Банкеръ Weekly



Banks will calculate VAT when selling property pledged or mortgaged in their favour. The surprising amendment was announced on October 22 when the National Assembly Budget Commission discussed the changes of VAT Act.According to the new text, whenever a pledged, mortgaged or distrained property is being sold, tax will be paid by the seller. This procedure will be applied on the compulsory execution regulated by the Civil-Procedure Code, on the public sales according to the Tax Procedure Code (TPC) and the sale of pledged property regulated by the Special Pledges Act, The Law for Banks and Article 311 of the Commercial Law. VAT will be transferred to budgetary accounts by the officer of the court, the public executor on TPC, the depositary on the Special Pledges Act or by the creditors on the Law for Banks and the Commercial Law respectively. The aim of VAT Act's amendment is to be introduced an intermediary who is not owner of the belonging, but performs the sale on behalf and at the expense of the debtor. Theoretically this individual is a quasi owner of the pledged or mortgaged belonging - in case debtor fails to pay, then the intermediary acquires the pledge and the right to sell it.What urged this change? So far it has been clear that making a pledge or a mortgage doesn't need calculation of VAT. By 1997 this was not considered to be a deal (as there is no transfer of property). Article 47 of the present VAT Act specifies that making a pledge and a mortgage are considered liberated supplies - it is accepted that there is transfer of property which is not taxable. On the other hand Article 49 of the Regulation for Application of VAT Act specified that this tax liberation was not applicable on the sale of mortgaged or pledged belonging for the purpose of satisfying guaranteed creditor. Neither the act, nor the regulation, however, explained how to carry out taxation at guarantee's realization and which participant in the deal should transfer the money owed to the state.An attempt to solve this problem is the new amendment of VAT Act which reads that the officer of the court, the pledge creditor and the other sellers are obliged to transfer on account of the Tax Directorate owed tax at the expense of debtor and within five days of receiving the full sale's price. It's not mentioned that debtor should be a registered entity on the VAT Act in order tax to be calculated. On the contrary, amendments read that tax is obligatory in all cases. This was the way MPs interpreted the texts. Valeri Borisov, Advisor of the Budgeta Commission, even offered to be added that tax was not calculated when the owners of sold-out property or estate were not registered on VAT. According to him the tax, levied on sold guarantee will make the situation of most debtors harder. In fact the truth is that this amendment will also cause problems to the banks, especially to those, which launch mortgage credits to individuals.As it has never been surmised that tax will be levied on entities which have not been registered on VAT, there is no way for the banks to have added VAT when making the evaluation of mortgaged property. This will also affect individual debtors as normally, in case of compulsory sale, they were able to count on receiving rest of the price after paying up with the bank. Most banks launch mortgage credits up to about 70% of the pledged estate's evaluation and at the same time pay careful attention this evaluation not to be too high. An apartment evaluated at USD30,000 will be credited by the bank with USD21,000 and the buyer is supposed to provide for the rest USD9,000. If the estate must be sold for the reason of overdue debt, a much lower price will be received than the initial purchase price - say, USD25,000. This sum will cover the principal, the other expenses and (probably) the lost revenues from interests of the bank.Thus the borrower was able to count on receiving at least half of his own funds, invested in the estate's purchase. But if the new regulation is enforced, then he loses this hope as well, because 20% VAT (or USD5,000 in the above example) must be calculated on the price. It's not difficult to suppose that in some cases, when inspectors or hired ecxperts have deliberatey made higher evaluation of mortgaged estates, banks will receive the cold shower as they might be forced to pay VAT at their own expense. An interesting requirement attached to the draft VAT Act is that tax will be calculated only after the whole price of the deal is paid. In other words, if 5% of the price are not paid, VAT cannot be paid, either.Another curious question is connected with the compulsory execution regulated by TPC when no VAT is calculated on sold property (Article 202, Paragraph 2). Strangely why, however, the draft act offers VAT to be levied exactly on the sales performed by public executors.

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