Банкеръ Weekly



Plamen Oresharski and his team are the new masters of the Ministry of Finance who will try to solve the long delayed problem of imposing reliable control over the operations of duty free shops in Bulgaria. After nearly six-month wandering in search of the right way out of the duty free issue, Minister Oresharski and his deputies decided to copy the experience of the former top financier, Milen Velchev. Therefore, at this stage any hopes about regulating the indiscriminate imports of alcohol and cigarettes labelled Duty free only are mainly related to the duty free trade draft prepared by Velchev's team.
According to unofficial information, a high-level meeting was held in early March at the initiative of Plamen Oresharski (it has been the first one since a year ago) between the leaders of the budget department and duty free companies. The conversation, also attended by Deputy Minister Georgi Kadiev, the Tax Policy Directorate head Lyudmila Elkova, and representatives of companies holding duty free trade licences, aimed at discussing the texts of the future document. At first sight, there is no problem with that. However, the same draft (with small exceptions) was discussed at length during the mandate of the government of the National Movement Simeon II (NMSII). The cabinet of Saxe-Coburg-Gotha even approved the draft prepared by the financial ministry and brought it forward to the 39th National Assembly. But as the three-partite coalition Government came to power last August, the draft was withdrawn from the Parliament and the duty free act saga started from the beginning.
While both former and present legislators exercised in making laws and rewriting the same clauses, the Supreme Administrative Court cancelled the competition appointed by Milen Velchev last year for licensing duty free operators saying there was no special act to regulate the process.
Sources from the financial ministry claim that the above-mentioned meeting between Plamen Oresharski and duty free operators led to no particular agreement. Radostin Genov, Chairman of the Association of Duty Free Companies in Bulgaria, confirmed there were principle differences on the duty free draft texts. Still, he denied there was tension between the current leaders of the ministry and the companies. And this couldn't have been said about former ministers.
According to Mr. Genov, one of the most dubious issues in the draft is the text stipulating that companies allowed to trade with excise duty goods freely are not allowed to carry out other commercial activities. There is such regulation in the draft prepared by the financial ministry indeed. Experts familiar with the case say that the idea about imposing such restriction is related to the easier calculation of the tax on duty free shops' turnover. The rulers plan to replace the current practice of duty free operators paying 2% of the turnover to the Customs Agency by the payment of a single duty on the sales amounting to 4 per cent. According to the currently operating regulation, apart from the payments to the customs, duty free operators also owe a tax on profit under the Corporate Income Taxation Act. The tax authorities have repeated many times that this double system made the financial results distorted.
However, legal experts say that the introduction of a legal requirement that obliges a company to carry out an activity contradicts the Constitution and the Commercial Act. Besides, duty free companies will hardly manage to re-register within the three-month period proposed by the Ministry of Finance.
One of the ministry's new proposals is definitely disliked by the duty free businesses - it stipulates that the excise duty and value-added tax owed to the treasury be secured by a money deposit in a real amount. This practice is being applied now, but only for the excise duty. VAT is secured by a bank guarantee.
It is also curious whether or not the state is going to accept the request of the duty free association which proposes that once the act becomes valid, the current operators be privileged by keeping control over the shops they now run without participating in competition again. The draft written by the ministry of Oresharski only gives that possibility to shops at the ports and air ports which are run by state-owned companies. As to the licensing of private entities, it is written that they compete for free shops, but there is no definition of this notion. The team led by Milen Velchev aimed at organizing a competition for all shops with expired licences, but this intention was spoiled by an intervention of the court.
The issues on which the state and the operators have failed to reach an agreement so far also include the possible introduction of excise labels not only for alcohol but also for cigarettes sold in the shops. Should the idea be approved by the MPs, too, instead of a special notice on the cigarette box there will be a security which the trader pays in advance.
According to Radostin Genov, in case that excise labels are put into operation, large world companies will give up producing cigarettes for the Bulgarian duty free market because they will hardly agree with introducing new sticking technologies only because of Bulgaria.
Considering that there are so many dubious issues, it will not come as a surprise if the duty free puzzle fails to be arranged during the mandate of the current Government. Despite the stubborn threats of the financial ministry that the duty free trade act would be published no later than the middle of the current year.

According to figures provided by the Association of Duty Free Companies in Bulgaria, duty free shops have reported a turnover amounting to BGN104MN. They have paid some EUR2.1MN to the Customs Agency. The shops registered a 4% growth of sales in 2005. However, the turnover figures do not include oil sold by the oil stations owned by the Turkish businessman Fuat Guven. A curious detail is that in 2005 only shops at the ports and air ports registered an increase in the sales (from 35 to 70%), while those at the land borders registered a 3.5% drop in sales.

Since 2003, the operation of duty free shops has been targeted by the Ministry of Finance (MOF) as part of its efforts to address the gray economy and the smuggling of excise goods. Duty free shops play a major role in cigarette smuggling in Bulgaria, as well as smuggling of alcohol, and to a lesser extent perfume and other luxury goods. Attempts by the MOF to close down shops operating in Bulgaria have been unsuccessful, in part due to political opposition within the ruling coalition. The focus of the Government of Bulgaria has been on the use of the duty free shops to violate customs and tax regimes. It is wholly possible that the shops are used to facilitate other crimes, including financial crimes. Credible allegations have linked many duty free shops in Bulgaria to organized crime interests involved in forced prostitution, the illicit drug trade, and human trafficking. There is no indication, however, of links between duty free shops or free trade areas and terrorist financing. The MOF's Customs Agency and General Tax Directorate have supervisory authority over the duty free shops. According to these authorities, reported revenues and expenses by the shops have clearly included unlawful activities in addition to duty free trade. Good identification procedures are lacking. For example, MOF inspections have revealed that it is practically impossible to monitor whether customers at the numerous duty free shops have actually crossed an international border.
From the report of the US Department of State, dedicated to the operation of duty free shops in Bulgaria and the committing of financial crimes and published in early March.

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