Turnover Tax in Romania. From Legal Background to Economic Reality

An effective tax system is one that successfully attains the objectives of fiscal equity, neutrality, efficiency, and sufficiency. Due to significant changes in the Romanian profit tax system, marked by the introduction of the turnover tax alongside the profit tax, and considering the limited existing research on this subject, the study aims to decrypt the legal background and assess its impact on economic reality. To appraise the adequacy of the profit tax policy with fundamental fiscal principles, the study captures a snapshot of the economy based on the financial results for the year 2022 for all Romanian companies. It estimates the impact of the fiscal burden, the consequences on key performance indicators, and identifies the adverse effects and vulnerabilities of the turnover tax system. The findings indicate that, for most companies, the effective tax rate nearly triples, resulting in a double-digit erosion of profitability. Turnover provides a glimpse of a business's scale, while profit stands as a reliable metric providing valuable insights into a company's financial performance. Therefore, the relevant criterion for evaluating, analyzing, and taxing a taxpayer should be profit, complemented by the establishment of a minimum threshold for the effective tax rate consistently applied to all taxpayers, irrespective of their turnover. Unveiling a novel perspective, the study presents both the weaknesses of legal provisions and their impact on the business environment. Furthermore, it concludes with alternative approaches to the mechanisms that can lead to the establishment of a well-balanced fiscal strategy, promoting economic strength and sustainable growth.