Банкеръ Weekly



Insurance companies in Bulgaria have experinced a dramatic taxation saga over the last five years. It began by replacing the profit tax, paid by them, by a tax on the insurance premiums and other proceeds. This is stipulated by article 2 of the Corporate Income Taxation Act which was passed in 1997 and as a whole improved the taxation of corporate activities in this country. But for insurance companies it introduced taxation terrorism.If we look upon things from insurance point of view, the premiums in fact represent the gross proceeds from sales (or the company's turnover). In that sense, the tax on premiums resembles the tax on turnover and should be born (as an indirect tax) by the insured persons, while the insurance companies should pay a tax on their incomes, i.e. on the profit. But the tax on the premiums in its essence is a direct tax, imposed on the insurer (instead of a profit tax). A proof about that is the fact that insurance companies do not pay another income tax, in addition to the tax on premiums and other proceeds.As a direct tax,the tax on premiums is absolutely unjustand places the insurance companies at a disadvantage as compared to all other subjects of the economic life in Bulgaria. This is so because the insurer should pay a tax even when it operates at a loss. Moreover, the insurer is deprived of the possibility to transfer its taxation loss to the future according to the Corporate Income Taxation Act and to deduct it from the taxable profit.An insurer may post losses if there are many or big insurance events within a year (fires, accidents, natural disasters), i.e. if the paid compensations exceed the premiums. The insurance premiums are gross proceeds, from which all expenses of the insurer - paid compensations, administrative costs, etc. - should be covered. And the insurer's income is formed only by the difference between the premiums and the paid compensations.The explanation of the tax authorities is that as the taxation basis is rather wider, the 7% tax is much lower than the tax rate (25%), imposed on the profit of the rest of the companies. However, this does not explain why an income tax is imposed on a company that has operated at a loss and practically has no proceeds. And the tax on premiums is often justified by saying that this is the practice in other countries as well. In fact, in no other country there is a tax on the insurance premiums as a direct tax.As a confirmationthe research of PriceWaterhouseCoopers on the taxation regime in 35 countries could be used. The Bulgarian tax authorities could find quite curious things in that research. For example, a tax on premiums is imposed mainly for certain property insurances, at that as an indirect tax, which is transferred and born by the insured persons. The taxes on insurance proceeds cannot be a corporative tax as they are not connected with the insurer's income. They are indirect, turnover taxes, born and paid by the insured persons (e.g. through tax stamps) and are not part of the insurance premiums. Insurance companies all over the world pay a tax on their incomes, i.e. on the profit.But let's return to Bulgaria. In 1998 a tax was introduced for insurance companies on the proceeds from other activities, also those that are not connected with insurance (under the Corporate Income Taxation Act), which is the second component of the same inadequate tax. And this part of it arouses still greater problems. Usually, the other proceeds include activities, regarding the management and administration of insurance contracts, such as the investment of collected money, reinsurance relations, etc., connected with the core activity. And by law the insurance companies cannot carry out other commercial activities, except insurance and the investments, connected with it.Investing the money, collected in the insurance reserves, is an important part of the insurer's activities. These proceeds in fact cover part of the insurance liabilities, especially in life insurance where 90% of them are mandatorily distributed to the policies of insured persons. Some of the other proceeds are the reinsurance commissions, which practically cover only partly the insurer's expenses for closing and managing the insurance contract.Each of the other proceeds covers certain innate insurance expenses and only the difference between these proceeds and expenses forms incomes for the insurer. It's normal for the other proceeds to be taxed on a net basis, i.e. after deducting the respective innate expenses.However, the tax authorities' explanationis different and the agrument again is the amount of the tax rate (7% instead of 25%). Again, the tax begins to resemble a tax on the turnover rather than an income tax. Something more - the explanation of the tax authorities to impose a tax on the gross proceeds gives rise to drastic discrepancies. The correct fixing of the taxation basisfor the other proceeds turned out technically impossible. A number of attempts have been made to describe accurately the other proceeds, but this has not been achieved and chaos reigns in that sphere. Each tax expert decides himself how to fix the taxation basis.The problem is the inadequate nature of the tax itself. If it is a direct tax, imposed on the insurer, the taxation basis should be fixed on a net basis with a view to the purposes of the Corporate Income Taxation Act. If the tax is indirect (on the turnover) and is paid by the insured persons, then another income tax should be imposed on the insurer. But no such tax has been introduced so far. The tax on the insurance premiums and the other proceeds of the insurers places on them a huge tax burden, which hardly any other juristic persons bears.The real taxpaid by the insurers over the last five years is in the range of 35-40% annually. As a result of that taxation many of the insurance companies have been seriously decapitalized. Regretfully, the analyses of the insurance market are usually reduced to the volume of insurance premiums, while the serious financial problems, caused by the inadequate way of taxation, remain unnoticed. However, it is worth while asking the question why international insurers do not show whatever interest towards the Bulgarian market. And they show such an interest towards the other countries in Eastern Europe (incuding smaller ones). If we look upon the problem in the light of the fiscal interests and considering the experience of the other countriesan easy decision could be foundThe insurance companies should pay a corporate tax on their incomes, i.e. a profit tax in compliance with the Corporate Income Taxation Act. Additionally, a tax could be imposed on the insurance premiums for property insurances in order to ensure tax proceeds from the insurance sector.

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