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An estimated 80 percent of Romania’s farmland is owned by individuals, out of whom only 10 percent are paying taxes for agricultural activities. The government wants to change this by introducing a new fiscal framework for individuals who own farmland and livestock, which should not only boost tax revenue but also pave the way for a possible VAT cut.
Part of a proposed set of changes to the Fiscal Code, the government has come up with a new scheme to tax agricultural activities, which, although it applies only to individually registered farmers, promises to support the growth of the entire sector.
Rather than taxing farmers’ declared annual revenue at 7.5 percent, as has been the case until this February, the government plans to apply a fixed 21.5 percent tax on an estimated average annual net income. The authorities thereby want to make sure that all individuals who own more than 2 hectares of farmland and receive direct payments through the Agency of Payments and Intervention for Agriculture (APIA) pay taxes, regardless of whether they work the land and the revenues they obtain.
The objective of this fiscal change is to simplify and improve tax collection, while at the same time reducing the individual tax burden by half, said finance minister Daniel Chitoiu.
In turn, this should generate higher tax revenues and the right incentives to consolidate land and root out the black economy, a deeply entrenched problem on the Romanian business scene.
For cereals alone, tax evasion amounts to an estimated RON 1 billion (approximately EUR 230 million) each year, according to Stefan Nicolae, president of the National Federation of Trade Unions in Agriculture, Tobacco, Related Areas and Services (Agrostar).
The income collected from individual farmers following this new tax is estimated to almost triple from less than RON 200 million (approximately EUR 46 million) raised under the old scheme to RON 580 (approximately EUR 135 million), said the agriculture minister Daniel Constantin according to Agerpres.
The measure will apply to more than 670,000 individual farmers who own more than 0.5-2 hectares of arable land (depending on the crop), 10 sheep or goats, 6 pigs, 3 cows, 100 birds and 100 bee hives. Farmers who own less than the above mentioned limits and those registered as companies – about 40,000 at present in Romania – will be exempt.
How does the new tax regime work?
“Before this, those who owned land, be it one hectare or thousands, had to declare their revenues and afterwards they were taxed – but almost nobody paid it,” explained Alex Jurconi, vice-president of the Romanian Pork Producers’ Federation.
As it was up to each individual who owned more than 2 ha of farmland to declare the obtained revenue which afterwards was taxed – 2 percent and another 5.5 percent as health contribution – the system could be easily cheated and there was very little the authorities could do to improve tax collection.
The consequence was that only 10 percent of those who should have paid the tax actually did, according to Sorin Minea, president of the Romanian Food Industry Federation (Romalimenta) and owner of Romanian meat producer Angst.
The new fiscal framework brings a new approach which reduces the actual tax but increase the tax base. A 21.5 percent tax, out of which 5.5 percent is the health contribution, will be applied on an estimated average annual net income for each crop type, which will be calculated by the authorities.
This will result in a fixed sum which will be paid per hectare, meaning that all farmers have to pay the tax regardless of the revenues they obtain. The tax will be paid in two installments, in October and December, as by that time farmers will have sold their produce and received the direct payments.
The actual tax payment will be made at the APIA headquarters by retaining the sum from the subsidies farmers receive, said Chitoiu.
“Right now the authorities don’t know how many of all those who own more than 2 ha of farmland work the land and declare their revenues and how many don’t work it or don’t declare revenue. The only certain information available is the number of those who apply to APIA for the subsidy and in general most do,” explained Jurconi.
Better a little from more than more from a few
The measure that will come into force on February 1, should changes to the Fiscal Code be adopted, was welcome by representatives of farmers’ and producers’ associations.
“This is not even a new tax but an increase of the tax base (…). Now everything starts from a very clear premise: if one owns farmland or animals, above a certain limit – and it is my honest opinion that the tax base is still too low – one has to pay a small, fixed tax. I strongly believe it is better to collect small sums from everyone, rather than large sums from only a few. It is illogical for someone who makes a living from agriculture and, let’s say, owns 10 ha of farmland, 3 greenhouses and 50 animals, to declare they sold nothing and therefore pay no tax whatsoever,” argued Minea.
Agrostar’s president, too, believes the change is good and will provide an improved mechanism for tax collection “but with the very clear stipulation that the Ministry of Finance will have to honor its obligations towards all farmers in time and avoid payment delays,” he stressed.
In addition to generating higher revenues for the state budget while reducing the actual tax farmers pay by half and thus helping stamp out the black economy, the recently announced fiscal change should also create the right incentives to solve another issue investors in agriculture have long complained about – farmland fragmentation.
By taxing all farmers regardless of whether they work the land or not and the revenues they report, those who can’t afford the tax will have to look for alternative solutions. “The land can be leased and there will also be the opportunity to consolidate plots,” said Minea.
About 25 percent of the country’s farmland is divided into plots of under one hectare, while investors are mainly looking for over 1,000 hectares. A plot of this size can often be obtained only by buying land from 500 to 900 individual owners.
One step closer to cutting VAT on food
Expanding the tax base will mean additional money for the state budget by providing a guarantee that all farmers registered as individuals will pay a tax which is lower than the previous amount, said Constantin. “This is very important, especially further down the line. This way we will have higher revenues for the state budget and in a way it will also be a guarantee that we can move to the second base, which will be to cut VAT on certain products at a future point,” explained the minister.
The fiscal change will mean additional money for the state coffers without increasing the burden for those who already pay their taxes, said Minea.
“We can talk about fiscal easing – because fiscal easing without improving tax collection is impossible. I am a strong supporter of cutting the VAT on agriculture products but I am one of those who understand that this can’t happen before we have some order in the market,” he concluded.
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