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Measures introduced to invigorate the job market in Romania
On 19 September 2014, the Romanian Parliament approved and published the law for an amendment of the Tax Code, resulting in an employer social security contribution (SSC) reduction of 5%. Taxand Romania details the key aspects of the new measure and how it will invigorate the labour market.
The new regulations provide for a reduction of applicable SSC (pension) rates payable by employers to the State Social Security Budget, depending on work conditions, as follows:
- From 20.8% to 15.8% for normal work conditions
- From 25.8% to 20.8% for difficult work conditions
- From 30.8% to 25.8% for special and other work conditions
According to the legislator, this measure is estimated to reduce tax on labour by approximately 2% when compared with 2013, which is 43% of labour cost. Total labour taxation is divided by the total employer’s labour cost (total social security contributions due by both employer and employee) plus the personal income tax divided by total labour cost at the employer’s level.
The decision to cut SSC by 5% highlights how important it is to stimulate the labour market. SSC has historically been a hindrance to this growth, as a result of:
- A formerly high tax on labour pressure on companies due to the high levels of SSC (two thirds of the contributions owed to the pension system represent contributions paid by employers)
- Distortions at the social security system level which determine reductions of the taxable base for pension contributions, as well as for health contributions
The objectives of this measure are:
- The reduction of the labour tax burden
- The support in creation of new jobs
- The reduction of the informal labour market
Implementation of the SSC reduction paid by employers is estimated to have a considerable impact on both business and social environment.
This change should impact the business environment by increasing funds available for employers. These additional funds can be used for the creation of new jobs, to increase current salaries or for capital investments for example. It is also thought that the reduction of the labour tax rate will stimulate both local and foreign investors to develop business in Romania, leading to an increase in the number of taxpayers.
This initiative will likely also impact the informal labour market, which will have an impact on the social environment of Romania. The SSC reduction supports the formal labour market and containing competition within that market while also aiming to encourage a high level social security service for all employees.
Moreover, the Romanian government has indicated that the reduction of SSC is expected to have a positive impact at a macroeconomic level, potentially leading to an actual increase in GDP by approx. 0.1% – 0.2%.
With regards to the lost revenue at the level of the Pension Budget, the Romanian government has in mind certain compensation measures for 2015 – 2018, such as potential revenue sources from the General Budget, improved tax collection, reduced tax avoidance, and possible effects of more investments and of the creation of new jobs.
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Employers and investors should assess the impact of this measure on their budget and make the necessary business decisions on the cost savings generated by this measure.
The lower rates for the SSC shall apply irrespective of work conditions starting with the income derived for October 2014. The measure is intended to stimulate the employment market and encourage both local and foreign investors. This new measure has been long awaited by the business community, who considers it welcome in the context of high labour taxation in Romania versus the average in European countries and the average in the neighbour countries.
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