A General Overview of the Income Tax 1. 2. 3.

A General Overview of the Income Tax Coverage Scope of the Income Tax Deductions Allowed for Taxation Purposes Part 1. A General Overview of the Income Tax In the RM the unitary income tax was introduced on 1.01.98 and replaced three taxes: the profit tax of enterprises, the individual income tax, and the profit tax of banks and other crediting institutions. In most countries of the world individual and corporate income tax vary; this is why the unification of these taxes is an innovation in the taxation practice. The income tax subjects comprise juridical and natural persons receiving income from any sources on the territory of the RM during the taxation year, and juridical personsresidents, which receive investment and financial income from sources outside the RM. Since there are various interpretations of the terms individual and company in the taxation and civil legislation, we will explain some of them. According to the taxation legislation juridical persons are: 1. Any enterprises, institutions, and organizations involved in enterpreneurial activity with the exception of individual enterprises and farms. 2. Non-residents with an economic presence on the RM territory According to the taxation legislation natural persons are the individual enterprises and farms. According to the taxation legislation, taxation subjects are the entities legally responsible for paying taxes. The income tax object is the net income, including the allowances received from all sources by all juridical and natural persons minus the deductions and exemptions granted to the given entity by law. The taxed income=net income (accounting for concesions)-deductions-exemptions. For 2011 the income taxes are imposed as follwos: A) B)

For juridical persons they constitute 0% of taxable income For natural persons including farms and individual enterprises 7% of the annual taxable income not exceeding 25200 lei 18% of the taxable income exceeding 25200 lei Part 2. Coverage Scope of the Income Tax

The net income covered by the income tax includes all types of income: 1. Income from enterpreneurial, professional or any type of such activity. 2. Income of associations and investment funds 3. Payment for the work executed and services provided, including salaries and wages, benefits offered by the employer, fees, commission fees, bonuses and other such type of premiums; 4. Income from renting out wealth; 5. Capital increases resulting from asset operations; 6. Income received in the form of percentage interest rates; 7. Royalties (income from providing the right to utilize non-material property);

8. 9. 10. 11.

Annuities (regular insurance payments, pensions and benefits with the exception of social security payments and benefits (pensions and compensations) received on basis of intergovernmental agreements); State subsidies, premiums and prizes, not defined specifically as non-taxable in the law establishing these payments; Dividends received from economic subjects non-residents; Allowances for temporary inability to work, received by natural persons from the state social security fund and others. Part 3. Deductions Allowed for Taxation Purposes

Deductions are defined as the sums deducted from the net income of the payer at the calculation of the taxable income. In conformity with the TC, for the purposes of determining the taxation basis, it is permitted to deduct from the net income the following items: 1. Regular and necessary expenses payed or bourne by the payer during the taxation year exclusively in the purposes of the enterpreneurial activity; 2. Expenses related to the business trips of employees, membership fees, company insurance payments, but only within the limits established by the Government; 3. Percentual disbursements if these are necessary outflows for the enterpreneurial activity and if the majority of the shareholders are not foreign citizens or exempt from taxation; 4. Accrued wear and tear for each type of property during the taxation year; 5. Spendings related to the extraction of non-renewable natural resources; 6. Amortization of each non-material property item (invention patents, author rights, industrial drawings and blueprints with a limited life-time); 7. Bad debts, which have lost value and are not expected to be payed duting the taxation year. It is not allowed to deduct the following outflows:

Sums payed for the purchase of land or property, which is subject to depreciation or of fixed assets with a lifetime longer than 1 year; Compensations and rewards, percentage interest rates and losses, incurred in the interests of an official or related person; Undocumented expenses above the limit established by the government; Personal and family expenses.

Particular Aspects of Individual Income Taxation 1. 2. 3. 4. Preferential Taxation Treatment for the Individial Income Tax Calculation Methods of the Income Tax Subtracted from Salaries and Wages Income Tax Deductions from Payments Other than Salaries and Wages Submission of Individual Income Tax Self-assessments Part 1. Preferential Taxation Treatment for the Individial Income Tax Each taxpayer (individual person, resident) in the year 2011 has the right to a personal tax exemption of 8100 lei per year. The amount of the individual preferential exemption constitutes 12000 lei per yearPersons who have contracted and experienced radiationrelated illness caused by the accident at the Cernobil AES. 1. Disabeled persons, whose disability has been proven to be related to the accident at the Cernobil AES. 2. Parents and spouses of deceased and missing participants to the military operations for the protection of the territorial integrity and independence of the RM as well as to the military operations in the Republic of Afganistan. 3. Disabled persons, whose disability occurred during military operations for the protection of the territorial integrity and independence of the RM as well as to the military operations in the Republic of Afganistan. 4. Disabled natural persons, whose disability occurred during wars, disable from childhood, disabled of category I or II or retired individuals who are rehabilitated victims of political repressions. Married individuals residents of the country, have the right to an additional discount in the sum of 8100 per year, this allowance has the name of married couples allowance, which is applied if the spouse is not exempt from tax. The taxpayer (the individual resident) has the right to an additional discount in the amount of 1800 lei per year for each dependent with the exception of disabled individuals, whose disability appeared in childhood, the discount for whom constitutes 8100 per year. In case the dependent has a number of custodians, the discount is offered to all the custodians. For tax discount purposes, a dependent must meet the following criteria: Be a primary relation to the employee or the spouse of the employee either through ascending or descending relation (parents, children, adopters). Live together with the taxpayer or separately, but the latter applies only in cases where the dependent is enrolled full-time in an institution of higher education for more than five months of the taxation year. Is being maintained by the taxpayer Does not have an income higher than 8100 lei per year. Part 2. Calculation Methods of the Income Tax Subtracted from Salaries and Wages According to the legislation of the RM, the employer executing the payments of salaries and wages, including remunerations and allowances offered to the employee is obligated to retain and transfer income taxes to the budget, taking into account the exemptions that apply to each employee. Taxes are retained from any type of income: salaries and wages, rewards, salary bonuses, premiums, subsidies, fees, commission fees and other payments. The taxable income also includes allowances offered by the employer, such as:

1. 2. 3. 4. 5.

Payments offered by the employer for the purpose of reimbursing personal expenses of the employees (this can include spendings for education, health care, or the maintenance of children in pre-school institutions); The cancellation of the employees debts to the employer; Financial aid provided by the employer for housing expenses of the employee, when the housing is provided by the employer; Expenses of the employer for providing the employee with the right to use property for personal purposes; Contributions to pension funds, with the exception of contributions to qualified nongovernmental pension funds.

The net income of the employee does not include the following types of income: 1. Insurance compensations obtained as a result of insurance contracts; 2. Compensations received as a remuneration for health injuries, including cases of disability incidents; 3. Student allowances for high school, undergraduate and postgraduate students, scholarships from charity organizations as well as one-time grants payed to young professionals offered jobs in rural areas according to the staff distribution; 4. Alimonies and child maintenance allowances; 5. Leave allowances; 6. Special compensations for the less privileged and socially vulnerable social groups; 7. Wealth received as a gift or through inheritance; 8. Allowances received from charity organisations and others. According to the RM legislation, the calculation of the income tax retained at the source and transferred to the budget is done according to the personal record book. Part 3. Income Tax Deductions from Payments Other than Salaries and Wages 1) Dividend taxation. Residents of the RM pay dividents from the net profits remaining after income taxation and they do not retain any income taxes on the dividends at the source of payment. However, in the cases where the economic subject pays dividents to its shareholders residents of the RM from profits before taxes, he/she must retain from the dividend amount an income tax of 15% Tax retention on percentage interest rates and royalties. Each payer of percentage interest rates and royalties must retain as income tax an amount equal to 15% of the percentage interest rates and royalties. Tax retention from other payments. Each person (resident) involved in enterpreneurial activity, or institution, organization, public authority or public institution of the RM, which pays for services, retains as part of the tax 5% from the amount corresponding to the sum payable. Services include: rent, advertising services, audit, management, marketing and consulting, security of individuals, property and services related to the installation, exploitation and repairs of computers. Part 4. Individual Income Tax Self-assessments Income taxes are transferred to the budget according to the place of residence of the economic subject, who made the tax retentions. In all the cases, the taxes retained at the source of payment must be transferred to the budget not later than on the 10th of the month following the month when the retention was made. The economic subject, who made the tax retention, is obligated to present to the territorial taxation inspectorate The Report

2) 3)

on the Income Tax Retained from Salaries and Wages and Payed to the Budget for the Taxation Period within 10 days after the end of the month when the retention was made or within 10 days after the termination of activity. The following categories must present an individual income tax self-assessment each year before March 31st: 1. Natural personsresidents with the obligation to pay taxes; 2. Natural personsresidents receiving income from sources other than salaries and wages exceeding the personal exemption of 8100 lei per year; 3. Those who received a salary or wage above 25200 lei per year, with the exception of physical persons who received the income in the form of salary in one single workplace; 4. Those who received income either in the form of salary or in any other form and from any source, exceeding 25200 per year.