In the 35th issue of Today Software Magazine, we brought to your attention some of the fiscal changes likely to affect the taxation of income derived from independent activities, as outlined in the draft amendment of the Fiscal Code, currently under debate. Considering that after heated debates and reviews in the Parliament, the final version of the New Fiscal Code was eventually published on September 10, we will take this opportunity to resume the analysis of the changes and to draw some conclusions, pointing out how it could affect your 2016 budget. Although the final version of the Fiscal Code also refers to some changes effective from 2017, in our opinion it is premature to focus on them, given the obvious tendency to continuously revise and amend any statutory rule and regulation.
Currently, self-employed individuals who earn income from independent activities do not owe contributions to the pension fund on such income if they also earn income from salaries. As of 2016, these persons shall also be insured under the compulsory national pension scheme. This change of consequence on the activity of every self-employed individual who earns income from independent activities has been preserved from the draft to the final version, and now we can explain how it will actually be implemented, providing at the same time answers to some essential questions.
For self-employed individuals who earn income from independent activities and are taxed on net earnings basis, the monthly calculation base for retirement contributions is 35% of the average gross salary applicable in 2016.
This base shall be used to determine the advance payments due to CAS and in 2017, after filing the tax return stating the income earned in 2016, the monthly base shall be recalculated as the difference between the gross income and the business expenses incurred in carrying out the activity, excluding CAS expenses. The result shall be divided to the number of months with positive balance in 2016. The monthly base CANNOT be lower than 35% of the average gross salary applicable in 2016, nor higher than 5 times such amount. The same minimum and maximum limits shall also apply to those individuals who earn income from independent activities and are taxed on fixed income basis.
For this category of self-employed individuals, the monthly calculation base of the retirement contributions represents the monthly fixed income rate divided to the number of months with positive balance; it cannot be lower than 35% of the average gross salary applicable in 2016, nor higher than 5 times such amount.
The individuals who earned less income in the previous year (2015) than the minimum limit shall be exempted from advance payments to CAS. This exemption also applies to the professionals whose monthly fixed income rate in 2015 does not exceed 35% of the average gross salary.
The compulsory rate is 10.5% applied to the estimated or final calculation base. One can CHOOSE to pay the full rate of 26.3% based on a request filed before January 31st, 2016 for those who conducted business in 2015 or within 30 days from commencement of the activity for those who start the activity in 2016. The option to pay 26.3% shall be maintained throughout the entire the fiscal year and considered renewed for each year when it is not terminated by a request to return to the individual rate. Since the value of the average gross salary for 2016 is still unknown, we shall consider for exemplification purposes the corresponding value in 2015, i.e. RON 2.415, and provide a concrete example of the calculation method of this contribution and its impact.
Average gross salary in 2015 = RON 2.415 Monthly minimum limit for advance payments: 35% 2.415 = RON 845 Compulsory CAS rate = 10.5% Monthly minimum CAS rate: 10.5% 845 = RON 89 Monthly maximum limit for the final payments: 5 2.415 = RON 12.075 Maximum monthly CAS rate: 10.5% 12.075 = RON 1.268
According to this calculation method of the CAS final calculation base we can distinguish between two possibilities:
If upon the adjustment it is found that earnings were below the minimum limit, the contribution paid in advance in 2016 shall not be refunded, but considered for the calculation of the retirement contribution and retirement score, and in 2017 the respective taxpayer shall not be subject to CAS advance payments.
With reference to the health insurance contribution, the draft Fiscal Code proposed the annual adjustment of CASS for all the earnings obtained by an individual organised as PFA. As such, in the following year, the fiscal authority would determine the annual calculation base as sum of annual calculation bases subject to health insurance contributions. And this cumulative annual base could not exceed the annual maximum limit, i.e. 5 times the average gross salary multiplied by 12 months (annual limit for 2015: RON 144,900).
Unfortunately, this adjustment related proposal has been approved to come into effect only from 2017; consequently in 2016 taxpayers shall owe health insurance contributions calculated against a base equating the positive difference between the gross income and expenses incurred in conducting the independent activity, excluding CASS expenses for self-employed individuals taxed on net earnings basis. For self-employed individuals taxed on fixed earnings basis, the monthly CASS calculation base is the annual fixed earnings rate, divided by the number of months with positive balance, for each source of income.
The draft also included a positive change, namely to remove the condition related to the minimum limit representing one minimum gross salary per country in determining the monthly calculation base of the contribution. Accordingly, the persons with zero income would not have had the obligation to pay the contribution, and those who derived less income than the minimum limit, would have paid according to the actual earnings. Unfortunately not only did the approved Fiscal Code not carry forward this proposal, but on the contrary, it extends the scope of the health insurance obligation to self-employed individuals with zero income (regardless of the source: salary, pension, independent activities, property lease, investment, agriculture, other). In a nutshell, no-income individuals shall PAY MONTHLY CASS, equal to 5.5% of the minimum gross salary per country.
The approved version of the New Fiscal Code features some changes related to tax income, as well. In our opinion, the most relevant are:
Considering these new fiscal tendencies when it comes to the taxation of income derived from independent activities, we can conclude that they are aimed to gradually eliminate these forms of business organisation, since such a high level of taxation cannot be sustained on long term by a professional. We are heading towards a "re-conversion" to other forms or work and organisation, such as employment, copyright royalties, and eventually microenterprises. This decision to re-route the business organisation should be made in full awareness of all the effects involved, by means of a comparative analysis based on an estimated budget of income and expenses resulted from your professional activity.
by Peter Lawrey
by Monica Rațiu
by Călin Biriș
by Dan Suciu
by Ovidiu Mățan