Bill to amend and supplement the Law on Corporate Income Taxation

MR IVAILLO CALFIN
DEPUTY MINISTER-PRESIDENT
ON DEMOGRAPHIC AND SOCIAL POLICY,
MINISTER OF LABOR AND SOCIAL POLICY I
CHAIRMAN OF NSTS

SUBJECT: Bill to amend and supplement the Law on Corporate Income Taxation

       

DEAR MR CALFIN,

On behalf of the Confederation of Employers and Industrialists in Bulgaria (KRIB), we would like to express our comments on the Law on Amendments and Supplements to the Law on Corporate Income Taxation (the Law on Corporate Income Taxation), which is essentially the proposal of the Ministry of Finance for changes in the tax legislation for 2016

KRIB in principle supports the proposed changes in the tax legislation for 2016. We believe that they will contribute to clarifying the economy and are in the spirit of the goals set in the Unified National Strategy to increase revenue collection, deal with the shadow economy and reduce the costs of compliance with legislation 2015-2017 We express the following comments on the specific proposals for changes.

I. According to the ZKPO

Regarding the amendments related to the tax relief, representing state aid for regional development (Article 189 ZKPO).

In principle, we support the proposed changes with the following comments:

The proposed texts create certain ambiguities and do not provide a clear answer to some identified and accumulated problems in the application of this tax relief during the previous program period 2007 - 2013. For example:

It is not clear whether the taxable person (DTP) will have the right to defer corporate tax also in the tax years following the year of receipt of the order while implementing an initial investment project. I.e. there should be a clear link between tax deferral opportunities and initial investments, which is not visible in the project.

If there is such a right of subrogation (according to the previous bill) from the project, it is not clear how the relevant calculations will be made for them in the context of Art. 189, item 2, letter "d" and item 73 DR ZKPO.

The mentioned questions are complicated by the fact that both the initial investment and the amount of corporate tax in the years have an estimated nature, and their actual amount is quite possible to differ from the estimated one.

It is not clear whether the present value will be determined on an annual or monthly basis (i.e. whether annual or monthly discounting is performed), and if monthly discounting is allowed, what methodology is applied (i.e. what is the applicable reference interest rate ).

We recommend refining the proposed texts in order to clarify the ambiguities.

Regarding the changes in the definition of dividend - item 4 DR ZKPO.

We believe that the proposed amendment may lead to controversial interpretations in tax practice. Our motives are as follows:

In the amended text, the exception regarding hidden distribution appears unnecessary. First, the hidden distribution is equated to a dividend for the purposes of the CPA (letter "c" of the definition). Second - in the proposed amendment, the hidden distribution cannot be "not a dividend", insofar as it is not recognized for tax purposes as an expense of the distributing entity (Article 26, item 11 ZKPO).

The question arises whether expenses recognized for accounting purposes, but not recognized for tax purposes, are a dividend for the purposes of ZKPO. This is because they are not covered by the 'not a dividend' exception. A dispute will arise as to which part of the definition is special - what is a dividend or what is not a dividend.

An expense that is not documented (not recognized for tax purposes on the basis of Art. 26, Item 2 of the Civil Code) and is not a hidden distribution of profit. Since it does not fall within the scope of "it is not a dividend", does it mean that it is a dividend and if it is charged to the benefit of the EU/EEA CCP, it will not be subject to withholding tax (ground Art. 194, para. 3, item 3 ZKPO) or if it is in favor of the MUL, the latter has the right not to tax this income (ground Art. 27, para. 1, item 1 ZKPO).

In order to avoid the potential problems set out above and to achieve the objectives of Council Directive 2014/86/EU of 8 July 2014 amending Directive 2011/96/EU on the common system of taxation of parent and subsidiary companies companies from different member states (OJ, L 219/40 of July 25, 2014) /which are limited to taxation at the parent companies/, we recommend specifying the proposed changes as instead of changing the definition of dividend in item 4 DR ZKPO , to create a new item 3 in art. 27, para. 2 ZKPO.

We are available to offer a working text for discussion.

Regarding the changes in the definition of jurisdictions with a preferential tax regime - item 64 DR ZKPO.

We support the proposed change to the extent that the list of states/territories is approved by order of the Minister for Finance and not in the Act itself.

We are concerned that the proposal to make the list non-exhaustive (item 3 of the DR amendment) will lead to unpredictability for businesses to assess which countries/territories fall within the definition. This is so because the information on not all of the conditions laid down in item 1 is public or promulgated - we specifically mean the condition under letter "b". So, for example, if there is a country/territory with which the Republic of Bulgaria has entered into force a SIDDO/agreement and its corporate tax is below 4%, then the DZL will not know whether this is a jurisdiction with a preferential tax regime or not, as it has no way of knowing ( lack of public information) whether this country/territory exchanges information with the Republic of Bulgaria or refuses/is unable to do so.

Given the requirements of the Constitution of the Republic of Bulgaria for the legality of taxes, we suggest that the list approved by the Minister of Finance be comprehensive and that only the countries/territories specified in it be considered jurisdictions with a preferential tax regime.

II. VAT

 Regarding the proposed introduction of a tax in the amount of 0 to 2 percent, which is paid into the municipal budget - Art. 42, para. 4 VAT

We agree with the publicly expressed opinion that the proposed change should be dropped.

Regarding the introduction of advance taxation of the so-called "other income" under Art. 35 – new Art. 44a of the VAT Act

We do not support the proposed change. We believe that the reasons justifying the proposal are unfounded. The legitimate question arises as to what happened in 2014 differently from previous years to give rise to these "significant differences" referred to in the reasons for the proposed change.

As far as these are accidental incomes (those of an accidental and incidental nature), we find it disproportionate to introduce advance taxation and to increase the administrative costs and burden of the enterprises/self-insured persons for their administration.

III. VAT

Regarding the proposed repeal of Art. 118, para. 7 VAT

We recommend that the proposed change be specified as not covering persons who have the status of "registered recipient" in the sense of Section IIIb of the ZADS.

The persons - registered recipients use automated reporting systems that allow real-time control of the excise goods received and to which the customs authorities have online access.

Also, the persons - registered receivers use means of measurement and control, meeting the requirements of the ZADS, the Law on Measurements and the normative acts on their implementation.

The introduction of an additional requirement for the installation of additional measuring devices (level meters) and provision of a remote connection with the NRA would create an additional administrative and financial burden for the registered recipients.

Regarding the proposed tax regulation of personal supplies

The VAT amendment proposals introduce two new provisions aimed at:

Persons who intend to use goods or services with a taxable base of more than BGN 700, for which a tax credit has been fully or partially deducted, both for their independent economic activity and for personal needs, to submit a declaration on the methodology for the distribution of the incurred direct costs (art. 120a), i

An irrefutable presumption is introduced that when such a declaration is not submitted, the goods and services are used only for personal needs (Art. 176c), regardless of the fact that such goods and services are also used for the independent economic activity of the person. This leads to a limitation of the right to a tax credit.

We do not support the proposed changes.

The proposed changes are in complete contradiction to Council Directive 2006/112/EC on the common system of value added tax (the Directive) and the consistent practice of the Court of Justice of the European Union (CJEU). They lead to an unlawful limitation of the right to a tax credit given by the Directive, they exceed the powers of the state given in Art. 273 of the Directive, therefore these changes should be dropped. More specifically, our arguments are as follows:

The VAT system established in the Directive and confirmed by the permanent practice of the CJEU aims to guarantee the neutrality of the tax on all economic activities, regardless of the objectives and results, provided that these activities are in principle subject to VAT (CJEU Decisions in the case C-284/11, item 43, C-268/83, item 19, C-153/11, item 53). The Directive does not allow the right to a tax credit to be limited solely on the basis of an unfulfilled administrative obligation to declare, nor does it allow the introduction of irrefutable presumptions about the way the goods or services are used. 

The right to deduct a tax credit is an integral part of the current VAT mechanism and, in principle, it cannot be limited (CJEU Decisions in case C-284/11, item 44, C-110/98, item 68 ).

The state may impose certain obligations on persons, which obligations are, however, necessary for the correct collection of VAT and prevention of tax evasion (Article 273 of the Directive). The declaration requirements imposed, and in particular the presumption that, in the absence of a declaration, the good or service is used solely for personal needs, are disproportionate and go beyond what is necessary for the correct collection of VAT and the prevention of tax fraud.

The current VAT regulations contain rules to limit the right to a tax credit when using goods or services for personal needs, equating such supplies to taxable. In other words, the proposed changes do not add to the outstanding issues law, but only introduce significant administrative difficulties. They exceed the objectives of the correct collection of the tax and introduce restrictions on the right to tax credit, which is in violation of European legislation.

We believe that the proposals for amendments to VAT can also be considered as violating the requirements of Art. 176 of the Directive.

In Art. 176 of the Directive provides that until the adoption of uniform rules for expenses for which VAT deduction is not allowed (use of tax credit), whatever rules have not been adopted so far, each member state can apply the restrictions on tax deduction credit, regulated in its national legislation at the time, in the case of the Republic of Bulgaria, of the country's accession to the European Union - 01.01.2007. Exceptions to the right to deduct VAT can only be such as were introduced by national legislation, effective as of that date.

In VAT, in force on the date of accession to the EU, no similar mechanism for charging VAT for personal use of goods or services is regulated, and if such a mechanism were to be introduced, it would indirectly limit the right to a business tax credit.

There is a permanently established practice of the CJEU (Judgments of the Court in case C-414/07 and in case C-371/07), in which it is accepted that it is inadmissible for a member state to subsequently amend the existing at the date of its accession to the EU national legislation in the direction of expanding the field of application of the limitations of the right to tax credit compared to the existing situation before that date.

Violation of the principles and provisions of the Directive could lead to the imposition of sanctions on the Republic of Bulgaria by the European Commission.

In the proposed changes to the provisions of the VAT, there is no regulated methodology that will be acceptable both for the business and the revenue administration, which is why it could be assumed that the provided declaration under Art. 120a of VAT and the distribution of costs indicated therein could become subject to subjective interpretation by the revenue authorities and potential tax liabilities.

In this sense, the use of formulations such as "reasonable method" and "degree of use" in the tax legislation is inadmissible, insofar as the tax base and the tax must be able to be clearly and accurately determined in accordance with the law. Such an approach also creates objective prerequisites for subsequent administrative and legal disputes, which is an extremely undesirable effect.

In § 19, para. 1 PZR from the proposed project only regulates a deadline for submitting a declaration for the chosen methodology for allocating the costs of acquired goods or services, for which the right to deduct a tax credit has been exercised and which are used for personal needs, without specifying that the submission this declaration will have binding effect going forward. The latter is mandatory given the constitutional practice of tax legislation.

There are also other problems and imperfections of the proposed amendments and additions to VAT, but for the sake of economy they will not be developed in this opinion.

In summary of the above, we consider that the considered changes are in contradiction with the EU legislation, the practice of the CJEU, as well as to a serious extent they are unsustainable and create prerequisites for many potential disputes and problems, which is why we propose to drop them from the draft law.

Regarding the proposed amendment of the administrative sanction under Art. 182 VAT

We do not support the proposed change.

We do not see the damage/damage for the tax office if the unissued or unreflected document does not lead to the determination of VAT in a smaller amount - for example, delivery with a place of performance in another country, VOD, export, etc.

In the currently effective art. 182 VAT fine/administrative sanction is imposed only if the non-issuance of a tax document or the non-reflection of the issued or received tax document in the reporting registers for the relevant tax period leads to the determination of the tax in a smaller amount.

We find the proposed amendment not fully considered, and insofar as there are no reasons justifying its necessity, we propose to drop the proposed change in Art. 182 VAT.

IV. ZOPB

KRIB fully supports and promotes the fight against the gray economy and tax evasion.

We believe that the measures in this area should be proportionate and the restrictions in the ceiling for cash payments should be brought in line with average European practices.

It was KRIB that initiated the introduction of a ceiling of BGN 15, which, in our opinion, is close to European standards.

Convincing reasons and analyzes for the proposed reduction of the legally regulated threshold for limiting cash payments are lacking.

In view of the above, we suggest that the threshold under ZOPB not be changed.

 

With respect,
Eugene Ivanov
Ex. director