Deloitte simulations for calculating new taxation for employees: net salary decreases in four out of six scenarios

The Ministry of Finance confirmed on Thursday evening that as of January 1, 2018, social contributions will be entirely transferred to the employee’s responsibility while the employer will only have the obligation to withhold and pay these contributions.

In addition, the Ministry of Finance has also stated that the cumulated rate of these contributions will be reduced from 39.25% to 35% so that net salaries will not be affected.

The Government has also reassured recently that the income tax will be reduced.

The problem is that these mentions are not enough, and the statements do not take the place either of a draft law or implementing rules, so the business community to know clearly what to expect.

Deloitte’s simulations

In this context, Deloitte simulated several calculations showing that, depending on the tax scenario applied, results are quite different: in four out of six scenarios, the net salary decreases.

The simulations made by Global Employer Services Deloitte Romania, coordinated by Raluca Bontas, Partner Deloitte Romania, in the following:

Scenario 1

• Social security contributions transferred to the employee
• Gross average salary of 3,131 lei increases by 22.75% (as a result of the transfer of employer’s contributions)
• The total contribution rate drops to 35% (by 4.25 pp)
• Income tax decreases to 10%, 0% respectively, for gross incomes up to 2,000 lei
• For gross salaries of over 2,000 lei, the tax of 10% is due only for the amount exceeding the exemption threshold of 2,000 lei
• Outcome: Net salary = 2,448 lei, 11.49% higher than at present

Scenario 2

• Social security contributions transferred to the employee
• Gross average salary of 3,131 lei increases by 22.75% (as a result of the transfer of employer’s contributions)
• The total contribution rate drops to 35% (by 4.25 pp)
• Income tax decreases to 10%, 0% respectively, for gross incomes up to 2,000 lei
• For gross salaries of over 2,000 lei, the tax of 10% is due entirely (without the exemption threshold of 2,000 lei)
• Result: Net salary = 2,248 lei, 2.38% higher than at present

Scenario 3

• Social security contributions transferred to the employee
• Gross average salary of 3,131 lei increases by 22.75% (as a result of the transfer of employer’s contributions)
• The total contribution rate drops to 35% (by 4.25 pp)
• Income tax remains 16%
• Result: Net salary = 2,098 lei, 4.45% lower than at present

Scenario 4

• Social security contributions transferred to the employee
• Gross average salary of 3,131 lei does not increase by 22.75% (as a result of the transfer of employers’ contributions)
• The total contribution rate drops to 35% (by 4.25 pp)
• Income tax decreases to 10%, 0% respectively for gross incomes up to 2,000 lei
• For gross salaries of over 2,000 lei, the tax of 10% is due only for the amount exceeding the exemption threshold of 2,000 lei
• Result: Net salary = 2,031 lei, 7.5% lower than at present

Scenario 5

• Social security contributions transferred to the employee
• Gross average salary of 3,131 lei does not increase by 22.75% (as a result of the transfer of employers’ contributions)
• The total contribution rate drops to 35% (by 4.25 pp)
• Income tax decreases to 10%, 0% respectively, for gross incomes up to 2,000 lei
• For gross salaries of over 2,000 lei, the tax of 10% is entirely due (without the exemption threshold of 2,000 lei)
• Result: Net salary = 1,831 lei, 16.6% lower than at present

Scenario 6

• Social security contributions transferred to the employee
• Gross average salary of 3,131 lei does not increase by 22.75% (as a result of the transfer of employers’ contributions)
• The total contribution rate drops to 35% (by 4.25 pp)
• Income tax remains 16%
• Result: Net salary = 1,709 lei, 22,16% lower than at present

Raluca Bontas, Global Employer Services Partner Deloitte Romania, explains that, in the absence of a normative act, an impact study or official calculations prepared by the competent authorities, the scenarios analysed provide „a picture of the effect of these measures applied simultaneously or selectively at the individual level„.

“Recently, the Government has reiterated that the income tax will be reduced from 16% to 10%, and social security contributions will be fully transferred to the employee, with a cumulative rate reduced to 35% (from 39.25%).

However, the income tax exemption for the gross monthly incomes of up to 2,000 lei was not reconfirmed.

At the same time, placing the contributions on the employee’s responsibility would require an increase in the gross wage by at least 22.75% to maintain the level of the net salary. This decision is probably a bit easier to implement in the budget sector, but it is debatable whether and how it can be mandatory for the private sector.

In the context of having no legal act, no impact study or official calculations prepared by the competent authorities, we are working with several scenarios about the effect of these measures.

In the most favourable scenario with all the measures applied simultaneously, the national gross average wage – which we took as a benchmark – would increase by 11.5%.

Obviously, there would be a bigger increase, of 16.6%, in the gross salary of up to 2,000 lei, while the growth would be felt less for the higher wages. For example, the increase would be of 8% for a gross salary of 5,000 lei. On the other hand, the most pessimistic scenario would be if no solution has been found for the artificial increase of the gross wages by 22.75% but the contributions were taken over by the employee and the income tax remained unchanged.

In this case, not discussed so far, the average net salary would decrease by 22.16%.

For now, we are talking about hypotheses. Our calculations give a picture of the effect of these measures applied simultaneously or selectively at the individual level,” explains Raluca Bontas, Partner of Global Employer Services Deloitte Romania.