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The elimination of the IT tax exemption for IT-workers may lead to a deepening IT staffing crisis, as some of the current employees may switch to working in Romania for foreign companies. There is already a trend in the market for employees to set up personal legal entities (PFAs) or work for foreign companies, warns the Polytechnic University of Timisoara.
There has been much public discussion about abolishing income tax exemptions for employees in IT, construction and research. According to the Ministry of Finance, this measure would bring an additional €600 million to the state budget every year.
But such a decision may backfire, as most employers are not willing to cover the tax, and there are already moves in the market for employees to freelancing or foreign companies. Florin Drăgan, rector of the Politehnica University of Timisoara, has analyzed the situation and comes up with several conclusions.
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“Many foreign IT companies have already started recruitment campaigns and their plans include employees from Romania. The coronavirus pandemic has made distance no longer a problem. Basically, people can work from home for companies abroad because they won’t require them to be physically present in the office or in the country. As IT workers’ incomes fall, they will be tempted to make the move to foreign firms. The IT market cannot support such a migration because there is a big shortage of specialists. On the other hand, there is a trend for high earners to set up PFAs or their own companies where there is a different tax system. An elimination of the income tax exemption will increase these trends and automatically taxes paid to the state will decrease”, says Florin Drăgan, rector of Politehnica University Timisoara.
Politehnica Timisoara University has over the years worked with both companies operating in the west of the country and state institutions to find the best solutions for the labour market. Many companies present in the west of the country have come in the last year to consult with UPT specialists for new investments.
A calculation shows that in the last six months foreign investment of around €1 billion has been announced to expand the production capacity of some companies, but also for research to create new innovative products. A large part of these companies’ planned budgets is allocated to human resources.
“When the financial specialists of these companies planned their expansion budgets, they took into account the tax base that existed at the time. Such a move would be a real shock because in Romania when you recruit a person, you negotiate the net salary. If the salary is taxed, you are basically proposing a lower income than what was planned in the budget and this can make recruitment more difficult. In other words, investments already announced could be affected or could be tempered. We could find ourselves in a situation where recent graduates of Romanian universities are directly employed by foreign companies, working for their offices there on higher salaries, and the labour crisis in our country could worsen”, says Florin Drăgan, rector of Politehnica University of Timisoara.
Two of the pillars of the NRRP could be affected: digitalization and construction
The Faculty of Construction at Politehnica University of Timisoara has seen an increase in student numbers in recent years. Interest in the field has increased since 2018, when more tax breaks were introduced for construction employees. Data collected from the General Register of Employees shows that graduates of the Faculty of Construction of UPT have an employability rate equal to graduates of the Faculty of Automation and Computers.
“We can say that the tax facilities introduced at that time have <<whitened>> this field. If we go back to the construction tax system as it was in 2017, all the efforts made so far will be reversed and we are back to a <<grey>> work of employees. For UPT construction graduates employability has increased by nearly ten percent compared to four years ago. The National Recovery and Resiliency Plan relies heavily on infrastructure investment. If we put the brakes on construction firms, the goals set out in the NRRP can be hampered,” said the UPT rector.
Another area of particular importance in the NRRP is digitalization. This can be done with IT people, but also with research people, who also benefit from income tax relief.
“At the moment it is very difficult to get good people to work exclusively in research. It’s an area where we could do more, and a higher income is an incentive for a specialist to stay in research. Most university graduates go into development, but research brings more value to the market. If people’s incomes in research go down, along with those in IT, then they will leave or migrate to other forms of collaboration and many of the digitalization projects will be at risk,” concluded Dragan.
Edited for English