Klomp said all segments of the real estate market will be affected should the proposed increase materialize.
“The recent history of sustained efforts made by the Romanian government into maintaining stable and low taxation levels contributed to a positive image of Romania as an investment destination. Jones Lang LaSalle flags the downward risks to Romania’s image as an investment destination of the envisaged increase of both the corporate and personal income tax rates from the current competitive level of 16% to the proposed level of 22%,” real estate consulting firm JLL said in its statement.
JLL representatives argue that a potential increase from the current level of 16% to 22% will make Romania less attractive to investors who carefully weigh such aspects when evaluating a future investment destination.
“Romania is being benchmarked against the rest of the CEE countries in such context. One important decision criteria for companies is taxation. Taxation is assessed in terms of the absolute level of taxation, the ability to repatriate profits and the predictability of the tax environment. The currently debated increase in taxation will clearly affect Romania’s competitive position,” according to Klomp.
“Increasing taxes without having a clear investment strategy would be unwise. Instead of increasing taxes, the state should focus more on improving tax collection rates (tax collection is down year on year, whilst the economy is growing), and freeing-up resources for investment by ending the disproportionate increase of public wages (+14.7% year-on-year growth in public spending on employment in the first nine months of 2013). The result of higher tax rates might very well be that tax proceeds in absolute terms will drop as new investments by foreign companies will not materialize and as tax evasion might further increase,” Klomp explained.
“Within the real estate market, the office and industrial sectors will likely be most affected as the tenants’ businesses and certainly their growth strategies will be hit. Exit liquidity will also be affected as the real estate investors monitoring Romania will not be appreciative of the unpredictable tax environment and might postpone their return / entrance to the Romanian market. Without a clear exit scenario real estate developers cannot redeploy their equity into new projects,” Klomp added.
As far as the retail sector is concerned, despite a potential compensational 2% decrease in VAT, the increase in personal income tax is likely to lead to a drop in retail sales.
“Many companies will not be willing or able to increase gross salaries to compensate for the tax increase. The disposable income of consumers will be seriously impacted. Consumer confidence will be affected adversely by this discussion regardless of whether the increase in taxes will materialize. Considering that in the past VAT hikes were not (fully) passed on to consumers, it would be logical to assume the same with the planned VAT decrease. In reality, the decrease in the VAT rate, which should compensate consumers might not serve its purpose,” Klomp concluded.
Jones Lang LaSalle is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate.