OECD recommendations for Romania: From a progressive taxation system and the elimination of tax incentives to the reduction of parental leave
Romania must accelerate fiscal reforms and increase tax revenues to reduce the budget deficit, according to the latest recommendations of the Organization for Economic Cooperation and Development (OECD). The organization recommends rethinking the tax system and abandoning a system based on low rates and numerous exceptions.
According to the organization, the level of tax revenues are among the lowest in the European Union and adjustments are needed in the coming years. Total tax revenues represent approximately 27% of GDP, while the average of the European Union states exceeds 40% of GDP. The OECD report on Romania, published on Monday, shows that, without reforms in the tax system and more efficient collection, the deficit and public debt could continue to grow.
With the fiscal deficit rising to 9.3% of GDP in 2024, international experts are calling for drastic measures, from eliminating tax breaks to rethinking property taxation.
Progressive taxation system
The OECD believes that the current “single quota” is no longer effective due to the many loopholes. Thus, it recommends exploring a progressive tax system, higher rates for high incomes, while maintaining a low tax burden for low incomes by increasing the tax-free basic allowance.
The OECD calls for the alignment of social contribution ceilings for freelancers (PFA, liberal professions) with those of employees. The aim is that there is no longer a massive financial advantage in working as a PFA instead of an employee, i.e. eliminating 'pseudo-independence'.
To encourage formal work, the OECD proposes reducing total taxation on low wages.
Property taxation
Some of the most important recommendations are related to property taxation. The OECD believes that Romania taxes real estate too little and therefore insists that the tax on buildings should no longer be calculated according to old administrative algorithms, but based on the real market value. That would mean a significant increase in taxes in big cities, such as Bucharest, Cluj, Timișoara.
The OECD also proposes the introduction of a tax on the profit obtained from the sale of homes that are not the main residence.
Elimination of reduced VAT rates
Romania has one of the biggest VAT collection deficits in the EU. Under these conditions, the OECD recommends the elimination of reduced quotas (n. ed. 5% or 9%) for goods and services that are not strictly necessary. Restaurants and hotels (n. ed. Horeca), as well as luxury or non-essential food products, are targeted.
The OECD also requires the full implementation of electronic invoicing (n. ed. e-Invoicing) and other digital control tools to reduce evasion.
The OECD also recommends introducing an “innovation criterion” in Start-up Nation and facilitating SMEs' access to tax credits for research and development.
Eliminating price caps and vice taxation
The OECD is calling for the phasing out of price caps on natural gas and electricity, arguing that they undermine incentives to save.
The organization also proposes increasing excise duties on fossil fuels (diesel, gasoline), but also on tobacco and alcohol. With one of the highest mortality rates from preventable causes in the EU, Romania must “tax the vices”, according to the OECD.
The organization suggests raising taxes on tobacco, alcohol and unhealthy foods to fund health literacy. Tax increases on products with high sugar or saturated fat content are proposed.
Taxation of companies and the banking sector
The OECD is also proposing a rethink of corporate tax, the way corporations are taxed, to improve collection.
Although the Government has applied an extraordinary tax on bank turnover, the OECD recommends its elimination by the end of 2026, considering it a long-term distortionary measure.
On the European funds side, the OECD notes that Romania risks losing billions of euros from the PNRR due to delays. The OECD recommends prioritizing “large and mature” projects to avoid this financial collapse.
No credit discounting until inflation drops
Given the high inflation, the message for the National Bank is one of caution. The OECD recommends resuming interest rate cuts “only once inflation is on a clearly downward trajectory”.
At the same time, the report warns of financial risks. Corporate loans in foreign currency remain a vulnerability, calling for hedging instruments for SMEs.
Reduction of parental leave
According to the OECD, “ad hoc increases in public wages undermine sustainability” and calls for a transparent, performance-based formula.
The report also recommends reducing the duration of long parental leaves in favor of expanding nurseries. In this context, it recommends encouraging fathers to take part of their leave through non-transferable periods.
Compulsory insurances
Although the law exists, enforcement is weak, which is why the OECD is calling for stricter control and awareness of home disaster insurance.
The report proposes that flood risk should be made mandatory in any real estate transaction.
All these recommendations are contained in the latest economic report presented to the government on Monday, the Organization for Economic Cooperation and Development (OECD) warns that, despite fiscal consolidation measures from 2025, Romania will have to make “sustained efforts in the coming years to significantly reduce the deficit and place the public debt on a firmly downward trajectory”.
