Банкеръ Weekly

Briefs

VAT REDUCTION IN BULGARIA SERIOUSLY OPPOSED BY OUR EUROPEAN PARTNERS

Ms. Shouleva, NMSII has explicitly demanded amendments to the Value Added Tax (VAT) Bill, voted in Parliament at first reading. Which are its main faults according to you?
- NMSII is mostly against the so-called joint liability in refunding the tax credit to entrepreneurs. Therefore, we want the provisions of the new VAT Bill, proposed by the Finance Ministry, to be made more precise. Currently, we are seeking a decision, guaranteeing foreseeability of the business medium in our country. That was in fact one of the most important pillars in NMSII's policy over the last four years. The legislative stipulations in the sphere of taxation policy should be applied clearly and unappealably. There should be absolute guarantees that prompt taxpayers would not be sanctioned because of somebody else's unconscientiousness. In other words, any possibilities for arbitrariness when interpreting joint liability should be eliminated.
According to some stances, the slow death of Bulgarian leisure industry will start as of the beginning of 2007 when the new VAT Act is enforced. The reason is the increase of VAT on tourist services. What is NMSII's stance on that?
- Leisure industry is undoubtedly one of the most quickly developing sectors in this country. It is the branch with the most important contribution for the reduction of the current account deficit in the balance of payments. Therefore, tax incentives will be necessary in the future, too. And not act in the direction of decreasing the competitiveness through rising VAT to leisure industry services.
Therefore, compromises in that respect will be sought. Bulgarian legislation should be in accordance with the European one, but especially for tourism there should be a possibility to apply a different VAT rate. The current 7% VAT should remain, at that for all services, included in the leisure industry package. That regime should remain in force till when Bulgaria's competitors in the sector - Greece, Spain, Malta, Italy, etc. - keep their VAT rates low. We should not demand a stage-by-stage increase from 7% to 20% (as the new bill stipulates) while the VAT in these countries is within the range of 5% to 7 per cent.
And what if you proposals are not accepted?
- The forecasts are highly negative. You remember the negative effects from the introduction of VAT on tourist services on the spot a few years ago. The bulk of proceeds in the branch come from foreign holiday-makers and it is obvious that the battle for vacationers is in fact a battle of prices. The preset status quo should simply persist. The problem is that we have accepted the single VAT rate and it is quite high - 20 per cent. While in the European Union differentiated VAT rates for various goods and services are applied on a large scale. Anyway, I believe we'll find the necessary concensus before voting the bill at second reading. And we'll unite around the texts which are supported by everyone.
Doesn't our country have a potential for reducing the VAT rate?
- Things concern mainly the growth of consumption in Bulgaria. It is quite significant at present and the pressure on the balance of payments is huge. Thus, from purely macroeconomic considerations and due to the fact that we have a currency board arrangement in the country, it is not reasonable to support the reduction of VAT rate.
Is there an agreement within the ruling coalition regarding the tax policy?
- We aim at maintaining its foreseeability above all. One of the big advantages under NMSII's ruling was that we declared at the very beginning what we planned and we succeeded to fulfil our projections. Regretfully, the present taxation policy is not a natural continuation of what began in 2001. Neither medium-term, nor long-term forecasts in that sphere have been presented. That is what we are trying to explain to our coalition partners, i.e. that it is extremely important for the business to know what taxes it will be paying for at least a few years to come. Because it cannot fulfil its plans without a clear predictability and transparency. NMSII will be insisting on that within the coalition.
You had remarks regarding the 2006 budget, too, but you finally supported it unappealably...
- It is not true. We made proposals for cutting down certain taxes and many of them were approved.
May we speak about serious disagreements between the ruling parties in the sphere of State finances?
- We cannot speak about serious disagreements. But some proposals of the Government or of some of the coalition partners might be a subject of discussion, change or debate. That is the normal practice. It should not be thought there is a drama when there are ideas for changing some provisions, as is the case with the VAT Bill now. These are not controversies, but optimization of texts and a routine practice in normal democratic countries. As we declared in our pre-election programme, NMSII is for a gradual reduction of the corporate tax and for approximation of the personal income tax to a unified scale. We'll be maintaining these taxation directions when specifying the coalition's policy. Of course, within reasonable boarders, determined by Bulgaria's general economic situation.
That is to say you will be insisting on the further reduction of taxes?
- It should be born in mind there is an European pressure for stopping the decrease of taxes in Bulgaria. Things are complex and do not depend on the transitory willingness for that to happen.
Finance Minister Plamen Oresharski has repeatedly explained that the profit tax rate in Bulgaria is among the lowest. Is it then likely that the corporate tax goes down from the present 15% to 12.5% or 12%, as written in NMSII's pre-election programme?
- We in NMSII really believe our economy needs lower taxes. The lower, the better, because more investments will be attracted in that way. The corporate tax rate was 23% when our ruling began and was gradually cut down to 15% by the end of our mandate. But as I said, our European partners quite seriously oppose a future decrease of taxes in this country. Many finance ministers from the European Union share the stance that low taxes in the new member-states have a negative effect on their own economies, causing higher unemployment and export of manufacturing in the newly accepted members. That is what they say: we are net payers to the European funds and we pay high taxes in our own countries. And the states which are net receivers have low taxes and take much European money. That situation seems unfair to them. There was even a proposal that if the new members decide to decrease their taxes additionally, that should be done at the expense of the financial assistance from the European Union. In other words, we should be always careful when seeking a balance between the taxation policy we follow and our participation in European markets and in the joint European policy as far as it exists.
There is talk of a possible reduction of the Pension Fund contribution to 2 per cent. At the same time, experts insist on raising the healthcare insurance instalment by 2 per cent. What would be the effect to the taxpayers in that case?
- The effect will be undoubtedly a zero one. But this is not an increase of the insurance burden. Your question is very broad. I have always maintained the thesis that the insurance burden in Bulgaria should be cut down as a whole as it is the cause of the big grey stream of labour force. In my opinion, it is not sufficient to reduce the insurance payments rates alone. Serious steps towards reformation of both social and healthcare insurance are necessary.
Concerning our pension system the share of private funds and of the so-called second pillar (additional pension insurance) is extremely small. At the same time, these are the funds, accumulated on the personal accounts of insured persons, bringing high yields and respectively much higher pensions than the State-paid. One of NMSII's ideas is to steeply raise the share of the instalment for the second pillar. It would have a much bigger effect than the reduction of the insurance burden. Thus, employers and employees will have a clear vision about the size of pensions they will be getting.
Would you share your proposals in the sphere of healthcare insurance?
- My personal stance is that increasing the size of instalment to the Healthcare Insurance Fund would not solve the problems in that sphere. It would be better to introduce additional voluntary healthcare insurance. It is clear for all that the money gathered now cannot cover the entire package of healthcare services. Only 2% won't be sufficient to cover the deficit. It is high time to realize what part of the services could be covered by the Healthcare Insurance Fund. An attitude when everything is allegedly covered and it is practically not entirely financed and the people are in fact made to pay, will only increase the chaos in the system.

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