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Consultants: Ministry of Finance takes money “by force” from private sector by establishing a gross salary threshold. Employers’ costs will increase

de Adrian N Ionescu 25.9.2017

The plan of the Ministry of Public Finance (MFP) to impose “a certain level of the gross salary” on private companies is a questionable intrusion into the private environment, according to the tax experts consulted by cursdeguvernare.ro.

Also, the measure involves several legislative changes, including the Labour Code and the Civil Code, and could be and will be challenged in court by those who will have the power to do that.

“The measure makes me think about a “nationalization” of a part of the private companies’ revenues, for maintaining the net salary at the same level as the one before transferring the contributions to the employee. The measure will undoubtedly increase the costs of privately owned companies, which are the main contributors to the budget revenues,” said Florentina Susnea, Managing Partner of the consulting firm PKF Finconta SRL.

They take “by force” from the companies’ liquidities, according to the expert, who also wonders “to what extent the promoters of this measure have done their homework and calculated how much the corporate tax paid to the state will be reduced by increasing the salary costs at the employer level?!”

They have contradicted the guarantees given by Minister of Finance, Ionut Misa, who stated on Tuesday that “labour costs will not increase at all” at the employer level if the employer is obliged “to maintain a certain gross salary level” following the transfer of social contributions to the employee.

“It is not clear what legal leverage the Ministry of Finance or the Ministry of Labour could use to change the gross wages in the private sector. In my opinion, introducing such obligation by law is questionable because it represents a state intrusion into a free consensual agreement between two private entities,” said Raluca Bontas, Global Employer Services Partner at Deloitte Romania.

Also, “it should be kept in mind that it is not just a provision in a law but a mix of changes, not just in terms of tax but perhaps in the Labour Code as well. Under these circumstances, it is very likely that these changes to be subsequently challenged by who has the power to do that,” added Raluca Bontas.

It would be beneficial to see whether legal professionals consider this intrusion in the economic life of the private sector is legal,” says Florentina Susnea.

How much gross salary should increase

The Government is already under pressure from the trade unions that warned about the possibility of a decrease in the net salary following the social contributions’ transfer to the employee.

PFK Finconta calculated the details for three salary “flyers”: one with the current taxes, a simulation with the expected tax of 35%, without changing the current gross salary and a simulation with a net salary maintained at 5,000 lei and the recalculation of the gross salary.

If the net salary maintained, there would be an increase of 4.7% from January, to 9.158 lei, compared to 8.751 lei, the cost at this moment. We included the employee’s and employer’s contributions, the income tax and net salary,” says Florentina Susnea.

If the gross salary is maintained at 7,128 lei, the transfer of all contributions to the employee reduces the net wage from 5,000 lei to 3,892, which means a 22% decrease. The amount representing taxes registers a 14% drop, according to PFK Finconta.

Deloitte Romania’s preliminary calculations also show the same thing: gross wages should be increased by at least 22% to maintain the net salary at current levels.

It is true that “for the time being, we are talking about a hypothesis, as there is no law draft or analysis issued yet by authorities regarding the Tax Code or other legislation. Therefore, we can only refer to official statements. That is why we are working on scenarios about the possible decrease or maintenance of net salaries,” says Raluca Bontas.

Transferring contributions to the employee “would translate into an increase in its obligations. Depending on the total amount of the contributions, whether it would be 39.5% (how much the cumulative contributions currently represent) or 35% (as the government program stipulates), the result is a different level of the net salary”, warns the Deloitte expert.

Our calculations show that a gross wage increase by at least 22% is required to maintain the current net salary,” said the Deloitte Romania’s expert.

New problems in the labour market

“Given the current labour market conditions and the companies’ difficulty to find the right employees, it is unlikely that particularly large employers will lower salaries as a result of a possible transfer of all contributions to the employee,” considers Raluca Bontas.

If employees would accept a net wage reduction, “the total cost of a job – that is gross wage and contributions now due by employers – would remain the same. But we are referring to the current situation, not a scenario in which the labour supply would shrink for various reasons.”

“In conclusion, such a measure should be applied only following an impact study in order not to create new risks in the economy, especially that the workforce is getting lower and less qualified, which will make the economic growth increasingly difficult in the mid and long term,” said Raluca Bontas.

Ministerial statements

Finance Minister Ionut Misa said on Tuesday that “there will be a law by which these (social) contributions will be transferred to the employee and the employer will have to maintain a certain level of the gross salary. (…) We have mentioned that even today the private employer may decide to change the employment contract and diminish or increase the salary, following own negotiations with the employee. At the same time, we mentioned that once this legislative measure is implemented, a transitional measure will also be introduced to basically force the employer, even in the private sector, to maintain a certain level of the gross salary,” said Ionut Misa, at the Senate, quoted by Agerpres.

Asked how a private company could be forced to maintain the gross salary level, Ionut Misa said that “there will be a legislative provision that will determine what the gross salary will include, which will be the sum of all other taxes an employer pays now for an employee”.

The Minister of Finance insisted to make “the very clear mention that the labour cost will not increase (for the employer) at all. So, for all employers, both in the private and the public sector, the tax burden, meaning the cost they support for an employee in relation to the state, will be the same. It would be a later decision if, as I said before, it can renegotiate the employment contract and decide whether to pay less or more. The employer will not pay any extra lei for an employee,” the Finance Minister added.

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