Taxing the digital economy – rethinking Romania’s prospects

Abstract

Abstract The digital revolution is fundamentally changing business strategies, structures and evolution, consumer behaviour and regulatory approaches. More than ever, the current pandemic has intensified the role of the ICT sector for economic and social survival and resilience and profiled it as a “winner” when compared to other sectors and industries. The paper addresses how the digital economy can contribute more in Romania from taxation, building on arguments in the literature in favour of considering the tax system composition as important as the absolute level of taxation. We discuss how the European Commission’s proposal of a digital services tax could be applied to Romania and what the impact would be on the ICT sector, which already benefited from certain tax advantages in the last 10 years. Within an exploratory and descriptive case study, we show the very good performance of the Romanian ICT sector relative to the overall economy in the last decade, in terms of turnover evolution and profitability, although its share in GDP remains relatively low. Still, average salaries in the industry are double than those of the overall economy, which may be an indication that its value added is higher. We conclude that it is unlikely for the Romanian ICT sector to be able to bear in full the EU proposed digital services tax, but a more bearable scenario is one with a 0.5% tax or 1% tax. Nevertheless, such a proposal should be accompanied by a comprehensive ICT strategy aimed at addressing the labour force competition and investing on the digitalization of the overall economy.