IMF urges Romania not to enact the flat tax drop to 10%

Jeffrey Franks (in picture, right), the head of the International Monetary Fund (IMF) mission to Romania, has asked for the recently voted flat tax drop to 10 percent not be enforced in Romania, as it is raising several concerns and as it had not bee discussed with the new Fiscal Council.

“First, if enacted into law, this measure would open a significant additional gap in the 2011 budget and its deficit would exceed 4.4 percent of GDP, which is a condition for the next IMF and EU disbursements to Romania. Second, the difficult but necessary measures taken in July to fix Romania’s fiscal problems are now beginning to bear fruit. Revenues are rebounding, expenditures are falling to more sustainable levels, and confidence in the Romanian economy is recovering both here and abroad. Initiatives to continuously tinker with the tax system create instability in the business climate and undermine the economic recovery,” said Franks in a recent statement.

“Finally, we note that this measure was not discussed with the new Fiscal Council as required by the Fiscal Responsibility Law, and is not consistent with the government’s medium-term fiscal strategy,” he added.

“We urge lawmakers of all political parties to approve a responsible 2011 budget and to approve the reforms needed to secure a more stable and prosperous future for Romania. We are confident that we will be able to proceed as scheduled to approve the sixth review at the IMF Board in early January once all prior conditions have been met,” Franks went on.

Romania’s Senate adopted Tuesday with 45 to 31 votes and eight abstentions a draft law drawn up by ruling democrat liberals, which reduces the flat tax to 10 percent, from 16 percent. Democrat liberals’ proposition aims to amend an article of the Tax Code and sets at 10 percent the flat tax on salaries, pensions, investments, awards and revenues gained from independent activities. The amendment makes no reference to the tax on profit.

The draft act will become law if the Chamber of Deputies, which has the final say on the matter, also adopts it.

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