NO MORE TAX BREAKS - or why Ronaldo isn't moving to Moldova
- Why doesn't Ronaldo move to Moldova?
- Even he is afraid of the MoF (Moldovan Ministry of Finance) next steps.
Portuguese soccer star Cristiano Ronaldo was fined almost 19 million euros ($21.6 million) earlier this year in Spain for not paying taxes. Sources indicate that the harsh fiscal system was one of the reasons to move to Juventus from Real Madrid. What's the bottom line? People like him don't like to pay too many taxes.
We are here to review yet another initiative by the Ministry of Finance: the personal income tax exemption cut at 360k lei (around €18k) per year.
On the first look, this might make sense, as in the poorest country in Europe, people who make over €1k per month should expect a higher taxation rate. But at a closer examination, this measure impacts mostly the law-abiding thin crust of the middle class.
ENTER THE LAFFER CURVE
This simple, economic concept states that an increase in a tax could lead to a decrease in tax revenue if the actual level of taxing has passed the optimal tax rate. According to Bejakovic (2019), over 35% of Moldovans work in the informal economy and over 31% work in the subsistence economy sector. That would say that over 60% of Moldovans do not pay the set income tax because of various reasons (the unwillingness of the employer to pay full fees, tNnhe tax evasion as a strategy to maximise income, the impossibility to pay taxes due to the meagre earnings etc.)
This shows that the level of income taxes cannot be considered to be optimal, or rather one that disincentives at least ⅓ of the employed Moldovans to pay taxes. And it would be presumptuous to assume that these are only the people with a lower level of salaries. They are the most likely "victims" of this victimless crime, as in their case, the employer decides to evade taxes.
TAX EVASION OR TAX ELUSION?
In the case of the higher wage earner, the possibilities of legal and illegal tax elusion are broader. The Government hasn't abolished the legislation on the entrepreneurial patent that gives abundant opportunities for the worker to define him/herself as a trainer, translator or another type of entrepreneur that does not need to pay the full tax rate, but rather a modest payment.
Also, there are several options for the worker to enjoy a more competitive tax system, especially if we speak of people that can work remotely (IT, Marketing, Services etc.)
For example, Estonia offers a program of e-residency, that during its initial four years that was joined by more than 50,000 people from 157 countries who have established around 6,000 new companies there. It is an option to benefit from a lowered tax rate and "leave" the income under another fiscal regime. Recently, Azerbaijan has also announced the launching of a similar program, and other countries are following suit.
Another way to elude the taxes is to choose to reside in a "tax haven", a country with limited or no income taxes. This might prove more costly for some workers, but, again, it's an option for the professions that can be done remotely.
Many high earners that work for foreign companies choose to "remain in limbo", claiming there that they pay taxes in Moldova and not to report them here. This category is of course under the risks of being exposed, but prosecuting them would imply enlarging the personnel of the Fiscal Service and a more ambitious work effort in "chasing" these remote workers. After a financial analysis of this activity, it might prove that the attempt to do so is futile and may not cover the costs of implementation.
WHO WILL BE AFFECTED?
Who are the likely "victims" of the tax exemption annulment? According to the Moldovan Statistical Bureau, the industries with the highest wages are:
IT and Communications;
Finance and Insurance;
Interestingly, the logic of this legal innovation does not follow the same logic as the Law on IT parks No.77 from 21.04.2016. The earlier law makes it easier for the IT enterprises to "go legal", but now the changes to the Fiscal Code disincentives the entrepreneurs who will have to compensate for the difference most likely.
Also, there is a clear targetting of the "passive income" of the Moldovan Fiscal residents. There are several cases where the exemption might apply for no good reason:
When a fiscal resident sells his/her apartment or any other real estate. The secondary market of houses and apartments in Moldova is quite active as much of the real estate is still coming from the Soviet era, and people tend to move actively to the capital, Chisinau. There is an income tax for the difference of the acquired capital, which could be quite significant if the owner has had it from the Soviet period.
When a fiscal resident rents his/her apartment or any other real estate, the renting market is mostly a black market, as the Fiscal Service cannot effectively monitor it and the 7% tax is quite prohibitive for people to "go legal" in renting their apartments. At the same time, the income from renting an apartment together with a modest salary could trigger the tax exemption annulment.
When a fiscal resident donates to anyone but a close relative, the rules of the difference for the acquired capital apply.
CONCLUSIONS AND RECOMMENDATIONS
The actual level of taxation does not seem to be optimised by the Laffer curve, as ⅓ of the Moldovan population works in the informal economy and another ⅓ in the subsistence economy. The proposed personal exemption annulment deepens the lack of optimisation of the tax rate and creates insecurity for the middle class in paying taxes. The Moldovan Fiscal Service has a limited capacity in implementing the fiscal policy and, at the same time, the new measures create incentives for tax evasion and tax elusion.
The new fiscal policy targets indiscriminately some types of income in a prohibitive way (donations, real estate sales, renting, etc.) and might limit the intents to legalise the renting market in Moldova.