INTEREST TAX - IN THE ZONE OF THE OBSCURE
Nobody would deny that tax surprises are something very unpleasant. For that reason perhaps the time has come for the Government's financiers to announce publicly when and if tax will be paid on interest yields from saving deposits. The issue is on the agenda due to
the application of EU Directive 2003/48
under which countries have undertaken the commitment to exchange information about the incomes from interest, received by foreign citizens. The so-called directive on savings concerns mainly the bank secret and in the broadest sense melts down the tax competition in the EU. Its fulfilment means that all banks are obliged to send to the respective governments information about their clients and accounts.
The directive was approved after 15 years of bitter debates between EU members and was enforced on July 1, 2005. Some countries, such as Austria, Belgium and Liechtenstein, Andora, Monaco and San Marino, defending the principle of the bank secret, have the right to undergo a transition period with regard to that directive, but nevertheless tax interest yields from deposits. However, they remit most of the collected taxes to the country where the depositors live. Under the directive, the current tax on interest from deposits is 15%, but will be raised to 20% as of 2008 and will reach 35% as of 2011, of which 75% will be remitted to the country whose citizen the depositor is. Debt securities (such as bonds, for instance) do not entirely fall under the regulation of the directive on savings, and that respectively opens opportunities for evading it. The tax can be also evaded by diversifying the portfolio. For instance, tax is not charged on dividends, insurance products and capital increase. That is why the current fashion in Switzerland is for big investors, banks and insurance companies among them, to offer financial products which are not within the scope of the above-mentioned directive. Moreover, only natural persons' deposits (and not those of companies) are taxed under the directive. Therefore, rich bank clients may set up firms in order to conceal their savings.
In fact, the directive on deposits guarantees to the Europeans that they may deposit their money wherever they think the terms are the most advantageous, without owing taxes in the country they live. And the exchange of information is obligatory in order to enable the EU members get the proceeds from their citizens' taxes.
There is no Bulgarian dilemma
regarding the directive's fulfilment, pundits comment. Its regulations are imperative for all EU members. So, our country's obligation at present is only to inform the countries where these incomes are taxed in order to avoid tax evasion. Principally, under this regime of applying the directive there is no obligation to impose an interest tax in Bulgaria. The other option is to introduce the regime of countries which are not obliged to share information about the incomes from interest and instead levy a tax on the source where it is formed (from 15% to 35%). Part of that tax is remitted to the country where the income receiver is.
The second attitude is inapplicable in Bulgaria as no transition periods for the directive's fulfilment were demanded during the negotiations for the country's accession to the EU. Moreover, the EC's monitoring report on the country (for 2005) recommends it to start preparations for guaranteeing the efficient exchange of information about incomes from interest on saving deposits.
The drama for Bulgaria is in the fact that in order to fulfil the directive, by 2007 it should make even the taxation treatment of incomes from interest yields for local people and foreigners. Currently, Bulgarians' incomes from interest are not taxed while those of foreigners are taxed by 15% at the source, i.e. by Bulgarian banks.
Two attitudes are possible in this case: the Government may either begin taxing Bulgarian citizens incomes from interest on deposits or eliminate taxes on deposits of foreign natural persons. Obviously, revenues to the Treasury would increase if the first attitude is accepted, and vice versa.
The political solution to the case
is still not clear. Despite the fact that this problem is not a new one for Bulgaria. The idea - to tax interests from deposits - was recommended to Bulgaria in the mid-1990s by the International Monetary Fund (IMF). During the mandate of the NMSII government there were also debates on the issue. However, the then finance minister Milen Velchev took a flat stance that the country was not obliged to impose a tax on Bulgarian citizens' interests from saving deposits. Moreover, Mr. Velchev said that after more restrictive measures were imposed on crediting on IMF's insistence, the introduction of the successive tax would just have a negative impact on the banks' operation as their proceeds are restricted in that way. At the same time, accusations from the opposition were heard that the NMSII was stretching a point in favour of the people with big deposits.
Both then and now financiers share the opinion that there are some nuances in the domestic fiscal system and the economy of the countries, due to which
the fulfilment of the directive seems quite illogical
especially in the section regarding the taxation of incomes from interests. The reason lies in the scheme for calculating taxes. In developed EU countries incomes from interests are higher than the inflation for the respective year. That means the interest yields real incomes on which taxes are due. But the tax is not paid on the entire interest as an income, and on the yield of the deposits made.
However, the situation is entirely different in Bulgaria. The average interest on deposits is around 3% while the annual inflation is in fact more than 5-5.5 per cent. That comes to prove just one thing - that deposits in this country bring negative yield, i.e. the interest on them is eaten up by inflation in advance. And the losses for the depositors will be still bigger if these incomes from interest are additionally taxed. Therefore, citizens won't have any motivation whatsoever to open new deposits, notwithstanding the banks' ads and the bonuses they promise.
Anyway, if the Government decides to tax Bulgarians' incomes from interest (instead of lifting the taxes for foreigners in order to achieve the EU-demanded equal taxation treatment) that would inevitably cause withdrawal of depositors from the bank system and would certainly fertilize the soil for a new type of financial Ponzi schemes. And banks' expenses will increase because they will have to gather more information about their foreign depositors.
Anyhow, isn't it better to know already what should be expected?