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Wednesday, October 06, 2004

No tax increase in sight till 2007. Keep saving

(source: ZF)

The Finance Ministry has no plans to modify the taxation of incomes of individuals until 2007 nor is there pressure from the European Union to take such steps.

"The idea mentioned last year about the inclusion of income derived from interest payments among those subject to global income tax is not applicable, at least not until EU accession, and the talks we've had with the European Commission on this issue did not reveal any requirements in this respect," Maria Manolescu, state secretary with the Finance Ministry, told Ziarul Financiar.

She says at the moment Romania cannot afford to make any move that would discourage saving, which is essential to supplying the banking system with resources to sustain the constant growth in demand for credit.

In other words, income derived from interest payment will be subject to the same 1% tax, at least until January 2007, the target accession date, with the tax being deducted by the bank directly.

Early in 2003, the authorities discussed the possibility of including this stream of income among those subject to global income tax.

The same was to happen to dividend-related incomes of individuals, however the Exchequer eventually gave up on those plans. On the other hand, the tax levied on the dividends received by individuals will double as of January 1, 2005, to 10%, so as to match the similar tax paid by legal entities.

After fourteen years of inflationary surges to over 100% and shock-depreciation episodes that shook people's confidence in the benefits of saving in ROL, deposits in ROL by individuals this summer successfully reverted to the levels they saw before the collapse that began in December 1990, the equivalent of 5.2bn euro.

The highest increase was seen recently, between December 2003 and July 2004, when savings increased by around 17% after fluctuating at a level of slightly more than 4bn euros for three years, a threshold crossed as late as 2001. Savings capacity held its ground and even consolidated despite the large amounts of cash used for loan repayments, a trend that became more visible last autumn. Savings looked to be losing ground in the spring of 2003, precisely when a major lending boom was about to happen.

Why did ROL keep on flowing into banks? Three successive interest rate increases by the NBR in the autumn of 2003 mirrored in the interest rates of commercial banks for deposits, as well the unprecedented flattening of foreign currency investment yields, turned saving in ROL into one of the most profitable ways to invest money.

As a result, the people retained the comfortable position of net lender to the banking system, with deposits reaching 5.5bn euros and outstanding loans of 2.3bn euros.

Posted by Mihai : 10/06/2004 09:33:00 am