Government officials and representatives from Bulgarian industry expressed strong opposition to the International Monetary Fund and its demand for abolition of the corporate income tax reduction from 15 per cent to 10 per cent.

The purpose of the IMF mission from October 18 to 25 was to prepare the final fourth review of the precautionary stand-by arrangement between Bulgaria and the IMF. But during his visit, Robert Hagemann, head of IMF mission to Bulgaria, made it clear that the decrease of the corporate income tax to 10 per cent did not follow IMF prescriptions for Bulgaria’s economic development.

Hagemann made several statements calling the decrease “groundless” and not well timed. His comments were met by an unexpected strong and united opposition from every circle of Bulgaria’s economic life.

Parliament approved the change in corporate income tax on October 19. The move earned high praised from business representatives seeking to attract more foreign investments to Bulgaria from Europe. Parliament’s decision placed Bulgaria amoung the countries with the lowest profit tax in Europe, together with Cyprus. All political parties in Parliament supported the move, rare evidence co-operation can exist between the public and private sectors. That is why Hagemann’s statements met such resistance.

When Hagemann met Government officials on October 26, he faced a position that tax cut would contribute both to attracting more investment to the country and help develop small-sized enterprises, a Cabinet statement said. The Government also cited the precedent of Ireland, a country whose successful policies Bulgaria has undertaken to follow, including tax cuts that have made Ireland an economic miracle in Europe today. The country has even given guarantees that the profit tax rate would not be changed for 20 years.

Hagemann said that the reduction of the corporate income tax held risks for the budget in the next year, both with regard to revenues and the need for new expenses rising from EU accession. Hagemann insisted on at least a two per cent budget surplus to counteract Bulgaria’s large current account deficit. By comparison, the expected budget surplus for Bulgaria in 2007 is 0.8 per cent. The country is scheduled to join the EU on January 1 2007. That is why the reduction came at the wrong moment, Hagemann said.  The planned salary increase of 10 per cent was also too high, taking into consideration 2007 budget parameters, he said.

Bozhidar Danev, chairperson of the Bulgarian Industrial Association, told The Sofia Echo that Hagemann had no reason to ask for the withdrawal of the corporate income tax reduction. “One of the main positive consequences of the reduction of the corporate tax is that the so-called ‘grey sector’ of the economy will come into light,” Danev said.   

Some relief came on October 23 when Hagemann met Petar Dimitrov, head of Parliament’s budget and finance committee. After the meeting, Dimitrov told journalists the IMF could only provide advice on  issues. There was no logic to abolish the decision taken by Parliament on October 18, since it was included in the draft budget for 2007, Dimitrov said.

On all the other issues concerning Bulgaria’s economic development, Hagemann expressed satisfaction. When Hagemann met Prime Minister Sergei Stanishev on October 26, he praised the Government’s prudent fiscal policy.

Bulgaria had to continue reducing inflation, while also maintaining sustainable development and limiting the current account deficit, an IMF statement released after the meeting said.

“The authorities have a correct approach of maintaining strict fiscal policy discipline - current forecasts for the 2006 budget surplus stand at some 3.3 per cent of GDP, which helps limit risks related to external imbalances,” the statement said.

The authorities have a correct approach of maintaining strict fiscal policy discipline - current forecasts for the 2006 budget surplus stand at 3.3 per cent of GDP, which helps limit risks related to external imbalances. Progress in the implementation of structural reforms on the programme, however, is largely irregular.

The next IMF mission will take place in December, when a review of Bulgaria’s arrangement with IMF, which expires in March 2007, will be made.