Банкеръ Weekly



ADDITIONAL TAX TO BE RESCHEDULED FOR 3 YEARSThe enterprises, which had revaluated their tangible long-term assets and entirely redeemed them, barely avoided a tax shock they even had not even suspected. The reason is a provision in the Corporate Income Taxation Act, effective in 2003 (presently art. 23, para 2, item 16). It stipulates that when a certain machine or building are entirely redeemed, their revaluated reserve should be transferred to the taxable profit for the current year, i.e. - a corporate income tax shall be charged on that amount. According to accountants, the additional tax will reach hundreds of million levs and will affect most of all the former and present state-run enterprises, which have duely revaluated their assets. Anyway, the problem was somewhat cushioned in the last moment. On December 3, while amendments to the Corporate Income Taxation Act were heard on second reading, the MPs from the Parliamentary Budget Commission voted at an extraordinary session that the payment of tax on the revaluation reserve should be rescheduled for 3 years. The reserve in question is equal to the increased value of specific assets. E.g. if a machine was purchased on December 31, 1997 for BGN1,000 and a year later was revaluated to BGN1,050, the BGN50 would form a reserve that would continue to grow with each following increase of its value. The size of depreciation allowances increases too. Let's accept they are 30% annually in our case and that the machine is worn and torn in a little more than 3 years (i.e. in the beginning of 2001). Had its value remained BGN1,000, then in each of these 3 years BGN300 would had been acknowledged as depreciation costs, and the balance of BGN100 in 2001. But as it was revaluated in the very first year, another BGN15 (30% of the BGN50 increase) will be acknowledged as expenses. If revaluations continue the reported depreciation allowance would go up too, and the taxable profit will decrease. The amount of the additional expenses for depreciation allowances is equal to the revaluation reserve, accumulated through the years. But under the currently effective provisions of art. 23, para 2, item 16, (b) of the Corporate Income Taxation Act, the enterprise which has entirely redeemed its machine in 2001 (as in our example), should add to its 2003 profit the entire accumulated revaluation reserve. At that, independent if it has been written off or still figures in the company's balance sheet, although with a zero value. Shortly, what the State gave in 1998-2001, allowing higher depreciation allowance, will be now collected to the full amount by charging a tax on the revaluation reserve. One needn't be an accountant in order to guess that this is a kind of an inflation tax.Luckily, the Corporate Income Taxation Act concerns only the small revaluations of assets, carried out after 1998, as the so-called big revalorization, effected on the grounds of a governmental decree of 1997, did not create a revaluation reserve. After January 1, 1998 revaluations were effected on an yearly basis as they could not exceed the coefficients for appreciation of groups of assets, announced by the National Statistics Institute. The state-run firms then followed these coeffcients. After the new Accounting Act entered into effect as of January 1, 2002, the enterprises were allowed a greater independence when making the revaluations. It could be assumed that a company which proves a higher market value of its machines in order to increase its depreciation allowance and report a lower profit, defrauds the revenue. But the Treasury is hardly defrauded by the revaluations due to the inflation, as if the depreciation allowances are not indexed, the enterprises would report artificial profits. It's even worse that a few people are informed about that and will understand it only on March 31 when they file their declarations under the Corporate Income Taxation Act, accountants and auditors commented. According to them, things are complicated by the fact that these stipulation will be in fact effective with a backdate, and for assets that were entirely redeemed prior January 1, 2003 if they were not written off the balance sheet. Therefore, the Institute of Professional Accountants presented to Nina Radeva, Chairperson of the Parliamentary Budget Commission proposals in written for settling the problem. One of then projected that assets which have been completely redeemed by the beginning of 2003, should not at all be entered in the taxation depreciation plan, and thus the taxation of their revaluation reserve would be eliminated. The other proposal was to reschedule the payment of the additional tax for 3 to 6 years. It was this proposal that the Budget Commission aaproved in the last moment. The Chairman of the National Accounting Council Velin Philipov said in front of the BANKER weekly that the new regulations for transformation of the profit, concerning the 2004 taxation year, define more accurately what part of the revaluation reserve would be returned, so that neither the budget, nor the enterprises would be defrauded. These regulations will no more concern the assets redeemed earlier, but only those included in the taxation depreciation plan.

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