The local subsidiaries of US IT giants Oracle and IBM, along with other subsidiaries of top multinationals in the high-tech industry, which have thousands of employees working in the most expensive office buildings in Bucharest and the main university cities in the country, would be among the most affected companies in case the tax exemption for the programmers’ incomes is dropped as proposed by the liberal party (PNL), the main opposition party in Romania, which won the European Parliament elections and seeks to get the government, too. If the tax exemption is dropped, it would cost each of the largest IT companies in Romania more than ten million lei (over two million euros), according to publicly available information and ZF’s calculations.
The income tax exemption the ruling partly PSD introduced in the early 2000s to attract investments from technology heavyweights in Romania has endured so far regardless of the government, and its scope was expanded to new IT industry categories. If it were dropped, a person working in the IT industry that earns RON8,000 in net amount today, would be earning RON7,200.
Romania currently has 110,000 programmers, 30,000 of whom are income tax exempt, and the IT and telecom sector contributes 6% to the GDP formation, more than agriculture does, for instance.
Romania’s exports of software and IT services were estimated at EUR4 billion in for 2019, EUR500 million higher than in the previous year, while domestic demand was put at EUR1.1 billion, merely EUR100 milion higher than in the previous year. Such exports are important because they help balance the trade balance, offsetting the imports.
Economist Ionut Dumitru believes dropping the income tax in the IT sector was important for the performance of the sector in the past 15 years but tax incentives are not the only reason for it. He believes there were several factors at play here, from the very good quality of IT graduates, the very good infrastructure (high Internet speeds), the very good language skills etc.
“Moreover, while when it was first introduced (before the flat income tax in force since 2005), the income tax was very high (progressive quotas up to 45%) and not paying income tax really made a difference, now with our 10% flat income tax, I don’t think not paying income tax makes that much of a difference. I don’t think 10% can make the difference for an IT person to decide to stay in Romania or not today, since the gap to the salaries in other more developed countries is not that wide anymore. Moreover, income taxation is much higher in most developed countries, which use a progressive taxation system,” Ionut Dumitru said.
A potential drop of the income tax exemption for programmers could lead to a decline in the number of employees in the star sector of the economy, which has been hiring en-masse in the last few years and is paying the highest salaries on the market.
“Such a step, which was not announced at least one year before coming into force, as it happens in other Central European countries such as Hungary, for instance, creates stress in the market. Worst case scenario, we could see the first personnel cutbacks in a sector that has grown the most. If you come up with a such a step after a lot of tax changes in the past two years, there’s bound to be budget adjustments in companies,” said Alina Popescu, talent information solution leader for Romania and the Balkans of Mercer Marsh Benefits, which conducts an annual salary survey among multinationals in Romania.
(English version by Loredana Fratila-Cristescu)