In connection with the laws submitted to us for discussion, concerning the tax sphere, the Confederation of Employers and Industrialists in Bulgaria, after discussion in the Committee on Taxes and Law of KRIB, expresses the following position:
I. POSITION ON THE DRAFT WALL OF THE TAX AND INSURANCE PROCEDURE CODE
We support the intention to make more and more effective efforts in the fight against tax fraud and tax evasion, but we recommend that specific measures be considered and discussed more thoroughly. The practice in countries comparable to Bulgaria shows that granting more rights to the administration does not always lead to the desired effect (controllers must also be controlled), especially when it is not supported by the necessary training, remuneration and protection of employees.
II. POSITION ON THE DRAFT WALL OF THE VALUE ADDED TAX LAW
Proposal for changes to the financial leasing rules
We consider the proposed changes unacceptable.
In our opinion, the decision of the Court of the European Union ("CJEU") in case C-118/11 ("EON Asset Management"), which justified the change of Art. 6, para. 2, item 3 of VAT.
In the cited decision, the CJEU ruled on the right to deduct a tax credit in the case of leasing a fixed asset. The VAT amendment proposal instead addresses when tax should be charged on supplies under finance leases.
We do not find a requirement in the cited decision of the CJEU to change the scope of equated supplies of goods in VAT. Indeed, the decision comments on the criteria for when there is a delivery of goods, making reference to the accounting legislation (for example, the criteria for transferring the risks and rewards of ownership of the goods).
It should be borne in mind that this is only for the purpose of determining the starting point of the entitlement to a leased fixed asset tax credit.
Moreover, we see no reason for the change to be introduced with an effect on the existing situation. The latter contradicts the principle of legal certainty and could have severe consequences for lessors and lessees.
Changes in connection with the activity of consortia
We find the changes editorial and clarifying the correct treatment, as it is under the current law and practice of the CJEU. We recommend that this be clarified in the reasons, in view of the lack of explicit rules so far.
Introduction of cash reporting
We support the change. However, we believe that the success of the regime will depend on its broadest possible implementation, which depends on (1) the application threshold and (2) registration restrictions.
Regarding the threshold, we find that after the introduction of the regime it is appropriate to start consultations with the Commission on its increase.
Regarding the restrictions, some of them provided for in the draft law are unfounded, for example, the restriction against persons who have ever committed administrative violations, including minor ones, for which they were duly punished and paid the corresponding sanctions. The ban on applying the regime to persons for whom the procedure under Art. 32 of the Code of Criminal Procedure (for serving documents and papers, by applying to the person's file), is also unfounded. The introduction of such restrictions, especially when there is no possibility after a certain time for the person to "rehabilitate" for the committed administrative violation, excessively limit the application of the regime.
We consider that the regime should also apply to continuous supply, supply between related parties and supply paid in cash. We see no reasoned opinion why the regime should not apply to these supplies.
Offers in the Barter Rules
In our opinion, §6 concerning barter is a literal translation of the Directive. It is necessary to refine and edit it so that it is clear and applicable by the Bulgarian taxpayer.
III. POSITION ON THE DRAFT WALL OF THE LOCAL TAXES AND FEES ACT
We believe that the proposals made in this way are in line with European measures, but in our opinion the power offered is underestimated. There are very few cars with such power and accordingly very few persons will have the opportunity to take advantage of this preference. From the point of view of the structure from which the tax is determined, we consider it expedient to do it according to the emissions, as it is in many other places in the EU and not according to the power.
IV. POSITION ON THE DRAFT WALL OF THE EXCISE AND TAX WAREHOUSES LAW
We support the proposed amendments with the exception of the section introducing a special line for deducting excise duty against fuel vouchers. After the debate and discussions with our collective member, the Bulgarian Oil and Gas Association, we believe that the proposed option is unsuccessful and will create an additional burden on the business. With the bill thus proposed, the authenticity of the vouchers is practically guaranteed by the storekeeper; new terminology is introduced without being defined; the principle of the administrative process in the field of coercive administrative measures has been violated. We suggest that changes in this area only take place after it has been agreed with the industry.
KRIBB PROPOSALS BEYOND TAX LAW CHANGES PROPOSED FOR DISCUSSION
In addition to the above, we would like to make proposals for changes that are essential for important sectors represented in KRIB:
A/. PROPOSALS FOR CHANGES IN ZKPO AND TAX RELATION
MARRIAGE OF ASSETS
1. VAT tax credit in case of marriage of assets (e.g. goods)
Regulatory base
Art. 79, para. 3 and Art. 80, para. 2, item 4 and item 6 VAT
Description of the problem
VAT requires an adjustment of the used tax credit in full when scrapping goods, as long as the scrapping does not fall within the special limitations for adjustments. Currently, no adjustments are made only for marriage as a result of:
- Force majeure (fire, flood, earthquake, etc.) as well as accidents and catastrophes that are not the fault of the company
- Expiry date
- Technological marriage within the permissible norms determined by technological documentation
With regard to technological marriage, the NRA authorities interpret it in a narrow sense - concerning only production activity. Thus, part of the marriage that occurs in enterprises from the commercial or other non-manufacturing spheres and is a normal and unavoidable part of the relevant business processes gives rise to an obligation to adjust the tax credit.
In addition, no correction is made if, when scrapping DMA, their balance value is lower than 10% compared to their reported value. However, the NRA authorities interpret the term balance sheet value not as the accounting value, but as the value that would be obtained if the maximum depreciation norms for asset categories under the ZKPO were applied.
Comparative information
Art. 185, para. 2 of the European VAT directive explicitly states that no adjustment is made to the used tax credit in the case of destruction or death (marriage) of assets, which is duly proven or confirmed. In this regard, the Bulgarian VAT does not correspond to mandatory texts of the European legislation.
The domestic legislations of the European countries are far more liberal in this respect compared to the Bulgarian one.
Change proposal
To adopt legislative changes in the direction of not requiring a tax credit adjustment in cases of proven destruction of assets (eg: documents from a waste management company, ecarisation, transferred secondary raw materials, etc.). In a practical aspect, it can be assumed that the concept of technological marriage does not apply in a purely production sense.
Pursuant to Art. 186 of the VAT directive, Bulgaria is obliged to introduce specific rules in this direction and, in particular, to set out the conditions under which it is considered that the destruction or destruction of the assets is "... duly proven and confirmed". The idea is not to penalize correct taxpayers for economic events that are an unavoidable part of their business, while at the same time limiting opportunities for abuse by incorrect taxpayers.
In addition, to expressly regulate that below the balance sheet value in the sense of Art. 80, para. 2, item 6 VAT means the accounting tax, i.e. in accordance with the accounting policy applied by the enterprise.
Recognition of expenses under ZKPO in case of marriage of assets (e.g. goods)
Regulatory base
Art. 28 ZKPO
Description of the problem
ZKPO imposes similar restrictions as VAT in the case of marriage of assets, in this case regarding the non-recognition for tax purposes of the relevant marriage expenses. Technological marriage is recognized under the Civil Code in the usual amounts for the relevant activity. Here again, however, the NRA authorities interpret the term technological narrowly - it concerns only production activity.
Comparative information
There are no European norms regarding the subject. But for the purposes of consistency of the tax system and clarity of taxpayers regarding their tax obligations, it is highly recommended that the approach under the Tax Code be identical or as close as possible to the approach under VAT.
The domestic legislations of the European countries are far more liberal in this respect compared to the Bulgarian one.
Change proposal
To recognize a technological marriage for all types of activities, but duly proven and confirmed (according to criteria to be developed by the NRA).
B/. PROPOSALS FOR CHANGES IN ZKPO AND TAX-RELATED CONSTRUCTION OF INFRASTRUCTURE ON STATE OR MUNICIPAL LANDS
Regulatory base
Art. 26, item 1 ZKPO; Art. 70, para. 1, item 2 VAT
Description of the problem
In practice, enterprises often have to build infrastructure objects on land that is not their property, but the state or municipalities (e.g. street, tunnel, sidewalk, kindergarten, etc.). Such infrastructure is, however, directly related to the economic activity of the respective enterprise, as it attracts or improves the access of their customers to their own sites.
The authorities of the National Revenue Agency tend to refuse in such cases the right to a tax credit, claiming that this is a free supply for the benefit of the state (municipality), as well as not to recognize the depreciation costs of the relevant objects, claiming that they are not related to the activity (formally not being owned by the enterprise).
Comparative information
Internal inconsistency of the tax system and in judicial practice. An excessively fiscal approach resulting in a double fiscal benefit (respectively damage to the taxpayer):
- saved budget expenditure on infrastructure and
- additional tax revenue
Change proposal
Texts should be included in the VAT bill explicitly indicating that such projects are not considered free supplies or activities outside the economic activity of the person, and accordingly the enterprise is entitled to a tax credit.
Texts explicitly indicating that similar projects are related to the activity and, accordingly, the enterprise is entitled to tax-recognized expenses in connection with them, should be included in the ZKPO.
C/. PROPOSALS FOR CHANGES IN THE TAX LAW REGARDING THE TREATMENT OF HOLDING STRUCTURES
We propose to introduce a tax-neutral holding regime in Bulgaria ("Regime")
Its essence is that dividends and profits from the sale of shares are not taxed under certain conditions (holding at least 20% of the capital for at least two years). On the other hand, losses on the sale of shares are also not recognized for tax purposes when the income would not be taxable.
The main goal of the Regime is to increase the competitiveness of the Bulgarian tax system in a way that is fully compatible with European law and good practices in taxation and therefore cannot create a negative reputation for our country, and at the same time can attract additional resources and cash flows , international management staff and to stimulate the creation of new shared service centers.
Currently, most European countries apply one or another type of tax-neutral regime to income from dividends and from the disposal of units or shares of commercial companies.
| Income | Availability of neutral mode | Countries |
| Dividends (from outside the EU) | Yes (22 countries) | Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, France, Germany, Hungary, Italy, Latvia, Lithuania, Luxembourg, Malta, Norway, Netherlands, Slovakia, Slovenia, Spain, Switzerland, Sweden, United Kingdom |
| No (7 countries) | Bulgaria, Greece, Ireland, Portugal, Poland, Romania, Slovak Republic, Finland | |
| Proceeds from the sale of units/shares | Yes (23 countries) | Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, France, Germany, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Norway, Netherlands, Slovenia, Spain, Switzerland, Sweden, United Kingdom |
| No (6 countries) | Bulgaria, Greece, Poland, Portugal, Romania, Slovak Republic. |
The report was prepared by KRIB tax experts according to data from the International Bureau of Tax Documentation
If introduced in our country, the Regime would remove tax incentives for Bulgarian groups to use foreign countries to establish holding structures, which would reduce administrative costs and give our tax system more transparency of real ownership. Also, the Regime would increase the incentives for international groups to use Bulgaria as a favorable and geographically natural holding jurisdiction for developing projects in the Balkan Peninsula (which in practice means basing more international management staff in the country and an additional incentive to create centers for shared services from international business groups). In this regard, Bulgaria would gain a significant advantage over neighboring countries, in which a tax-neutral holding regime has not yet been introduced.
It should be borne in mind that, from an economic point of view, the Regime does not undermine the tax base, but only reduces the possibility of double taxation of certain investment incomes, which is the root of its political legitimacy and widespread use in Western Europe. The dividend derives from a profit that is already subject to corporate tax at the company that distributes it. The same largely applies to gains from the disposal of shares or units. For example, if a shareholder acquires shares in company A worth 100 and it subsequently makes a profit of 10, after corporation tax the profit of company A would be 9. If this profit is not distributed to the shareholder, but instead he sells his shares, the profit realized by him, which would contain the value of the company's undistributed profit of 9, would be taxed again with corporate tax. The regime would eliminate the possibility of such double taxation.
The regime would not constitute disguised state aid or unfair tax competition. On the contrary, if accepted, Bulgaria would create opportunities that already exist in many European countries and are in full compliance with Bulgaria's legal and political commitments as part of the EU.
The proposed conditions for the operation of the Scheme (i.e. a two-year minimum period of ownership of the shares or shares and a 20% minimum participation threshold in the capital of the relevant company) aim to limit possible adverse fiscal effects for the budget, including cases of incorrect use of the Scheme for the purpose of tax avoidance. It is expressly stipulated that the envisaged tax reductions could be applied after a period of at least two years, during which period they will have a motivating effect for investors in Bulgaria through holding companies, without having a negative effect on the state budget. The regime will not have a negative effect on the state budget in the sense that, according to it, losses from the disposal of shares or shares will not be recognized for tax purposes. This can be seen as a kind of closure of a legal possibility for reporting in Bulgaria tax-recognized "losses" that may be artificially incurred in a foreign country where efficient fiscal control cannot be exercised. In this sense, the overall effect on budget revenues from the neutral holding regime will be more positive than negative.
KRIB experts have the opportunity to participate in discussions in formulating the specific provisions of the ZID of the ZKPO.
D/. PROPOSALS ON EXCISE POLICY ON TOBACCO PRODUCTS
In connection with the preparation of the 2014 budget, as well as with a view to the formation of the fiscal framework for the country in the medium and long term, it is necessary for the government to analyze, mark and set in its management program documents the main sources of income for the coming years.
Undoubtedly, after the declared intention of the government to maintain fiscal stability in terms of the main sources of revenue such as corporate tax and VAT, the focus should be on preparing a clear vision and a precise plan for the excise policy.
With this letter, KRIB expresses its position regarding the excise policy regarding tobacco products, which is of key importance for Bulgaria due to the significant share of total tax revenue in the budget and the amount of revenue from excise tax on tobacco products in the state budget.
The formation of a clear long-term excise policy on tobacco products is directly related to curbing and limiting the illegal trade in cigarettes, and would ensure predictability and stability of the market environment for business, which in turn would lead to relative predictability of the price levels of tobacco products for end users.
Based on the fact that Bulgaria must reach the minimum levels of excise duty on cigarettes in the EU by January 1, 2018, Directive 2011/64/EC recommends the most appropriate way to increase the excise duty, namely that it should be done gradually and smoothly on small steps over the years so that as of January 1, 2018, the minimum tax for all cigarettes will be no less than €90 per 1000 cigarettes. In the event that the increase in excise duty, which is the basis of the price increase, is not done smoothly enough and is not in line with the development of real incomes in the country, it would lead to an increase in illegal trade, negatively affecting revenues. Bearing in mind that the price levels in Bulgaria are the lowest in the EU, and at the same time the country has the lowest purchasing power, the only solution is to ensure such tax conditions, which through the gradual increase of the excise tax in the smallest possible steps , will allow the gradual increase in prices without market shocks. And although 2018 seems far enough in the future, delaying the start of excise duty increases will mean they will be larger to reach EU levels, thus risking reaching increase in levels of illegal cigarette trade and to the logical loss of budget revenues.
KRIB welcomes the recently announced public intention of the Ministry of Finance in this direction, namely to apply gradual increases in excise duty levels on tobacco products until the minimum requirements are reached. We would like to recommend and encourage the team of the Ministry of Finance to prepare and lay down in the draft ZADS a specific schedule for changes in excise rates until 2018. Considering the dynamics of the market of cigarettes and tobacco products, related to free pricing, the introduction of a concrete timetable for the gradual increase of the excise duty will be an instrument for maintaining market stability and predictability for government revenues. In addition, we recommend the introduction of a specific schedule in the law, as we believe that only in this way, the Ministry of Finance will have a basis on which to predict the possible average price levels, which will serve to prepare a forecast for excise revenue in the budget in the next 3 to 5 years.
As regards the method of distribution of the burden and the size of the individual components of the mixed structure of excise duties on cigarettes, Directive 2011/64/EC foresees that the decisions remain within the powers of the member states, but at the same time it is recommended that they be used in an effective manner way those components in the mixed structure of the excise tax that ensure better predictability and collection - and these are the minimum rate and the specific component. Similar are the guidelines of the RKKT of the WHO, related to ensuring a high degree of protection of public health. At the same time, we believe that the burden of the proportional component in the mixed structure of the cigarette excise duty, which is entirely dependent on the pricing decisions of the companies, should be gradually reduced, as has been the practice in most European countries in the last three years (20 out of a total of 27 member countries have reduced the proportional component in the structure of excise duty on cigarettes since 2010).
The Committee on Taxes and Law at KRIB is made up of highly qualified professionals in the field of tax policy, with experience in Bulgaria and abroad. In this regard, we express readiness to be included in a working group at the MoF for consultations on the preparation of the schedule for excise duties on tobacco products, which will be proposed for consideration in the National Assembly.
We believe that this government has a unique opportunity at the start of its mandate to send a positive signal to business and the public about its intention to provide a predictable environment and revenue predictability by enshrining in legislation a tobacco excise schedule that is supported, as by the entire industry as well as the entire business community.
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