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Construction companies with an employee number ranging between 50 and 800 will suffer an increase in costs ranging between 5%-28% starting with January

BUCHAREST, 17th of January, 2019: Ruling no. 114 has a direct impact on the construction industry, which, in essence, conveys tax benefits to employees, whereas increasing costs to employers. Company “Cromwell Evan Global”, an independent firm that offers tax and financial advisory services, has performed a draft calculation on the potential impact this ruling has on employers from the construction industry:

1. Companies with an employee number ranging between 50 and 800, where the proportion of employees receiving the minimum wage represents 40%, will bear an increase in costs ranging between 5-7% starting with January 1, 2019.

2. Companies with an employee number ranging between 50 and 800, where the proportion of employees receiving the minimum wage represents 60%, will bear an increase in costs ranging between 12-15% starting with January 1, 2019.

3. Companies with an employee number ranging between 50 and 800, where the proportion of employees receiving the minimum wage represents 80%, will bear an increase in costs ranging between 24-28% starting with January 1, 2019.

Oana Motoi, Managing Partner at Cromwell Evan Global declared, “Ruling no. 114 certainly brings tax benefits to employees, however we need to ask to what extent will employers be able to maintain the same number of jobs which was retained until December 31, 2018? Is this ruling truly beneficial to the economic environment, where the companies activating in the construction industry have indicated that the profitability ranges between 5-10% from its turnover?

Taxes payable to the state, associated with the employment contracts that will be affected by the new legislative changes envisaged by ruling no. 114, will decrease with 35% to 50%.  However, we need to note, that, these taxes are due by the employee and not by the employer.

At present, according to the Workforce Balance published by the National Institute for Statistics (NIS) on January 1, 2018, in Romania are activating approximatively 700,000 workers in the construction industry, either on an employment contract or as freelancers. In theory, in the case 300,000 of these workers would benefit from income tax exemption of 10% starting with January 1, 2019, whilst benefiting as well from exemption from medical contributions (in full) and social (reducing it from 25% to 21.25%), and would be eventually remunerated based on an employment contract with the minimum gross salary:

– an increase of the economic consumption power of 212% will be feasible (approx.. 375,300,000 LEI), which is related to a number of 300,000 people, out of 5,630,000 people which were officially working as on January 1, 2018 (Workforce Balance of active workers published by NIS on January 1, 2018)

– however, the total amount collected by the state budget will be reduced with a total of 22% (approx.. 55,092,000 LEI) related to a number of 300,000 of employment contracts.

– The real goal of this legislative change is to provide an incentive to the Romanian citizens who are working abroad to return to Romania. For instance, in the case 300,000 Romanians will decide to return to Romania by June 2019, the economic impact for the first 6 months of the year, bearing in mind the sample of 300,000 people mentioned above, and considering the additional 300,000 active workers, would be as follows:

– an increase of the economic consumption power of 425% will be feasible (calculated on June 2019 vs December 2018, amounting to approx.. 1,084,050,000 LEI), which is related to a number of 600,000 people, out of 8,600,000 people which were officially working as on January 1, 2018 (Workforce Balance of active workers published by NIS on January 1, 2018)

– the total amount collected by the state budget will increase with 56% (approx.. 139,191,000 LEI) related to a number of 600,000 of employment contracts.

It appears that, in answer to the question as to what extent the new legislative changes would benefit the employers, it seems that this scenario does not seem advantageous to them. Without considering the attraction of additional workforce from abroad, which would eventually allow an increase in the number of projects for companies to undertake, it appears that, in essence, companies falling under the conditions set out in this article would perceive a detrimental impact. In the best case scenario, only companies with a total number of employees ranging between 50 and 800, where the proportion of employees receiving the minimum wage represents 40%, would be able to withstand the increase in the costs generated by the new legislative changes, however, without achieving any profit (zero). In practice, without an increase in revenue, in order to survive on the market, these companies will have to restructure their business model (i.e. reduce the costs and concomitantly increase the prices). In the situation when these legislative changes will indeed achieve their main purpose and attract a part of the workforce established abroad, the budget revenue would be increased by collecting additional taxes, and in overall, a positive impact will be achieved. However, companies will still need to reorganize their business model, as it will become necessary to increase the number of projects and prices in order to be able to sustain a higher number of employee

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ABOUT CROMWELL EVAN GLOBAL

Cromwell Evan Global, is in independent firm which offers tax and financial advisory services. The company was launched in 2018 by Oana Motoi (a financial consultant with an overall experience of over 11 years, having gained experience in other companies such as KPMG and PwC), and is active in Romania and Republic of Moldova. CEG is currently working on a large portfolio of clients that consists of a Top 3 bank on the Romanian market and a number of entrepreneurs and investors activating in numerous industries, such as banking, real estate, IT and construction. At the same time, CEG introduced a new type of service on the business advisory market: 360 Consultancy, which offers investors with an integrated and complete consulting package, coordinating technical experts from different industries – fiscal, legal, or technical, needed in planning and implementing a new investment. CEG has entered into an association with the boutique law firm Vernon | David.

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