The land where skilled IT workers don't pay tax. Yes, it really exists

Summary:Some countries in Eastern Europe have opted for an innovative way to hang onto their most talented IT staffers.

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Cluj Napoca, one of Romania's IT centres. Image: Shutterstock

With fierce competition to attract investors as well as hang on to local talent, some countries are resorting not just to offering incentives to corporations to operate there, but also to IT workers themselves.

It's common practice for countries in Central and Eastern Europe to encourage multinational tech companies to set up shop, particularly in underdeveloped areas, using incentives and subsidies. However, some countries are taking it a little further than that — especially Romania, where IT workers have been exempt from income tax since 2001.

Normally, Romanian workers have to pay a 16 percent flat tax on their income. While the rate is low compared to the rest of Europe, Romania's economy suffered under one of the most brutal communist regimes in post-war Europe and the country remains one of the continent's most deprived today. It is now the second-poorest member of the European Union, and its average monthly gross salary hovers around the €500 mark, according to accountancy firm KPMG.

Things are different in the IT sector though, with wages able to reach €2,000 or even as high as €4,000 per month, according to a recent Bloomberg report. That puts tech workers' wages in Romania higher than in  its main rival, Poland , though still lower than nearby Czech Republic and Russia.

After Poland, Romania has often been referred to as the most promising location in the region for tech. According to Ramona Jurubita, deputy head of taxation services at KPMG in the Romanian capital Bucharest, the IT sector employs around 90,000 people in the country. Analyst firm Gartner puts the number of certified IT specialists in Romania at 64,000.

"Indeed, since 2001 a string of Romanian tax laws have stipulated that a tax exemption — the standard rate of 16 percent is reduced to nil, and the [workers'] net salary is in effect 19 percent larger — applies to wages earned by employees engaged in 'software development activities'," Jurubita told ZDNet.

However, when Romania's regulators set out the conditions for applying the exemption, they left the scope and definition of qualifying activities as reasonably broad. "Thus, they extend well beyond the literal meaning of 'software development' to include information and technology (telecoms, for example) support and consultancy, ICT project management or database management."

The main checks and balances on using the exemption come in the form of workers' education

"It should be said that the scope of where the tax relief can be applied has been somewhat limited by regulations involving employees that hold higher education degrees in certain areas of specialisation, which might explain why, according to the same industry sources, in 2010, out of the 90,000 employees in the Romanian ICT sector, a limited number benefited from the exemption," Jurubita said — thought to be in the region of 16,000 people.

Other countries that found themselves in similar positions to Romania during the first part of the 2000s have also put in place such tax breaks.

"Moldova, for example, introduced a similar tax exemption in 2005. Salaries exceeding twice the average monthly wage earned by individuals employed by a company involved in software development are exempt from income tax," Jurubita said.

"We also know of Belarus, which chose instead to encourage the sector by granting lump-sum deductions [that is, tax breaks] of 20 percent for business and professional income earned by taxpayers and derived from the creation of databases and computer software."

Moldova has reported positive results according to Jurubita, and it seems to have worked for Romania too. According to Curtis Robinson, a Prague-based analyst at IDC, Romanian IT had its best period from 2006 to early 2008.

"Costs had risen rapidly in more Western oriented countries in Central and Eastern Europe, like Poland, the Czech Republic, Slovakia and Hungary. So the frontier for opening service centres moved eastwards as it always does."  The accession to the European Union in 2007 contributed as well, as it gave companies legal protocol protection. 

Also, Robinson cites Romania's unique position because Romanian is linguistically close to the world's Latin languages.  "They can serve Spanish and Italian much better than other places. And more students in Romania learn French than in any other country in the region, making it a very attractive place for French companies."

In that process, incentives play a large part, helping develop smaller regions such as Cluj Napoca to get investment. According to Bloomberg, multinationals have received €77m in government aid during the past two years alone. The payoff for the government is the creation of jobs there, something all countries in the region with their relatively high unemployment figures find well worth the initial costs.

"It is something all countries in Central and Eastern Europe have to do, as multinationals have a free choice of where to base themselves," Robinson said of the somewhat weird situation where tech companies with billions in the bank can count on millions in subsidies from the governments of poor countries.

"It means thousands of more jobs and access to great experience. But with that, it also means access to international movement," Robinson points out, meaning that employees will also find it easier to leave the country and work elsewhere.

And that’s where the tax exemption also comes in, as it also damps down the effect that emigration can have on the number of higher-educated IT personnel in the country. While, since the early 1990s, the population of Romania declined from 24 million to less than 20 million, the country still ranks as having the highest number of IT workers per capita in Europe.

But the recession that arrived in 2008 has hit Romania hard, and almost meant an end to the tax break in 2010. "Romania received billions in bailouts," Robinson said. "So it is a valid question whether such programmes are sustainable in such economic conditions."

However, KPMG's Jurubita is much more upbeat about the system. "Although it has been challenged a few times, and came close to be repealed in 2010, at the height of the financial crisis, the exemption proved sustainable and currently it appears there are no serious pressures to remove it," she said.

"On the contrary, the scope of the exemption was extended, as in 2013 the government added new types of specialisations that could benefit from it."

Repealing the incentive would also be risky. As one developer told Bloomberg: "If that incentive were eliminated, my company would definitely move to Moldova or Albania."

Read more from Central and Eastern Europe

Topics: Government, EU, IT Employment

About

Michiel van Blommestein is a Dutch journalist who has been living in Poland since 2010. He worked as a technology journalist in the Netherlands before moving to Poland to work as a regular correspondent for various news outlets. He still loves the bits and bytes though.

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