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WE ARE ADVISING THE GOVERNMENT NOT TO INTRODUCE THE SOCIAL INSURANCE CEILINGS

THE GOVERNMENT'S EXPECTATIONS FOR BIGGER REVENUES ARE TOO OPTIMISTICMs. Piritta Sorsa, IMF Resident Representative for Bulgaria, to the Banker WeeklyMs. Sorsa, on November 6 the next IMF mission will arrive to conduct the third review of the execution of the loan agreement between Bulgaria and the Fund. Which will be the key issues in the talks with the Bulgarian Government?- The IMF mission will do mainly three things. It will follow the execution of the conditions set in the two-year agreement (signed in February 2002) as of end-June and end-September. Besides this, the macroeconomic forecasts of the country for next year will be discussed, as well as the policy targets under the SBA for the next 6-9 months as well as whether it will become precautionary. The most important element in the discussions will be next year's budget. The commitments in the current programme towards end-March and end-June next year will be set as well.The talks in September between the IMF representatives and the Finance Ministry experts on the 2003 draft budget failed to result in a unanimous position. Have your positions already come closer?- The differences in our views after the last mission in September still exist. They are mainly in two areas - the collectibility of the VAT and social insurance revenues. According to the IMF, the expectations of the Government are too optimistic.The second difference refers to the subsidies. The subsidies can turn out insufficient in case the necessary reforms are not carried out, especially in the healthcare sector, the DHCs and the railways.Why are you concerned that the VAT and social insurance revenues forecasted by the Government for next year will not be collected?- The forecasted pace of VAT and social insurance revenue increases can be too optimistic in views of past experience of collection and generally slow impact of improvements in revenue collection. It seems one relies mostly on the considerable improvement of the collectibility, mostly as a result of the introduction of minimum social insurance ceilings and the labor contracts registration, as well as the VAT revenues increase resulting from better collection. The influence of some of these measures is not certain at all. It can be positive or negative as well. This is why it is better if the budget is based on conservative assumptions. The practice in many other countries shows that after amendments are made to the laws, it takes time before the collectibility is improved. If, anyway bigger revenues are realized indeed, the government can always utilize them.Would you specify on the risks of the introduction of minimum social ceilings, about which the IMF is reserved?- The risk linked to the revenues collectibility, is that this measure has not been applied so far and its effect is not certain. We think as a whole the idea of the minimum ceilings is not good, since it is very possible to increase rigidity on the labor market, while its flexibility is very important under a CBA and for lowering the high unemployment. Everything depends on how these ceilings will be implemented and respectively how the employers will observe the new requirements. It may be hard for a small company in the countryside to pay the same wages as a small company in Sofia, which can even result in layoffs and less revenue, or employers can declare employees in the lowest categories undermining revenue collection. According to me, the problem of the revenues collectibility is better to be solved through the improvement of the tax administration and the introduction of the National Revenue Agency, while companies can agree on their employees' remuneration themselves. If the government anyway insists on the introduction of these ceilings, this will not violate the agreement with the IMF. We are simply advising against this change, since it is questionable it will lead to a revenue increase.What is IMF's opinion on the reduction of the turnover ceiling, above which the companies need to have a VAT registration?- The Fund's tax experts are advising in principle on the very smooth and gradual reduction of the VAT ceiling and only when there is an improvement of the work of the tax administration. The increased number of small companies with a VAT registration can become a big burden for the tax administration, and the additional revenues from them can turn out to be lower compared to the expenditures to control the system management.It is possible for you to reach a consensus with the Government on the proposal about a zero corporate tax rate for companies investing in high unemployment regions? What are the risks linked to this measure?- We have discussed various draft laws on the zero tax rate. We did not like the idea very much since it is a step aside from the principle of a transparent tax system with equal rights for everybody. When some exception is introduced, the risk is created for pressure for other tax preferences. We are however ready to discuss various forms of application of the a.m. alleviation in high unemployment regions. One of our concerns is that with the adoption of this law the opportunity for tax evasion can be created. We have sent a number of proposals to the MoF on this issue. Most important is that the tax system does not get too complicated and difficult to apply. There should be also concrete requirements to the companies in the a.m. regions e.g that all assets should be located in the region There is a proposal as well that the preference for the corporate tax be introduced for a certain period of time, for example three years.Do you think that the zero tax rate in the above mentioned regions will bring the desired investment increase?- The investors usually take into consideration the general economic environment. So in case the necessary infrastructure is missing, if there are no clear business rules regarding the licensing regimes or the legal system is bureaucratic, it is questionable whether such a preference will attract the companies to the high unemployment regions. We however are supporting some other measures proposed by Deputy PM Nikolay Vassilev - like the reduction and simplification of the licenses, as well as the Commercial Code amendments, referring to the insolvency procedures and their acceleration. I think they are much more important for attracting investors and improving the business climate than the ideas of the creation of a risk capital or industrial zones.

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