

* Workers protest, unions plan more demonstrations (Adds details)

By Luiza Ilie and Radu-Sorin Marinas

BUCHAREST, Nov 8 (Reuters) - Romania’s government approved a tax overhaul via emergency decree on Wednesday, despite criticism from investors, trade unions and the European Union state’s centrist president.

The Social Democrat-led government has said the fiscal changes will curb bureaucracy, tax evasion and boost budget revenue. Critics have expressed concerns the plan will be implemented in too short a timespan and carry risks for private sector employees who may see their net incomes slashed.

The overhaul includes cutting income tax to 10 percent from 16 percent and lowering social security contributions while shifting their burden entirely onto employees.

Romania will become the EU’s only member state to shift all social security taxes to employees.

The measures will come into effect in January, meaning employers have roughly seven weeks left to comply. Hundreds of protesters rallied outside government headquarters. Unions plan to stage more protests in the coming weeks.

Currently, social security levies amount to 39.25 percent, jointly paid by workers and employers on their behalf. From Jan. 1, workers will pay 35 percent, while employers get a 2.25 percent tax on their overall wage fund.

Some fear removing payroll taxes for employers could lead to lower net wages for private sector workers, as companies are not obliged to pass their savings on.

Small firms with annual sales below 1 million euros will pay a 1 percent tax on turnover instead of the 16 percent tax on profit. Low income earners will get higher tax deductions.

The emergency decree will also enforce a European Union directive that will make it harder for multinational companies to ship out their profits to their mother firms.

The fiscal changes will carry a loss of roughly 5.2 billion lei ($1.30 billion), which the finance ministry has said will be covered by better tax collection as well as a measure to cap contributions to a mandatory private pension scheme at their 2017 levels.

However, the country’s fiscal watchdog said impact assessment risks were “unusually high” as it was unclear private sector employees will pass their savings on.

In the public sector, the government has approved a 25 percent hike of all public sector wages that will cover the bigger tax burden.

Separately, the government also plans to raise the minimum wage from next year as well as pensions and child rearing subsidies.

The ruling Social Democrats have gone backwards and forwards on their tax intentions this year, often announcing measures without assessment their impact and then backing out, provoking uncertainty among investors and weighing on assets.

The Romanian leu was flat on the day, but down 2 percent this year, underpeforming its regional peers. ($1 = 3.9900 lei) (Editing by Alison Williams)

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