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An Observation on the Effective Tax Rate for Corporate Income in Romania

Article  in  Economic computation and economic cybernetics studies and research / Academy of Economic Studies · March 2011

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Senior Lecturer Lucian łÂłU, PhD
lucian.tatu@fin.ase.ro
Professor Victor DRAGOTĂ, PhD
victor.dragota@fin.ase.ro
Lecturer Nicoleta VINTILĂ, PhD
ncltvntl@yahoo.com
The Bucharest Academy of Economic Studies

AN OBSERVATION ON THE EFFECTIVE TAX RATE FOR

CORPORATE INCOME IN ROMANIA

Abstract: In the global economy, taxation is an important factor in the

decision making process, especially for investment projects implementation in one
state or another. Therefore, the level of corporate tax, providing tax relief,
tightening the tax system may be elements that lead to fiscal competition between
states to attract investments. Therefore, not the statutory tax rate, but the effective
tax rate on profit is relevant in determining the tax benefits for a country. This
paper aims to analyze the relationship between effective tax rate and statutory rate,
based on the results recorded by the companies listed on Bucharest Stock
Exchange during the period 1997-2009. It demonstrates that the unique statutory
tax rate is a theoretical concept, and the effective rate differs from this level.
Basically, the key element in calculating the corporate income tax is given by the
deductibles.
Keywords: corporate income tax, unique tax rate, emerging economies,
Romania

JEL Classification: H22, H32

1. Introduction
The world economy became increasingly integrated and institutional
barriers in the way of foreign direct investment have been reduced or even
eliminated. However, there are still distortions in the optimal allocation of capital.
Differences between countries in terms of corporate taxation remain a key factor of
disequilibrium, reducing overall economic efficiency. There are two manners to
reduce these imbalances. The first one relates to coordination of government
policies, but no significant progress is done (see, for example, the European Union,
where the steps taken towards the harmonization of corporate taxation are quite a
few). A second solution is related to the market, through a fiscal competition
between countries (see, also, Talpoş et al., 2009a; Talpoş et al., 2009b).
Liberalization of capital movements is associated with reduced rates of
taxation on capital income. Tax rates, especially the effective ones, seem to get an
Lucian łâŃu, Victor Dragota, Nicoleta Vintila
_____________________________________________________________
increasingly important role in determining the level and destination of foreign
direct investments.
At the microeconomic level, estimation of anticipated indicators at
company level takes also into account the corporate income tax. This level is
decisively influenced by two factors: amount of profit and tax rate. From this
perspective, introducing a flat rate of 16% and maintaining it on a relatively long
period in Romania can be a useful experience from the perspective of international
comparative finance.
Many debates have been linked to ethics regarding the positive or negative
role of introducing a flat corporate income tax. However, despite of a fixed
proportional tax rate on profit, the existence of a rule that distinguish the pre-tax
profit by accounting profit makes that the ratio between corporate income tax and
gross accounting profit to be, in many cases, substantially different from the
statutory tax rate1. Thus, from one company to another, the effective tax rate of
accounting profit2 is different.
This study highlights the actual situation on the corporate tax rate in
companies listed on the Bucharest Stock Exchange in the period 1997-2009. The
existence of a discrepancy between the effective tax rate of accounting profit and
the statutory tax rate, and the elements that lead to this discrepancy, may influence
the decision-making by investors.
The rest of the study is structured as follows. Section 2 provides a
summary of the main studies in this area. Section 3 presents some theoretical
aspects of the statutory tax rate and effective tax rate in Romania. Section 4
presents the data. Sections 5 and 6 present numerical results and conclusions of the
study.

2. Related Studies

There is no doubt that tax policy has an influence on the relevant indicators
in the analysis of results achieved or expected for a company. For example, the
influence of changes on corporate income tax (their implementation schedule, the
tax rate, tax benefits granted) on stimulating investment is highlighted by
numerous authors (see Summers, 1981, Mauer and Ott, 1995, Hassett and Metcalf,
1999, Graham, 2003 and others). Some authors argued that when there is a lack of
neutrality of the tax system, in certain historical periods, fiscal policies have been
effective only insofar as they have positively influenced the use of production
capacity, while the impact on direct investment was negligible (for instance,
Chirinko, 1987).
A feature of the tax policy of a state is the asymmetric tax rules (for
example, if a company make taxable profit, it has to pay taxes immediately, while
the losses are carried over, usually for a limited period, which means that reducing

1
The statutory rate represents that share of corporate income tax applicable to taxable profit under the
laws in force in a country.
2
The effective tax rate is the actual tax burden faced by a company, in terms of corporate income tax,
determined as a ratio between corporate income tax liability and gross accounting profit.
An Observation on the Effective Tax Rate for Corporate Income in Romania
_________________________________________________________________

the tax due is delayed). Devereux, Keen and Schiantarelli (1994) show that the tax
asymmetry does not significantly influence the investment behaviour of
companies. Governments should periodically adjust tax rates to counter the
negative effect of other variables on investment, but such adjustments occur rarely.
In addition, companies have to hand tools that lead to counter tax asymmetry. An
example is the use of leasing, which is a solution for companies that have
exhausted the source of tax incentives for investment, so they rent, instead of
purchasing fixed assets.
Unlike the prices for production factors, fiscal policy parameters tend to
maintain the same level for several years, after which changes its value
immediately following a legislative change. Because this process takes place in
leaps, companies can only implement a project to benefit from a tax incentive
(overinvestment) or may defer its current investments to expect the introduction of
favourable legislation (underinvestment) (see Vintilă, 2009).
Since the treatment of income and expenditures is different in terms of tax
and accounting, we are interested to determine the effective tax rates, which affect
profitability and cash flows of a company. The owners of a company appreciate the
managers that reduce the effective tax rate, considering that they better manage
costs and have a good strategy in place activities in geographic areas with
favourable tax regime. The recorded level of effective tax rate is a variable often
used in the compensation of managers, especially for those with responsibilities in
the field of taxation (Bauman and Schadewald, 2001).
Estimating the actual level of tax rate and its development is a concern for
many researchers and practitioners in finance, but in different contexts. For
example, the actual tax increase leads to an increase in the informal economy and
tax evasion (Djankov et al., 2009). Also, there is an inverse relationship between
corruption and tax revenues (Braşoveanu and Obreja Braşoveanu, 2009). They
highlight the fact that high effective tax rates lead to lower investment in
production, but have less influence on investment projects in services.
Two different concepts on effective tax rate have been defined in literature.
Average effective rate is useful to measure the distribution of tax incentives
between companies or industries, while the marginal effective rate is suitable for
analysis of tax incentives for new investments. In this study we determined and
analyzed the average effective tax rate.
To quantify the average effective rate, at the numerator we considered the
paid taxes, wherever they are paid - both in the country and abroad. In the
denominator, there may be several alternatives: (i) pre-tax profit (not
recommended if the objective is to capture and study the effect of tax incentives on
effective rates; average tax rate calculated by this formula has relevance only if the
tax system stipulates progressive taxation); (ii) accounting profit before tax, which
is, in most cases, different of taxable profit (this way of determining the effective
rate is used in our study due to the single tax rate on profit (with some minor
exceptions only applied to certain activities over the period considered); (iii)
operating cash flow (use of this measure captures the effect on actual differences in
Lucian łâŃu, Victor Dragota, Nicoleta Vintila
_____________________________________________________________
rates resulting from the choice of accounting methods that relate to company size,
meaning that larger firms tend to use accounting methods that would lead to lower
profits) (Gupta and Newberry, 1997, Richardson and Lanis, 2007).
Empirically observed differences in effective tax rates between companies
and over time have been used to justify inequality of tax systems and the need to
reform. A lot of factors influence the underlying effective tax rate variability, long
discussed and empirically tested in the literature (e.g., Stickney and McGee, 1982,
Zimmerman 1983, Shevlin and Porter, 1992, Gupta and Newberry, 1997, Derashid
and Zhang, 2003, Richardson and Lanis, 2007). We can mention here: firm size,
capital intensity (the share of fixed assets to total assets), financial leverage (see
DeAngelo and Masulis, 1980), the proportion of operations carried out abroad (see,
for example, Bauman and Schadewald, 2001), the industry, the company’s
profitability (for an aggregate approach, see Feldstein, Dicks-Mireaux and Poterba,
1983), other factors (change in research expenditures, ownership structure,
managers’ reward policy, organizational culture, the ratio of market value and book
value of the company, state-owned shares in the equity of the company).
These factors lead to a significant variability on effective tax rates
worldwide. For example, we would expect to find a convergence for the countries
in the European Union, if not for the statutory rates, at least at the level of effective
tax rates. Buijink, Janssen and Schols (2002) note significant differences between
the statutory rates of member countries (the study is conducted for EU-15, for the
period 1990-1996). A real picture of the tax burden generated by the tax on profit
can only be achieved when taking into account various tax incentives offered by a
state, which can be measured only through the effective rates. The conclusion is
that tax incentives have been used in a manner substantially different between
Member States. However, the effective rates differ among countries not less than
the statutory rates, which means that the tax incentives used did not equalized
effective tax burden of companies in EU Member States more than were able to
carry out statutory rates.
Following the tax competition between OECD Member States, statutory
tax rates have declined significantly in the 80s and 90s. But statutory corporate
income tax rate is not the most important factor in choosing the country where to
invest, due to the avoidance of double taxation methods practiced at the
international level (Simmons, 2003).
Devereux, Lockwood and Redoano (2008) build a model that is based on
the assumption that multinational companies invest in capital assets as a response
to effective marginal rates, but also choose the location of activities (profit centre)
in response to changes in statutory rates. Using data for 21 countries, they
concluded that these companies compete in both areas: the effective rates to attract
capital and statutory allowances to attract profit (income mobility can be achieved
by the subsidiaries in countries with higher tax rates to other entities within the
group, in countries with lower tax rates, through loans between subsidiaries,
through transfer pricing, etc.).
Concluding, in addition to the statutory rate, effective tax rate is an
important tool in the foundation of economic decisions at the enterprise level.
An Observation on the Effective Tax Rate for Corporate Income in Romania
_________________________________________________________________

3. Theoretical aspects of the statutory and effective tax rate in Romania

From a technical standpoint, the statutory tax rate is applied to taxable
profit. For the purpose of our study, we assume that the company recorded a profit.
If the loss is recorded, the discussion on the applicability of the statutory rate loses
its usefulness. There are differences between effective tax rate and statutory tax
rate, between accounting profit and the taxable profit, due to the methodology of
calculation of corporate income tax. Explanations for some of these indicators can
be found in Table 1.
Table 1: Indicators used in the text
Indicator Explanation
τs statutory tax rate
PA gross accounting profit. Relationship: Gross income – Total Expenses (less income tax)
TR taxable revenues
DE deductible expenses
ESRE elements similar to revenues and expenses, recognized by fiscal law, but not influencing
yearly gross accounting profit
TPr tax provisions (amounts that, according with the fiscal law, diminish the taxable profit,
but are not taken into account when calculating accounting profit); there are, for example,
accounting expenses recognized in previous years but that are not recognized for tax
purposes, or depreciation calculated for tax purposes
NTR non-taxable revenues
NDE non-deductible expenses (are those expenses made by the company, but are not
recognized for tax purposes in calculating taxable profits)
FL fiscal loss reported from the previous years for recovering
PT taxable profit. Relationship: PT = PA ± ESRE− NTR− T Pr+ NDE− FL
T tax payable for corporate income. Relationship: T = τ s × PT
DIVg gross dividend due to individual shareholders
DIVn net dividend collected by individual shareholders
τd tax rate for gross dividends for individual shareholders
τef effective tax rate. Relationship: τ ef = T / PA
PN net profit. Relationship: PN = PA −T

The tax rate on profit, even if it is a fixed percentage rate, due to the
difference between accounting profit and taxable profit, can result in a higher or
lower level than the regulated one, if we refer to the actual degree of taxation for
accounting profit and not for taxable profit. For example, if for financing the
business we can choose between a loan from a shareholder and a loan from a bank
at the same level of interest rates and under the same conditions, it’s possible that if
the loan from shareholder will not benefit from the deductibility for all interest (tax
code imposes certain conditions to be able to deduct interest on a loan contracted
from an non-specialized person in lending), which would result in a higher taxable
profit and tax than if we resort to borrowing from the bank. Thus, at equal levels of
gross accounting level we have different taxes and thus different degree of
taxation. At the level of public authorities, effective tax rate may be a useful
Lucian łâŃu, Victor Dragota, Nicoleta Vintila
_____________________________________________________________
indicator on which they can make predictions about the fiscal revenues that can be
collected at the state budget.
At the microeconomic level, tax can clearly influence business life.
Beyond the fact that every taxpayer is interested in knowing the level of taxes that
is required to pay, among other things, the difference between gross profit and
taxable income should be taken into account in determining the indicators on
which they will base their decisions. For estimating the capital budgeting
indicators, the amount of corporate income tax has a particularly important role, as
a result of influences that may occur because of the technique for determining the
taxes. For example, considering these implications this may lead to changes in
anticipated performance associated with an investment project.
Agent problems highlighted in numerous studies on the Romanian
companies (see Dragotă, 2006; Dragotă, Dragotă, łâŃu and łâŃu, 2009), can also
lead to reducing the accounting profit, especially by making expenditures that
favours controlling shareholders, managers or employees, which in many cases are
not tax deductible, hence the degree of gross accounting profit tax higher than the
statutory tax rate. Thus, for example, while in Romania the travel expense
allowance is deductible for employees (maximum is 2.5 × travel allowance paid for
public institutions), higher travel allowances may be favourable for some
categories of taxpayers: for example, a company in which shareholders are also
employees may mask the payment of dividends by higher travel allowances. The
argument would be: if that amount would be paid as dividends would be taxed the
first with tax for profit and then tax on dividends, while if that amount would take
the form of travel allowances, it would be taxed (for exceeding the legal limit of
deduction) with corporate income tax, but it would not be taxable amount for the
shareholder-employee. The use of this tax trick leads to a higher level of tax to
gross accounting profit than the statutory tax rate on taxable profit, but on the
greater benefit for shareholders. So, corporate income tax is virtually the same, but
the amount of accounting profit decreases with the additional travel allowance paid
instead of dividends. In Appendix 1 is presented a model that is highlighting the
net amount received by a shareholder who is also an employee in two cases,
determining an optimum from a fiscal point of view somehow similar to Miller
(1977).
4. Database
To highlight the relationship between the effective tax rates recorded and
the statutory tax rate, we built a database of gross profit and owed corporate taxes
by companies listed on BSE during the period 1997-2009. Average effective tax
rate is determined based on these two information (see Table 1), using a method of
calculating it recommended, among others, by Gupta and Newberry (1997) and
Richardson and Lanis (2007).
In order to determine the amount of corporate income tax we use gross
accounting profit and net profit. Thus, the tax on profit was determined by the
relationship: T = PA − PN
The database contains financial information for the period in which
companies were listed on BSE, so for each company the number of observations is
An Observation on the Effective Tax Rate for Corporate Income in Romania
_________________________________________________________________

between 1 and 13. The source of data is www.ktd.ro. Number of companies taken
in the analysis for each of the years 1997 - 2009 is shown in Table 2.
Table 2: Number of considered companies (by year)
Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
No. 28 43 43 43 44 44 46 48 52 55 64 67 65

The information considered is the accounting annual gross profit (PA) and
annual net profit (PN). Based on these indicators, we determined the level of
taxation as a ratio of corporate tax to gross profit. Based on the processed data, the
maximum degree of taxation for the gross corporate income is shown in Table 3.
For comparison, it is also specified the statutory rate for that year.
Table 3: The maximum, mean and median level for ratio of corporate income tax to gross profit
for the analyzed companies
Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
T/PA Max 90.2 124.7 94.7 90.0 208.1 94.6 94.6 80.2 71.7 255 56.16 78.3 73.8
(%) Mean 41.03 41.84 35.00 23.87 24.68 28.52 22.90 22.64 15.21 18.22 17.50 12.32 20.54
Median 37.90 38.65 34.23 19.93 18.01 20.97 20.84 22.43 15.16 14.58 14.82 13.15 17.28
Statutory tax 38.0 38.0 38.0 25.0 25.0 25.0 25.0 25.0 16.0 16.0 16.0 16.0 16.0
rate (%)

From Table 3 we conclude that in terms of the actual degree of taxation for
the gross profit, there is a significant difference between it and the standard rate of
corporate income tax. It has to be mentioned that a part from the analysed
companies paid income tax even they recorded losses (see Table 4) 3.
Table 4: Share of companies paying tax under the circumstances of recording losses, from the
total number of companies
Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
% 3.5 4.6 2.3 0 4.5 4.5 4.3 2 5.7 1.8 1.5 4.4 25.3
Except for one year of the analyzed period (2000), we can observe the
permanence of the phenomenon. High percentage recorded in 2009 occurred due to
financial and economic crisis, when a large number of companies recorded losses,

3
The negative values of the indicator may be based on several scenarios. One of them is the company
has made profits during the taxable year and paid tax, and at the end of the year it registered losses, so
the tax paid may be recovered from the State budget. According to the methodology of calculation of
corporate income tax for the period under review, the profit tax is determined quarterly, using the
aggregate values from the beginning of the year. If, in the first, the first two or first three quarters, the
company obtains taxable profit, it has to pay the tax. If at the end of the year, or the following
quarters of that year, the company record losses (cumulative from the beginning of the year), tax paid
for previous quarters are subsequently recovered or offset the tax will be due in the future or be
compensated with other taxes owed to the State budget. Reasons for delay in recovery / offset other
taxes with paid corporate income tax, although the company has this right, may be different. Thus,
companies can hope to offset their taxes that will occur in the future with what is paid at this time,
thus neglecting economic rationality, by defying the time value of money. Also, companies can avoid
a control by tax authorities required when applying for tax refunds or offset other taxes due. Another
possible scenario may involve recording of accounting losses, while corporate income tax is positive,
due to the fact that there were high non-deductible expenses. In addition, from 2009 the fiscal
legislation stipulates a minimum income tax, even though the company get losses, which led to
mandatory payment of minimum corporate income tax, regardless of their taxable profit.
Lucian łâŃu, Victor Dragota, Nicoleta Vintila
_____________________________________________________________
accompanied by the introduction of the minimum tax on profit, which means that a
company has to pay profit tax, even it has accounting losses.
Mean and median values in Table 3 were determined by removing from the
database those companies for which the ratio T/PA has a negative value. We can
observe the trend of declining the ratio of corporate tax to gross profit for the
period 1997-2008, that can be explained by lower corporate tax rate from period to
period (38% for period 1997-1999, 25% for period 2000-2004 and 16% for the last
analyzed period, 2005-2009). However, 2009 is characterized by an increase in this
indicator, even if the statutory rate was maintained at the same level from the
previous year.
5. Numerical results
First we determine the number of observations that are close to the
standard tax rate. Thus we establish the number of companies that have effective
tax rate which is within the range [standard tax rate - 0.5 pp, standard tax rate + 0.5
pp]. We considered that a small deviation of effective tax rate from the standard
rate is not necessarily the result of a tax strategy at the taxpayer, but may occur as a
result of some tax adjustments to accounting profit. The results for the
neighbourhood analysis of effective tax rate compared with the standard rate are
shown in Table 5.
Table 5: The share of the total sample of companies for which the effective tax rate is close to the standard tax rate (in this
table we have defined the proximity to be given by the range [standard tax rate - 0.5 pp, standard tax rate + 0.5 pp].
Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Share of
companies 7.4 4.88 4.76 6.98 2.38 2.38 2.27 2.13 10.2 1.85 11.01 9.37 0
(%)

The data shows that the number of companies for which the effective
corporate tax rate is close to the standard rate is relatively low, so we conclude that
tax incentives, the possibility of recovering the tax losses recorded in the past,
some significant non-deductible expenses or other factors leading to a difference
between the amount of accounting profit and taxable profit have significant effects.
In fact, some descriptive statistics can offer a clue for the higher level of
volatility for this indicator reported to the standard rate (see Table 6). In order to
estimate the deviation from the standard rate, we use the measure proposed by
Andrei, Stancu and Pele (2002, p. 112).
Table 6: Descriptive statistics for the effective tax rate
Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Statutory 38 38 38 25 25 25 25 25 16 16 16 16 16
tax rate
(%)
Mean 41.03 41.84 35.00 23.87 24.68 28.52 22.90 22.64 15.21 18.22 17.50 12.32 20.54
(%)
Mean 7.97 10.10 -7.89 - 4.52 -1.28 14.08 -8.40 -9.44 -4.93 13.87 9.37 -23 -28.5
deviation
from τs
(%)
Median 37.90 38.65 34.23 19.93 18.01 20.97 20.84 22.43 15.16 14.58 14.82 13.15 17.28
(%)
St.dev 17.32 24.06 23.42 20.67 33.75 22.62 18.90 16.097 13.34 34.94 12.43 13.58 17.31
(%)
St.dev. 17.59 24.07 23.82 20.39 33.35 22.40 18.80 16.098 13.23 34.69 12.49 13.97 17.73
from τs
(%)
An Observation on the Effective Tax Rate for Corporate Income in Romania
_________________________________________________________________

Regarding the classification of observations in the category below and

above the standard tax rate, our results are shown in Table 7.
Table 7. Distribution of companies for which the level of taxation for gross accounting profit
falls below the standard tax rate, at the standard rate of taxation and above the standard tax
rate
Year
Observations under the standard Observations over the
tax rate Observations standard tax rate
at the level of
standard tax
number % rate (%) number %
1997 14 51.85 0 13 48.15
1998 19 46.34 0 22 53.66
1999 28 66.67 0 14 33.33
2000 31 72.09 0 12 27.91
2001 30 71.43 0 12 28.57
2002 31 73.81 0 11 26.19
2003 26 59.09 0 18 40.91
2004 31 65.96 0 16 34.04
2005 30 61.22 0 19 38.78
2006 36 66.67 0 18 33.33
2007 41 65.08 0 22 34.92
2008 43 67.19 0 21 32.81
2009 21 42 0 29 58

From the observations, in any year, none of the analyzed companies

recorded a profit tax rate equal to the statutory tax rate. Excepting years 1998 and
2009, it appears that most companies have the highest percentage of effective tax
rate below the standard tax rate. Since 1999 the share of companies in this situation
is not lower than 60%, excepting 2003, when there was a value of 59.09%. This
observation is illustrated in a suggestive way by Chart 1.
Lucian łâŃu, Victor Dragota, Nicoleta Vintila
_____________________________________________________________
Chart 1: Distribution of companies according to the position of
effective tax rate to the statutory rate

100%
Observations under standard
80% rate (%)
Observations at the level of
60% standard rate (%)
Observations below standard
40% rate (%)

20%

0%
1997 1999 2001 2003 2005 2007 2009

Note also that there is not any situation, in any year of the period, that the
effective tax rate to coincide with the statutory rate. Therefore, the statutory tax
rate used in estimates or forecasts (for example in capital budgeting), is a purely
theoretical hypothesis, detached from reality.
At first glance, one might say that there is a high number of companies
benefiting from tax optimizations allowed by the law, leading to record a taxable
profit lower than accounting profit. However, as this category also contains
companies that have not paid income tax (coming especially from cancellation of
taxable profit with losses recovered from previous years), we also highlight the
companies that have no corporate income tax payable (Table 8).

Table 8. Percentage distribution of companies that have not profit tax payable or the degree of
taxation of gross accounting profit falls below the standard tax rate (but greater than 0), at the
level of standard rate of taxation and above the standard tax rate
Observations for not Observations under the Observations at the
Observations over the
Year profit tax payable standard tax rate (%), level of standard tax
standard tax rate (%)
(%) but greater than 0 rate (%)
1997 0 51.85 0 48.15
1998 4.88 41.46 0 53.66
1999 11.90 54.76 0 33.33
2000 4.65 67.44 0 27.91
2001 9.52 61.90 0 28.57
2002 11.90 61.90 0 26.19
2003 13.64 45.45 0 40.91
2004 17.02 48.94 0 34.04
2005 16.33 44.90 0 38.78
2006 22.22 44.44 0 33.33
2007 25.40 39.68 0 34.92
2008 31.25 35.94 0 32.81
2009 0 42 0 58
An Observation on the Effective Tax Rate for Corporate Income in Romania
_________________________________________________________________

The data in Table 8 shows that, with the exception of years 1998 and 2009,
the number of companies that have registered a tax level below the standard rate
was greater than the number of companies that have registered a higher degree of
tax than the standard rate. However, unlike data in Table 7, these data are much
closer in value, a fact illustrated in Chart 2.

Chart 2: Distribution of companies that have not payable tax for

profit, and those that due taxes, according to the position of the
effective tax rate to the statutory rate

100% Observations over the standard

tax rate (%)
80%
Observations at the level of
60% standard tax rate (%)
Observations under the standard
40%
tax rate (%), but greater than 0
20% Observations for not profit tax
payable (%)
0%
1997 1999 2001 2003 2005 2007 2009

A higher value (more than 60%) of companies for which the level of
effective tax rate is positive, but less than τs, is recorded in 2000-2002, years in
which some companies have benefited from reduced tax mainly as a result of
export activity. We must not forget that for those companies for which the level of
gross profit tax is in the range (0, τs), a lower level of taxation can also be obtained
due to the fact that some of them have been diminished the profit as a result of
deferral of losses from previous years, losses that were lower than the level of
taxable profit, or that they have benefited from other tax facilities, without direct
influence on accounting profit, such as, for example, a 50% reduction in corporate
income tax reinvested in tangible and non tangible assets.
If we consider Tables 7 and 8, we can state that, if we take into account the
previous activity for the companies, the share of companies benefiting from tax
provisions to minimize corporate tax rate for accounting profit is significantly
higher than share of companies that have the level of taxation lower than the
standard tax rate. As we eliminate from the analysis the influence of losses
recovered from previous years (assuming that if companies do not owe corporate
income tax while obtaining an accounting profit, recording a zero duty is a result of
the recovery of losses from previous years, under the condition that these losses are
greater than taxable profit of the current year), the gap between the percentage of
firms that are helped by tax provisions and the percentage of companies that are
negatively affected by tax provisions become smaller.
In Table 9 we perform an analysis based on variance. Intervals are
determined from the average effective tax rate (µ) and standard deviation from the
Lucian łâŃu, Victor Dragota, Nicoleta Vintila
_____________________________________________________________
mean (σ). Intervals are set as follows: (µ - λ × σ, µ + λ × σ) with λ equal to 0.5, 1, 2
and 3, respectively.

Table 9: Analysis regarding the dispersion of effective tax rate values (number of observations
in the interval as a percentage of total number of observations)
Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Mean τef 14.81 24.39 28.57 20.93 23.80 7.14 11.62 21.27 24.48 33.33 9.52 4.68 10
+/- 0.5 ×
standard
deviation
Mean τef 44.44 43.90 42.85 39.53 47.61 16.66 25.58 36.17 44.89 53.70 22.22 10.93 34
+/-
standard
deviation
Mean τef 70.37 70.73 61.90 65.11 73.80 42.85 51.16 59.57 59.18 70.37 39.68 21.87 42
+/- 2 ×
standard
deviation
Mean τef 81.48 80.48 73.80 79.06 92.85 66.66 67.44 68.08 63,26 94.44 47.61 35.93 54
+/- 3 ×
standard
deviation

For each of these intervals we determined, for each individual year, the
proportion of observations in that year in total number of observations. We can see
a great variability of results from one year to another. Comparing with normal
distribution, we can also observe that the population consisting of listed companies
not circumscribe this distribution. Thus, for any normal distribution, 38.3% of the
observations fall in the interval (µ – 0.5×σ, µ + 0.5×σ), 68.3% within a standard
deviation from the mean, 95.5% within two standard deviations from the mean, and
99.7% within three standard deviations from the mean. It is easy to state that in
none of the analysed periods, this is not happen.

6. Conclusions
We may notice a discrepancy between the statutory corporate tax rate and
the effective tax rate for the companies listed on BSE. Thus, even if most of the
companies recorded an effective corporate income tax rate lower than the standard
tax rate (the percentages vary from year to year, between 42% and 73% of total
observations in the analyzed period), however, the number of companies that have
a higher effective rate than the statutory rate is significant.
At first sight, it could be considered that tax incentives for companies that
lead to obtaining a lower effective tax rates than the standard rate may be based on
some tax provisions meant to encourage economic activity. Thus, we can justify
the low levels of effective tax rates by reduced tax levels in certain periods
(especially, between 1999 and 2003), by providing additional facilities such as
depreciation deductions, partial or total tax relief for invested profits. However, it
should be noted that, for many companies, the lower effective corporate income tax
rate than the statutory rate is justified mainly by losses that can be recovered in the
next five years (seven years for losses starting with year 2009), especially given
that many companies in the sample had alternative periods with profit or with
losses. Thus, comparative taxation facility with other countries with low tax rates is
especially consisting of a reduction in standard rate tax (from 38% in 1997 to 25%
An Observation on the Effective Tax Rate for Corporate Income in Romania
_________________________________________________________________

and then to 16% from 2004) rather than tax incentives granted to reduce the tax
base.
Significant number of companies that had effective tax rate higher than
standard rate shows that, in many cases, were objectively or subjectively recorded
expenditures that are not allowed for deduction from the tax on profit. Thus, where
the effective tax rate of profit is greater than the statutory rate, this phenomenon
may illustrate an ease in making expenditures at the company level.
When this situation appears for several times, it can be a clear sign for
shareholders that the company recorded an inappropriate fiscal management, with
negative consequences for company performance. Often, these costs are not
recognized as deductible for tax purposes, and they are made for the benefit of
majority shareholders (or controlling shareholders) or for employees with special
status (for example, managers). This fact may highlight a lack in the minority
shareholders protection (see Dragotă, 2006; Dragotă, Dragotă, łâŃu and łâŃu,
2009).

Acknowledgements
This paper is part of the research project “Directions of improving the
system of indicators used in direct investment projects valuation”, programme
CNCSIS- IDEI, code 1820/2008, financed by the Romanian National University
Research Council (NURC). The authors wish to thank to the participants of
INVESTEVAL Workshop (2010), and especially, to Gheorghe Ruxanda and
Daniel Traian Pele.

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Appendix 1
In this section we study two distinct situations for transferring an amount
from the company, having the status of non-deductible expense, to the individual,
where it is considered non-taxable income: (i) the company has only taxable
revenues (TR) and deductible expenses (DE); (ii) in addition to income and
expenses below, the company recorded a non-deductible expense (NDE), that is
non-taxable income for the shareholder-employee, who receive it.
In both cases we work on the assumption that the entire net income is fully
distributed as dividends (DIV), taxed at the individual shareholder tax on
dividends.

Situation (i):
PA = PT = TR − DE (1)
PN = PA − T = PA −τ s × PA = (1 −τ s ) × PA (2)
DIVg = PN = (1 − τ s ) × PA (3)
DIVn = (1 − τ d ) × DIVg = (1 − τ s ) × (1 − τ d ) × PA (4)
Since in this case accounting gross profit and taxable profit coincide, the
effective tax rate has the same value as the statutory rate:
T τ s × PA
τ ef = = =τs (5)
PA PA
Substituting the rates of taxation in relation (4) with specific values from
the Romanian Fiscal Code, τ s = τ d = 0.16 , shows that the net amount received by
the shareholder-employee is 70% of gross profit:
 Lucian łâŃu, Victor Dragota, Nicoleta Vintila
_____________________________________________________________
DIVn = 0.84 × 0.84 × PA = 0.7 × PA (6)

Situation (ii):
PA = TR − DE − NDE (7)
PT = TR − DE (8)
PN = PA − T = PT − NDE −τ s × PT = (1 −τ s ) × PT − NDE (9)
DIVg = PN = (1 − τ s ) × PT − NDE (10)
DIVn = (1 − τ d ) × DIVg = (1 − τ d ) × (1 − τ s ) × PT − (1 − τ d ) × NDE (11)
From (7) and (8) we can say that: PT > PA and multiplying both terms by
(1–τs)×(1–τd), result that: (1–τs)×(1–τd)×PT > (1–τs)×(1–τd)×PA, which means that
we can write:
(1 − τ s ) × (1 − τ d ) × PT + (1 − τ d ) × NDE > (1 − τ s ) × (1 − τ d ) × PA (12)
The effective tax rate in this situation differs from the statutory rate:
T τ ×P  NDE 
τ ef = = s T = τ s × 1 +  (13)
PA PT − NDE  PT − NDE 
From (13) we can draw two separate cases. In the first case, if NDE < PT ,
then:
 NDE 
τ ef = τ s × 1 +  >τs (14)
 PT − NDE 
In the second case, if NDE > PT , then:
 NDE 
τ ef = τ s × 1 +  <τs (15)
 PT − NDE 
Starting from (11), the net amount received by the shareholder-employee is
equal to:
DIVn + NDE = (1 − τ d ) × (1 − τ ) × PT − (1 − τ d ) × NDE + NDE =
= (1 − τ d ) × (1 − τ ) × PT + τ d × NDE (16)
Substituting the rates of taxation in relation (16) with their values under the
fiscal law in Romania, τ s = τ d = 0.16 shows that the net amount received by the
shareholder-employee is equal to:
DIVn + NDE = 0.84 × 0.84 × PT + 0.16 × NDE = 0.7 × PT + 0.16 × NDE (17)
From (6) and (17), while considering the relations (7) and (8) that the net
amount received by the shareholder-employee in the case (ii) is higher than in case
(i). From (5) and (13), taking into account the customizations of (14) and (15), we
can observe the differences that arise between the actual rates in different situations
(making or not deductible expenses for tax purposes) and to the statutory corporate
tax rate, for both the general and the particular case of Romania.

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