Банкеръ Weekly



Mr. Kunev the flat tax introduced this year seems to be advantageous only to the Treasury, especially as the tax-exempt minimum was eliminated. The citizens did not get the expected benefits. Leastwise, have the population's incomes gone to the light as hoped?
- The results so far have proven that the introduction of the flat tax was a good step and the economy has come to light. According to data, proceeds from taxes on the citizens incomes have increased by 21 per cent. Considering the 6% growth of the economy (even if the grey economy is 20% or 30%, accounting for another 2-3% hidden growth), the increase of tax proceeds is much higher than that of the gross domestic product (GDP).
Is it true that elimination of the unified 10% tax rate on natural persons' incomes is being discussed by the Bulgarian Socialist Party (BSP)?
- That's a storm in a glass. And the answer is purely political. The issue of eliminating the flat tax in the near future (10-15 years) has never been topical within the BSP. It's true there is no such tax in any developed EU country where taxes on incomes are progressively rising. But almost all countries in transition introduced an unified flat tax rate. That is a good, but indeed a temporary solution for a developing economy. The next few governments should not eliminate the flat rate during their tenure. The present discussion about that is only because of the forthcoming elections.
Yes, but some people's interests are injured by the 10% flat tax. They are those with monthly incomes between BGN200 and BGN430 who according to statistics are about 1 million. Those who get their main remuneration under civil and copyright contracts also pay higher taxes now.
- Well, all that are figures at random. The State had to compensate more than 600,000 people employed in the budget sector or in commercial companies with state participation, affected by the flat tax rate. That has been already done.
But who will compensate the people working in the private sector? That depends solely on the employers' good will.
- Presently, there is an incredible crisis for skilful workers and it's just absurd to want to keep someone at a position without raising the salary. Today only lazy people have problems finding work in Bulgaria.
And what would have happened if you had preserved the tax-exempt minimum? Is there a possibility to restore it? The opposition claims that the costs for such a step could be compensated with money from the budget surplus.
- I cannot answer precisely. It's a matter of calculations. I don't think that as of today that is possible. Moreover, we should stop crying about the budget surplus. We forgot very quickly about the situation ten years ago when we didn't have enough money to pay teachers' salaries, while remuneration to the army and the police was a month late because of the budget deficit in the country. We, Bulgarians, tend to forget very quickly, we don't read old newspapers and we don't go to graveyards!
There is constant talk that the distribution of the insurance burden between the employed, the employer and the State, would be changed to 6:10:12 (from the present 8:10:12). Is that only conjecture or will the time come when citizens will be paying less insurance instalments?
- No conjectures. I'm personally for that. It was proposed by Social Minister Emiliya Maslarova during the tripartite coalition's meeting in Bansko.That is in fact a reduction of the tax burden by another 4 per cent. Let's not forget that during the incumbent Government's mandate a lot has been done to cut down taxes and this fact should be positively appraised.
The best evidence are the results from the reduction of the corporate tax rate from 15 to 10 per cent. For a second year now we have more than 50% continuous growth of proceeds from corporate tax. In fact, there are two taxes which are the main reason for concealing incomes - the profit tax, and the citizens' income tax. It's difficult to simply make 2 million workers and hundreds of thousands of employers pay due taxes. Some regulations should be introduced to stimulate them do that. And it's already cheaper to pay a 10% corporate tax than register an offshore company in Cyprus, for instance, pay taxes there, set aside money for certification of audits, and spend several thousand of dollars a year to maintain that company. Bulgarian businessmen have preferred to sleep at ease and pay their taxes in our country.
In 2007 the number of profit-making firms rose by more that 40%, let alone that proceeds from the corporate tax increased by BGN1BN.
Well, could we expect a reduction of the VAT rate? As far as I remember that was written in BSP's pre-election programme. Why do flip-flop now?
- Yes, it has been written, but if certain conditions permitted. Moreover, it concerns introduction of differentiated VAT rates and not reduction of VAT. In fact, I don't believe VAT would be reduced during the incumbent Government's tenure. After all that tax is the backbone of our fiscal system! The tripartite coalition is unanimous that there should be no differentiated tax rates.
Why? They do exist in many countries.
- We won't be able to administer them. The problem is quite serious. We are opening a loophole and we don't know who would take advantage of it. If we cut down the VAT on textbooks, what shall we do with books, newspapers, magazines? They cannot all fall into that group. And we'll arrive to a lower VAT on children's foods, children's clothes, etc. Then we'll come to handicapped people.There was also talk about cutting VAT on diesel oil by 2 per cent. But that would not solve the problems. In this case the fuel's prices would drop by no more than BGN0.05/litre. I'm adamant that it the VAT rate on foodstuffs, medicines and everything else is reduced, the difference will remain in the hands of retailers. We already have a bitter experience with lifting the excise duty on coffee as it is exempt from excise duties in Europe. But even producers confess that its prices did not go down.
If we accept the opposition's demand to cut down the VAT on all products by 2%, that would cost the Treasury some BGN800MN a year. The question is where that money would go. And that would certainly not be consumers and prices won't go down. VAT is being reduced nowhere in Europe. Yes, they do have differentiated VAT rates there, but their taxation systems have long traditions and good administration. I'm sure a time will come when we'll reduce the VAT rates on certain groups of commodities and services, but that will concern future Bulgarian governments.
Are changes to the other taxation acts already spoken about?
- The macro framework of the 2009 budget should be changed in order to amend tax laws. The macro framework, presented by Finance Minister Plamen Oresharski does not project steep changes in the State budget for next year which means that no tax amendments are planned. Bulgarian business has much more serious problems than taxes. Brussels' most recent report is sufficiently exhaustive on that issue. The judiciary system is to be reformed. People want justice and punishments!
Another topical issue is the spending of the budget surplus. For instance, there are suspicions that investing the money in infrastructure is the most non-transparent way to spend it and the funds would sink no one knows where. Isn't it better to transfer the budget surplus to the so-called Silver Fund?
- No, it isn't! If I have BGN100 I'd invest it in production and I'd develop instead of investing the money in the Silver Fund. And I don't understand why everything that goes to infrastructure is thought to be corruption. According to that logic, there should be no motorways anywhere in Western Europe.
Yes, but it is claimed that the money goes to one and the same firms, connected with rulers. Moreover, there have been numerous instances of violated procedures when assigning public procurement orders.
- There could be all kinds of suspicions. The truth is that last year the money from the budget surplus was spent in the last moment. The situation will be different now and nothing of the kind will happen. On Tuesday, August 26, we held a meeting with Finance Minister Oresharski on that matter. He proposed that BGN1BN-plus from the surplus should be predominantly invested in two packages: for infrastructure and social policy. We should invest in roads because we are lagging far behind in that respect. We are the only country in Europe which has not completed a single motorway. We would certainly focus on the transparency of procedures. We are now preparing amendments to the Public Procurement Act. Yes, money should enter the Silver Fund, but there is nothing more foolish than freezing billions that would be yielding low interest. Elections are pending and that's why there is so much noise about that fund.
The high inflation and the increase of interest rates on deposits result in lower consumption. Won't that slow down the growth of our economy and how does the Government intend to combat that problem?
- That issue has been discussed for quite a long time now, particularly in view of the high fuel prices. You know what's happening in Europe. Spanish farmers, French fishermen, etc. have gone on strikes. I think that over the next few years inflation in Bulgaria won't be lower than 5%, but that won't be the worst thing according to me. We have two options. The first one is a strong state protection or freezing the economy (wages, insurances, pensions and everything else). We put the Bulgarian economy in the fridge and the country's population is gone within five years. When the average monthly wage in the country is EUR250, while that in Romania is EUR400 and that in Greece - EUR800, and things are improving there, it's clear that in four or five years our population would be 3 million.
I cannot comment if or how much economic growth would slow down. Whenever we say that it starts to slow down due to the big crisis in the USA which influenced adversely the financial sector in Europe, just the opposite has happened and Bulgaria's economy has been developing better than expected. And anyone who comes as a fortune-teller from London to say in what an incredible crisis we are and how the entire bank and finance system would collapse as of the next day, that does not sound serious. I think that the next few years would be good for our country's economy if we have a financial and political stability. Economy does not like steep movements and anything of the kind will throw us out of the game. And political disbalance would drive investors away.

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