Банкеръ Weekly

Briefs

TAX PREFERENCES ON PENSION DEPOSITS TO BE RESTRICTED

The tax reliefs on the additional insurance or extra pension insurance were restricted for the next time in a row. This became clear after the amendments of the Law on Taxation of Individuals' Incomes were voted on second reading. The workers on payrolls as well as the freelance workers can now take out up to 10% of their taxable income for volutarily made pension insurances and 10% more for insurance deposits. So far there were no restrictions - if someone transferred his whole salary into an insurance fund, then the sum was not taxed and tax was paid only after the withdrawal of the money from the fund. On request of the Ministry of Finance after the draft law was already voted on first reading in the Parliament, Nina Chilova offered a maximum ceiling to be put on the deposits which are not taxed. The offered sum of BGN40 for pension deposits and BGN40 for insurance deposits outraged the insurance sector. And on December 3 when the Budgetary Commission was to discuss the new texts, all insurers protested in front of the MPs. For several hours representatives of the Ministry of Finance and the heads of the two branch organizations, represented by Atanas Tabov, Sofia Christova and Nikola Abadzhiev, were trying to sort out their positions.The present discussion is in fact a continuation of the arguments from last December when the then deputy minister Atanas Katzarchev was fighting as best as he can to do away with tax preferences for the insured. At that time he had partial success. By end-2001 deposits in pension funds led to reduction of the taxable income, but the money, received from these deposits were calculated taxes on according to the table in the annual tax declaration. One had the opportunity to make such deposit, thus reducing his income, and then to transfer the sum to relative pensioners who have no other taxable incomes. If the spared sum was properly distributed among the relatives so as not to exceed the annual nontaxable minimum (BGN1,200 for 2001), it was possible to entirely avoid taxation. (For example, if you have annual income of BGN6,000, you deposit BGN4,800 in a pension insurance fund at end of the year and declare only BGN1,200. Shortly afterwards you transfer to each of your parents pensioners BGN1,200 (or a total of BGN2,400) which are nontaxable. By repeating the same operation in January, next year, you clear out the remaining BGN2,400, too).With his attack Katzarchev managed to achieve withdrawn sums to be taxed not according to the table (which to allow use of the nontaxable minimum), but to be levied with final tax of 20 per cent. Only when the money is withdrawn from the fund in form of pension (that is when certain age is completed), then taxation is calculated according to the table of Article 35, so no tax is paid if the additional pension is under the nontaxable minimum.A similar approach was applied to the insurance payments as well. In the previous year payments for permanent healthcare and annuities had equal statute with the securities and therefore used the same preference. The more popular life insurances, however, were treated backwards - they were made on taxed income, but when money was paid back (in case of death or end of term) this income was not taxed. The amendments, enforced early this year, require that the life insurances will not be taxed initially (that is, deposited sums will be deducted from the income), but when money is withdrawn back, the final tax of 20% is due to be paid. Only when the sums are received at end of the term of the contract and if this contract is at least a 10-year one, then a lower tax of 15% can be paid. Insurances are not taxed when cashed only in two cases - when the sum of the question is that part of the income, received as a result of investment of the payments, and when the sum is received in case of death (obvious event which cannot be manipulated).According to the Ministry of Finance, however, the hole permitting tax evasion has not been entirely closed. Deputy Finance Minister Gati Al Dzheburi stated in front of the Budgetary Commission that the insurers had openly advertised the schemes for possible tax evasion on their websites.The Deputy Finance Minister explained that in the UK the maximum part of the income to use tax reliefs is 17.5 per cent. But insurers insisted that larger percentage of the income should be saved through pension insurances and life insurances. They were disappointed by the fact that instead of the 15+15 per cent they asked for, only 10% were acknowledged for pension insurances and 10% more - for general insurances. At the same time the MPs accepted the offers of the two branch associations for additional measures against tax evasion. So from 2003 on the final tax of 20% will be levied also on sums transferred to third parties (although it did not become clear whether it will be written somewhere that when the third party wirhdraws the money, it won't pay 20% more). Moreover, the MPs decided that the 20% tax will also be paid when the insurance contract is exchanged with a contract without any tax reliefs attached (e.g. a children insurance contract). The lack of coordination between the two branch associations prevented some of the remaining tax problems from solving. Above all - the much too high percentage which is imposed on the saved sums at the moment of their withdrawal. Another obvious injustice is the accumilated income in the pension funds to be taxed, while in case one decides to provide for his old age with long-term securities, he doesn't pay tax on their interests. After all the state which is hardly managing to fulfil the engagements to pensioners, should be stimulating the extra pension insurance. And this can be achieved not only by preferences, but also by stable legislation.

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