Банкеръ Weekly

Briefs

NEW VAT RATE TO BE KNOWN IN AUTUMN

Mr. Dimitrov, the Value-Added Tax Act adopted at first reading stipulates that the indirect tax rate will be 20% next year. What is the real situation with the value-added tax amount in 2007, since the Minister of Finance Plamen Oresharski said many times in the past weeks that it was early to talk about concrete rates?
- This is what I'm saying, too. If there is an objective ground to change the 20% rate which is written in the law, changes may be made. This will probably be decided next autumn when the 2007 budget is adopted, as it happens every year. The major aim of the new value-added tax act is to provide harmonisation with the European requirements. As far as the rate is concerned, now we have no reasons to think there will be fluctuations. Of course, the 20% written in the act has is somewhat conditional. The ruling coalition committed itself to reduce the tax in the end of the mandate. However, nobody has ever said it will happen in 2007. It will all depend on the budget revenues and expenditure, the condition of the current account of the balance of payments, and of course, on the price of oil and oil products which influence inflation in Bulgaria directly.
Speaking of value-added tax, the taxation of legal services is expected to provoke sharp reaction on the part of the opposition. These services are said to grow expensive and that will violate major constitutional rights of the people.
- Healthcare, education, the right to work and other rights are constitutional, too, and they are subject to value-added tax assessment. So, why should there be unequal tax treatment? Someone might say that medicines or textbooks should be exempt from this tax, too. Not to mention milk, bread and other food products that would become more accessible for consumers. This is why we cannot make a tragedy of the fact that legal services will grow expensive and people will be deprived of defence.
Has the mechanism of assessing vehicles been cleared enough, so that we can avoid witnessing tax wars between importers of new and old vehicles?
- In the case of new vehicles, value-added tax will be paid where the vehicle is registered, therefore there will be no difference in which country within the European Union it has been bought. The rate in the country where it is acquired is zero. As to the old cars, value-added tax will not be paid in Bulgaria but in the country where the car has been acquired. However, there is an obligation for the car dealers if their sales for Bulgaria exceed a certain barrier. In this case they need to register in Bulgaria and apply the Bulgarian tax rate. And it is clear that since countries have different value-added tax rates, it will be more profitable to buy an old car in a country with a lower rate.
Construction estates, privatisation deals, scrap trading, etc. are already in the range of commodities subject to value-added tax. Won't this cause tension in the respective sectors of the economy?
- Look, there is a list of 17 goods and services that may be either exempt or taxed with lower rates. The commodities mentioned above are not among them, that is why Bulgaria cannot avoid applying a taxation regime. Of course, there are already people dissatisfied with this fact. Companies that occupy with collection of scrap are concerned that fictitious buyers of scrap may appear and try to drain value-added tax by exercising this activity. That is why, together with representatives of this business we are looking for mechanisms to prevent or at least minimize the possibilities for draining value-added tax. I would not say that the draining loopholes are put in the act itself, but all forms of protection against this process should be undertaken.
Can we say that the new value-added tax act impedes the draining process to a greater extent compared to the previous one?
- The barriers in front of draining value-added tax refer to the so called joint liability. This creates concern since in any normal country taxpayers should not be held responsible in the process. But conditions in Bulgaria are specific. Everyone has visited the Iliyantsi market and has seen those dark-skinned Bulgarians who offer invoices. The opposition put forward extraordinary measures against the organized crime of which the draining of value-added tax is part.
In fact, there is no political power satisfied with the joint liability. We are interested in finding a more democratic mechanism that protects the white dealer. But at the same time, we cannot allow that the budget is drained. Working alternatives for changes in the joint liability principle may appear between the first and the second reading of the act. We are going to support them with pleasure. But I think this will not happen. You remember that the value-added tax account was once introduced with the intention to put an end to the draining and was chosen as the lesser evil.
A lot of nice words have been said about the removal of value-added tax accounts, since they reduce red tape and costs of the companies. On the other hand, however, the term for restoring the tax credit is prolonged - up to three months, which is the general principle. It turns out that the measure is a double-edged sword. Is this true?
- I feel more fear since the European information system which reports the value-added tax operates with a three-month cycle. It means that the accumulation and submission of information from this system to Bulgaria confirming that a certain inter-community delivery has been fulfilled will be received in a three-month period. But how long after the expiry of this period - it is not known. That is why we may find ourselves in the extremely grave case in which the delivery is fulfilled, the money is restored, but it all happens on paper only. Virtually... Then, when the information from the European Union arrives, we'll find out that the delivery has been fictitious and no delivery has in fact been made.
Moreover, I find it difficult to say how the European information system will be combined with the terms for restoration of value-added tax, bit I'm afraid there will be problems.
You mean the problem with draining value-added tax will intensify?
- I'm afraid that with the custom-houses removed this process will catalyse rather than shrink. It's obvious that the terms for restoring value-added tax need to be coordinated with the operation of the internal and the European information systems. Otherwise, we'll have no guarantees that draining will stop, just the opposite.
But in Bulgaria there is no single information system yet?
- People are working on it. To my regret I learned from the financial ministry that the developer of the system of the National Revenue Agency asked for suspension again. But the system had to start operations at the beginning of the summer. If it fails to start working in the coming months, more radical solutions need to be sought. Its construction cannot be delayed infinitely.
How long is the requested suspension this time?
- I cannot say concrete terms. I have no official information, but I found out unofficially that the French Bull company has some problems with starting the system in the term promised.
In fact, does Bulgaria have a choice with regard to the clauses of the new value-added tax act, considering that it copies the European legislation in 80-90 per cent?
- Unfortunately, we are not able to copy the European judicial system, the potential of the European administration and the ethics of the European business.
By July 31, as we promised in the memorandum with the IMF, we should have adopted the laws on income tax and corporate tax harmonized with the European legislation. Will the deadline be respected?
- What will happen with these acts cannot be said now as they have not entered the National Assembly. In fact, the new value-added tax act had to be adopted finally by the end of last month, too, but it was not. That's why it is not clear whether or not we can expect a reduction of the income tax and the tax on profit. It all depends on the fulfilment of the budget revenues. To the greatest extent it is predetermined by the value-added tax, which explains why a reduction of this tax is unlikely. In order for a possible reduction of the value-added tax to be compensated, other tax rates need to be increased. That is why the effect of these reductions or increases on the competitive power will be assessed. Being an indirect tax, value-added tax is paid by the Bulgarian consumer and does not reflect on the exports. Whereas the increase of corporate tax, income tax or insurance payments reflects directly on the exports price and disturbs the competitive power.
Will the corporate tax be reduced next year?
- In terms of tax on profit we stay at Europe's border of tolerance. In Europe, the lowest rate is about 12.5% and it is a rarity. In Bulgaria, there is willingness to cut the present 15% to 12 per cent. But it depends on many factors. Cutting the rate below 12% will transform the country into an offshore zone and the European Union will hardly allow this to happen. It would be an arrogant dumping towards the rest of the European countries.
Did you give up thinking about introduction of a zero rate on reinvested profit?
- No, just the opposite. You know that the two-year term is valid for depreciation of software and computers and that's an almost zero rate. If it is possible, this term will be cut to one year.
A further 2% reduction of insurance payments from 2007 is mentioned from time to time. Will it be realized?
- Nothing has been said officially. Analyses are still being made of the 6% reduction of the insurance burden (social and health) from the start of 2006. For the time being, this seems to have been a positive trial. Revenues to the Pensions fund have not shrunk, even though a BGN600MN gap was expected for the entire year. This is explained by the improved level of collection.
Even governmental financiers said already that next year will be a dramatic one for the budget, mostly because of the reduced value-added tax revenues and the possible instalment Bulgaria will have to pay for its membership in the European Union. What is your opinion?
- I would not want to provoke dramatic expectations. Bulgaria's instalment will amount to some BGN600MN. The budget revenues will be overfulfilled both for 2005 and 2006 - I guess overfulfillment will go beyond 2% of the gross domestic product. Therefore, there will hardly be grave shocks for the treasury or breaking of the financial stability.
But according to the opposition it is better to use the budget surpluses for cutting taxes because they have been taken from the taxpayers.
- The 2% of GDP in question can be considered taken away from the imports and put into the reserve in order to support the financial stability. I myself think this money has to remain in the business. And if it transforms into production and exports, we should rush towards cutting taxes. But if it is added to the deficit on the current account, it will only make the situation worse. This pressure did not come from the National Assembly. You know that the international financial institutions' insistence is in that specific direction - not to transform the surpluses into imports.

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