It has become customary for some wealthy Bulgarians to describe the source of their acquisitions as loans from other people.
Suspecting that this was no more than an excuse to evade taxes, Bulgaria’s National Revenue Agency (NRA) plans to crack down on the practice by requiring all taxpayers to declare loans of more than 5000 leva in their annual tax forms.

The requirement will apply to revenue forms for 2010, which will be filed in 2011, NRA head Krassimir Stefanov said on October 18. The amended regulation was approved by the Cabinet on October 14 and now awaits Parliament’s consent.

Taxpayers will be asked to declare only loans from individuals, not from lending institutions, Stefanov said.
"Fictitious loans have turned into somewhat of a national pastime. Every day we listen to explanations about non-existent loans. This has to end," Stefanov said in a statement.

"I am certain that this measure will not create an administrative burden, because we all know that these loans do not really exist, so they will not be declared. The change means that unless the loan is declared in the tax forms, it will not be be tax-deductible."

According to an NRA study, the amount of loans between individuals was 2.7 billion leva. The agency concluded that most were fictitious and had the sole goal of evading taxes.

The loan explanation is used by taxpayers in half of the cases when they make expensive acquisitions worth more than their declared income, NRA said. Usually, these loans are said to be long-term and carry no interest, nor is there any paper trail to prove that the transfer took place, NRA said.

In one case, NRA launched reviews of 139 individuals that one taxpayer identified as lenders in his tax form, in an attempt to prove attempted tax evasion.

Panacea or snake oil?
NRA’s reasoning is that prospective tax evaders will no longer use the loan excuse if they have to declare such loans in their tax forms, rather than whip out the excuse during a tax review.

Analysts, however, were not persuaded that the amended regulation would achieve its goal. "People declare fictitious loans to avoid paying taxes. From now on, they will declare the same loans in their tax form, so what will change?" economist Georgi Angelov wrote in his blog, ikonomika.org.

"NRA can investigate the people that allegedly gave the loans even now. If they can prove that the loans are fictitious, then there is no problem for the NRA, but clearly the agency cannot. So how will the requirement to declare these loans change anything, other than by introducing an additional administrative burden?"

Luchezar Bogdanov from think-tank Industry Watch was equally scathing. "Indisputably, several hundred people are laundering money in this way, showing receipts of loans, but the sums are usually much higher than 5000 leva," he told website vsekiden.com.

"Yes, there is a problem, but its solution cannot be sought in the infringement of liberties and the sanctity of information of nearly the entire population," he said. "The tax administration should focus on the big deals and big risk of money laundering using this method, rather than the money a father lent his son to buy a TV. The state has to come to grips with the fact that it cannot know everything and control everything."