TAXATION
1.The new Fiscal Code to enter into force on January 1st 2016
Much discussed and hotly debated, already amended by a Government Emergency Ordinance even after its promulgation by the President of Romania, the new Fiscal Code will enter into force on January 1st 2016. It provides for a series of changes, notably:
Taxation predictability - no legislative changes that raise taxes or introduce new ones may be enforced for a period of at least one year, with the exception of tax changes resulting from Romania's international commitments.
Cutting VAT to 20% from January 1st 2016 and to 19% from January 1st 2017.
Cutting the tax on dividends from its current level of 16% to 5% from January 1st 2016.
Cutting the dividend tax on the distribution of profits among Romanian legal persons will lead to positive economic effects through: increasing investment and stimulating the development of holding companies, encouraging the local capital to stay here, and speeding up the repatriation of Romanian capital.
The ceiling for micro-enterprises is set to rise to 100,000 euros
Micro-enterprises will be subject to new fiscal regulations from 2016. Specifically, the turnover ceiling allowing a company to register as a micro-enterprise will go up from the current level of 65,000 euros per year to 100,000 euros. The tax rate system applicable to micro-enterprises will be differentially applied, depending on the number of employees. More specifically, micro-enterprises will be taxed between 1% and 3% according to the existence of employees and their number:
According to the legislation still in force in 2015, micro-enterprises pay a 3% income tax regardless of the number of employees they have. The introduction of different tax rates according to the number of employees is a measure meant to stimulate job creation. The 3% tax on the micro-enterprises that are temporarily inactive will most likely lead over time to the disappearance of inactive SMEs.
Cutting the VAT on water to 9%, for all types of services provided
Drinking water and water for irrigation will be subject to a VAT of 9%, as is currently the case, among other things, with food, including drinks (except alcoholic beverages) for human and animal consumption.
The repeal of the additional excise tax of 7 euro cents per liter of fuel (introduced on April 1st 2014) and of the special constructions tax from January 1st 2017 (with the exception of the tax on agricultural constructions, set to be repealed from January 1st 2016).
WATCH OUT: an increase in state budget revenue collection expected in 2015, as a result of strengthening fiscal discipline, is seen as a success by public authorities. We expect fiscal authorities’ verifications to continue and be even more intense. Therefore, #goodaffairs’ recommendation is to try to think like a tax inspector, review your internal financial procedures, make sure you are up to date with the legislation in your industry, and take corrective action if needed.
WATCH OUT: Medical services remain exempt from VAT under the new Fiscal Code. Also, private educational establishments, from kindergarten through college, are exempt from profit tax.
MACROECONOMIC INDICATORS. 2016 FORECASTS
2. Popular measures vs macroeconomic stability
During their last visit to Bucharest, in October 2015, IMF experts said that the economy was growing at a healthy clip, with real GDP projected to grow by 3.4% in 2015. However, IMF analysts believe that renewed volatility in the global financial markets, including downside risks to trade and capital flows, could put strains on Romanian economy. Also, the budget deficit could rise to almost 3% of GDP in 2016 and exceed 3% in 2017, on the back of sizable tax cuts and wage increases. The doubling of the budget deficit from the current level of 1.5% to 3% (projected for 2016) is likely to put Romania’s macroeconomic indicators on a downward path.
The IMF mission acknowledged that tax collection is better, but the collection gap is still wide. The banks received praise for weathering well “the bouts of uncertainty surrounding Greece during the summer and [because they] continue to maintain adequate capital and liquidity buffers.”
Still, the lack of progress in structural reforms is a major obstacle to long-term growth prospects, warn IMF experts: “Romania’s strongest pillar of structural reforms have been continuous improvements in energy pricing, accompanied by ongoing efforts to strengthen the support system for the most vulnerable [consumers]. However, actions to sustainably raise the performance of many inefficient state-owned enterprises (SOEs) in the transportation and energy sectors have stalled.” The IMF experts are asking Romanian authorities to give new impetus to the involvement of the private sector in state-owned enterprises, through initial public offerings or strategic privatizations.
Without modernizing Romania’s public transport infrastructure, the benefits of the current strong economic activity will be short-lived, and progress toward economic convergence will be slow. We would like to point out that in the Transportation Master Plan adopted by the European Commission (EC) in July 2015, under the optimistic scenario in which the EC would activate the structural reform clause for Romania, starting with 2017 our country would be able to access external loans of about 8 billion euros to supplement European and state budget funding for the road infrastructure by the year 2020. The money is to be used for building 6 highways. Under the negative scenario, undisciplined fiscal policies and a lack of reforms will only make possible the completion of the Pitesti-Sibiu highway and several expressways.
WATCH OUT: in the optimistic scenario under which Romania taps into external funding for transportation and infrastructure projects, new business opportunities will arise in several industries. You might be one of the beneficiaries!
TTIP DEVELOPMENTS[1] AND THEIR IMPACT ON ROMANIAN BUSINESS COMMUNITY
3. TTIP could bring an increase of 0.25% of Romania’s GDP, according to EU research.
Part of the economic benefits would stem from slashing customs tariffs, but 93% of Romania's economic benefits deriving from the agreement would be owed to removing non-tariff barriers: a lower regulatory burden, simplified customs procedures, and access to American supply markets.
The strongest argument for TTIP comes from the Romanian companies that are already doing business with the USA or are exploring the possibility to do so. Among the benefits of TTIP is the fact that the agreement could help them to increase their transatlantic exports.
The staunchest supporters of TTIP are the USA and the United Kingdom. However, negotiations in the EU have stalled as a result of criticism from Germany and France, with both countries accusing the lack of bilateral or multilateral negotiations on the sensitive issue of trade agreements, as well as the lack of a public debate on certain points apparently already settled.
We anticipate that the negotiations between the US and the EU on TTIP will extend throughout 2016 and will closely trail the political agenda: the international coalition against terrorism (France has requested US help in fighting against terrorism, while America will ask in return that France review its position on certain topics of major interest); solving the migrants’ crisis; the game Russia plays in the war in Syria.
WATCH OUT: Unless you are already doing business with US companies, you might want to prospect the market. From the end of 2016 or the beginning of 2017, when TTIP is expected to be signed, exports to the US will be far more attractive than now.
MAJOR BUSINESS MERGERS
4. Royal Ahold takes over Delhaize/Mega Image
The Dutch group Royal Ahold agreed to acquire the Belgian group Delhaize, the owner of the Mega Image retail chain, for about 9.32 billion euros in shares, creating the fourth-largest food retailer in Europe and the fifth-largest in the United States, the retail industry’s largest deal in the past decade. Ahold shareholders will hold a 61% stake in the enlarged company. The Dutch retailer has announced that it would distribute 1 billion euros to its shareholders via capital return. The two sides see the transaction being completed by mid-2016.
5. Pfizer takes over Allergan in the largest purchase in the history of the pharmaceutical industry.
Pfizer and Allergan have reached a merger agreement for a stock deal worth about 160 billion US dollars that would create the biggest pharmaceutical group in the world, with a product portfolio ranging from Viagra to Botox. The newly-formed group will be the world’s largest drug maker, with annual sales of about 60 billion dollars.
The agreement is unprecedented from several viewpoints. It is this year’s biggest takeover and the biggest in the history of the pharma industry, eclipsing the purchase of Warner-Lambert by Pfizer for 116 billion dollars in 2000. The deal is set to be completed in the second half of 2016.
6. Americans are encouraged to invest in the Romanian banking sector.
The American investment fund J.C. Flowers intends to acquire Banca Comerciala Carpatica (BCC), raise its capital, and later proceed with Carpatica’s purchase of Piraeus Bank, as the latest negotiations show; talks were in an advanced stage at the beginning of December. The talks for the takeover of BCC started back in the summer of 2015. The purchase of Carpatica and Piraeus by J.C. Flowers, one of Wall Street’s major players, founded by a former Goldman Sachs executive, could see the creation of a bank that would be among Romania’s top 10.
These moves on the banking market are part of a larger plan of American investors to acquire several banks operating locally. The Americans have been given the green light by the National Bank of Romania (NBR) to acquire several banks, clean their books, and consolidate a very fragmented banking market, with far too many small banks that are struggling to survive after the crisis, lacking the critical mass needed to grow.
WATCH OUT: The consolidation of the Romanian banking system projected for 2016-2017 will bring more stability and predictability to lending to businesses, and also a strengthening of banking and financial discipline.
DOMESTIC POLITICS
7. Limited-term cabinet
The cabinet led by Dacian Ciolos, a technocrat, has little room to maneuver:
It has a limited mandate - the term of the current cabinet ends in November 2016 (with the next general elections). Therefore, it will be not be able to implement meaningful reforms, to undertake medium-term political objectives. The current government fulfills more of an administrative role.
It operates at the behest of the Parliament - it cannot write legislation without the backing of a political consensus among the parliamentary parties, which will have to pass new laws by parliamentary procedure. And this is difficult to achieve. It could run the country by Emergency Ordinances, but these also must be validated by the Parliament, while the previous cabinet had the support of a solid parliamentary coalition formed of PSD, UNPR, and ALDE.
It must implement the popular measures (wage increases, fiscal measures for business) adopted by the former government, which will prove very difficult. On the one hand, there is a strain on the budget (the IMF, the Fiscal Council, and analysts have shown that the negative impact on the state budget will be exceedingly large, and Romania’s macroeconomic indicators may veer off course). On the other hand, there is the public pressure (Mr. Ciolos’s cabinet is the expression of people’s will, and hence it must comply with market demands, which call for the eradication of corruption and raising the standard of living).
Mr. Ciolos’s cabinet objectives:
The government intends to boost trust in the Romanian economy, which is why it plans the development of a government working group for economic development. A Plan for industry-specific actions is in the works, which will be sent to the Parliament together with the state budget draft for 2016. Prime-minister Ciolos has asked all cabinet members to pinpoint what must be done in the following period (obligations, commitments, conditionalities etc.) and is carried over from the previous administration, and which projects follow from the current government’s program.
In matters concerning the economy, the government working group is coordinated by deputy prime minister Costin Borc, minister of the Economy; the group will include businesspeople and will identify several strategic industries whose development must be specifically targeted, regardless of who is in power.
WATCH OUT: although Mr. Ciolos’s cabinet largely survives on the will of the Parliament, 2016 is a year when the MPs will be extensively involved in the local and general electoral campaigns. They are likely to be extremely sensitive to the short-term measures taken by the government, and especially to those concerning welfare, thereby neglecting to a significant extent long-term measures like the professional training of civil servants. It will be interesting to see what mix of short- and long-term measures Mr.Ciolos’s cabinet will take.
2016 - AN ELECTION YEAR. LEGISLATIVE CHANGES
Two sets of elections will take place in 2016: The local elections (in May or June) and parliamentary elections (in November or December). In practical terms, the political decision-making process will stall in 4 out of 12 months, since electoral logic will prevail (with inactive periods in the months before and after the elections).
From the very start of 2016 the Ciolos government will face pressure from parliamentary parties to disburse/unfreeze public investment funds throughout the country (in cities, communes, and villages) to help party representatives secure a solid vote.
On top of these administrative hiatuses will be the two winter (January-February) and summer (July-August) parliamentary recesses that will suspend the Parliament’s activity, and hence political decision-making.
8. The local elections
The 2016 local elections will follow new regulations. The mayors are to be elected in a single round, and those running for office have to submit a list of signatures from at least 1% of all voters, but no less than 100 signatories for communes, 500 for second- and third-rank towns, and 1,000 for municipalities and the capital city.
An important change concerns the election of County Councils chairs. The appointment will be done by a simple majority vote in the council. County Council chairs will be revoked by a two-thirds vote. Also, more candidates will join the fray in the 2016 elections thanks to the new law that allows the establishment of a party by just three members.
9. General elections
In July 2015 the new bill on general elections was signed into law. According to the new law, in the next elections votes will be cast on party lists, for a lower number of parliamentarian seats. The representation quota is one deputy for every 73,000 people and a senator for every 168,000 people. Thus, we are going to have 308 deputies, 134 senators, 18 MPs representing the ethnic minorities, and 6 MPs for the diaspora. The total is 466 MPs, 122 fewer than today. The new general elections law is at odds with the people’s will expressed in the 2009 referendum, when the Romanians voted overwhelmingly in favor of a unicameral legislature with 300 MPs.
The electoral 5% threshold is maintained, while electoral alliances have to add 3% for the second party and then 1% for each additional party, up to 10%.
WATCH OUT: While running for office in 2016, the political parties or their candidates might make promises infringing European and Romanian law, free market regulations, or even common sense. Follow closely political statements, avoid giving everyone full credit, but instead choose carefully those public policies that may materialize after the elections.
FOREIGN POLICY
10. The refugee crisis. Challenges for Europe
The wave of refugees from Syria, Iran, Iraq, Afghanistan, and Africa continues to swell. Europe has shown that it is not ready to cope with this crisis. After Italy, France is now asking the European Commission to find urgent solutions to the refugees’ crisis. EU’s developed states are witnessing massive street protests against migrants, as they are seen as a real danger to the stability and prosperity of the continent.
The EU needs close cooperation with Turkey to stop the influx of migrants, since the state is their main access point to the West. The EU projects the arrival of about 1.5 million migrants in 2016 and of another half a million in 2017.
Romania is not yet significantly affected by this crisis, as our country is not among the destinations targeted by migrants. Still, the EU has required its Member States to accept mandatory migrant quotas to relieve the targeted countries. At the most recent meeting of the European Council, President Klaus Iohannis opposed this solution. There was no final resolution. However, all things point to forcing EU member states to share the burden. The adoption of a wave of refugees will put even more strains on the state budget and the public policies of the new cabinet. Romania is not ready financially to meet these challenges. But our country has a strategic partnership with the EU, and therefore will have to honor its commitments arising of this partnership.
11. Russia vs NATO
At the end of September Russia launched air raids into Syria in support of Bashar al-Assad’s regime. The United States and NATO accused Russia of targeting positions of insurgents supported by the West. Moscow claims that it exclusively targets the positions of the Islamic State terrorist network, which controls regions in Iraq, Syria, Libya, and Egypt, where it proclaimed a “Islamic caliphate."
Recently, Turkey has shot down a Russian military plane near its southern border with Syria, in what is seen as the most serious incident involving Russia and NATO in the past 50 years. Turkey, a NATO member, justified its actions by saying that the Russian plane, which was theoretically flying in NATO airspace, did not respond to repeated warnings of Turkish interceptor jets. In Moscow, president Vladimir Putin used replied in strong language and compared the downing of the Russian fighter plane to a stab in the back by supporters of terrorism, saying that "Russia will not tolerate the crimes committed by Turkey.”
Mr. Recep Tayyip Erdoğan’s administration in Turkey has its own interests in the Syrian conflict, fearing especially the advance of the Kurdish militias. In addition, according to Russian prime-minister Dmitry Medvedev, certain Turkish officials have "direct financial interests" in the illegal oil trade done by the Islamic State terrorist organization. Also, Ankara has repeatedly expressed its concern over the fate of the ethnic Turks who live in northern Syria.
After the Paris shootings, Russia has emerged from its near-complete geo-political isolation (into which it had been pushed as a result of starting the conflict in Eastern Ukraine) and was allowed to join the international coalition against terrorism. But after the downing of the Russian military aircraft in Turkey the context has changed. The main geo-strategic world players are currently fighting over control of the Middle East, but the situation is still unclear. The spheres of influence are still subject to negotiations.
WATCH OUT: the ongoing conflict in the region will continue throughout 2016 on multiple levels - economic, informational, military, and political. In November 2016, US president Barack Obama will reach the end of his second and last term in office; the future president - either a Republican or a Democrat - is expected to show an increased involvement in the Black Sea region and the Middle East, unlike Mr. Obama, whose attention has been focused in particular towards domestic issues.
ROMANIA’S ROLE IN THE EUROPEAN UNION
12. Romania, a growing influence in Brussels
Romania has 32 members of the European Parliament (MEPs) who are part of 5 political groups: Group of the Progressive Alliance of Socialists and Democrats in the European Parliament (S&D), Group of the European People's Party (EPP), European Conservatives and Reformists Group, Group of the Alliance of Liberals and Democrats for Europe (ALDE), Europe of Nations and Freedom. The work of Romanian MEPs is virtually unknown at home, but very appreciated in Brussels.
In 2015, two Romanian MEPs have received The Parliament magazine’s MEP Awards for 2015 - Victor Negrescu in the “Digital Agenda” category, and Adina Valean for “Energy”.[2] Four Romanian MEPs, three Social-Democrats and a liberal, were shortlisted for MEP Awards 2015: Daciana Sarbu (PSD) - Health, Viorica Dancila (PSD) - Agriculture, Victor Negrescu (PSD) - Digital Agenda, and Adina Valean (PNL) - Energy. This year, Romania is among the countries with the most nominations for the MEP Awards.
The intense work of Romanian MEPs in the energy sector is praised in Brussels and is an opportunity to initiate new EU-level talks on complex energy issues - one of the areas of strategic interest for the Romanian economy.
WATCH OUT: the term of the MEPs in office ends in May 2019, a year when Romania will assume the presidency of the Council of the European Union (July-December 2019). Romanian MEPs are held in high esteem in Brussels, both by their colleagues in the European Parliament and by European Commission officials. The concrete and coherent initiatives coming from the Romanian business community and the civil society have found in Romanian MEPs partners who are active, informed, and influential in European institutions.
TRENDS
13. Diesel - on the way to becoming history
The Volkswagen scandal, in which the car manufacturer was found to have manipulated the emissions controls for its Diesel engines, reignited the debate on the importance of the electric car to the reduction of greenhouse gas emissions. Several European capitals have specifically expressed their interest in taking measures to replace fossil fueled cars, decrease traffic, particularly in crowded cities, and mitigate their impact on the environment.
Thus, the mayor of Paris announced that she intends to prohibit access to the city for all diesel cars by 2020, even as two thirds of the cars currently sold every year in France are powered by diesel engines. The British government has said that it considers the introduction of a special tax of up to 12.5 GBP for all diesel cars passing through the center of larger British cities, also starting from 2020.
Romania has not taken an official position on the matter yet, and no measures to decrease the number of conventional cars are being considered (at least declaratively). We note that car manufacturing is the main pillar of Romanian exports. Sales of Dacia models grew by 19% in 2014. With sales of 511,465 units, Dacia achieved in 2014 its best sales performance ever. The nation’s second largest automotive exporter, Ford Romania, posted in 2014 a 41.57% increase in sales over the previous year.
The transition from the internal combustion engine to the electric one will be "organic", say environmental journalists, through car makers’ research and development efforts. These projections point to the year 2020. We also note that Europe has set target caps for diesel engines’ carbon emissions: 130 grams of CO2/km by 2015 and up to 95 grams by 2020. For these reasons also, the set emissions cap will not lead in the short term to higher sales of electric cars. However, it is estimated that more ambitious targets for 2025 and beyond might change the balance of supply and demand.
WATCH OUT: Coupled with restrictions on driving diesel cars, there will be incentives for owning electric cars, like subsidies for their purchase and the building of more recharging stations at more and more accessible prices.
14. Social activism on the rise in Romania
Social media has become an instrument of social activism in Romania, extensively used since 2008. Social networks contributed in the past three years to the fall of two governments - those of prime ministers Emil Boc (March 2012) and Victor Ponta (November 2015) - as well as to the victory of Klaus Iohannis in the presidential elections in November 2014. The social media phenomenon went through a spectacular development in Romania, far more dynamic than in other former Communist countries. Social networks are seen as the most accessible channel for freedom of expression issues. But in the past three years these networks gave rise to a new phenomenon - civic involvement. Facebook users (the most popular social media channel in Romania) not only share their impressions or common values, which they like or share, but appeal to involvement, to activism, in the fight for a common cause. These forms of social involvement go beyond mere expression; they materialize in offline civic movements.
Let us mention that the tragic accident at Colectiv Club made almost 25,000 people take to the street in the University Square - a symbol of freedom - to protest against a "corrupt system that kills innocent children." The street’s energy fizzled out after a week, but the civic involvement propagated through social networks led to the creation of at least three political platforms that morphed into political parties that are alternatives to the current political class: The Colectiv National Party, The Colectiv Party, and “Save Bucharest” Union Party.
WATCH OUT: there are signs of groups of citizens coalescing around narrower, but more concrete and pragmatic, issues, such as: groups that monitor the activity of city halls, that monitor and aim to get involved in safeguarding historical buildings, groups of people who set aside time to help public institutions (in particular schools and kindergartens) to get approvals from the emergency services and the fire department etc. These groups are actual grassroots initiatives and mark the emergence of a new social stakeholder social that cannot be ignored and which could become more and more active, more vocal and influential in the design and execution of public policies.
[1] TTIP - the Transatlantic Trade and Investment Partnership is the free trade agreement between the European Union and the United States of America that is currently under negotiation. Negotiations are expected to be completed in 2016.
[2] The nomination of a MEP can be made by any EU citizen, together with a support statement of maximum 350 words. The nominations are reviewed by The Parliament magazine, which draws up a shortlist according to the contribution of each nominee. The shortlists are then sent to all MEPs, who vote for the “MEP of the year” in each category. Only MEPs have the right to vote in this competition, which reached its 13th edition in 2016.