In parallel with changes to corporate tax making their way through the process of approval by Parliament, the Bulgarian Socialist Party (BSP) is at loggerheads with its coalition partners about its proposed changes to personal income tax.
On September 1, Parliament approved the first reading of changes to corporate income tax. The draft approved provides for a reduction of corporate income tax by five percentage points to 10 per cent. The bill says that all entities not subject to other forms of taxation will be liable to corporate income tax. Only sole traders and natural persons will be liable for patent tax.
Provision is made for a simplified procedure for ceding corporate tax liabilities to companies producing goods in municipalities where unemployment is “high”, defined as 35 or more per cent higher than the national average. This is a lowering of the bar, because the previous definition required a minimum of 50 per cent higher.
Speaking in debate on the bill, which was approved by 118 votes in favour with 35 against and five abstentions, Finance Minister Plamen Oresharski said that tax treatment of dividends had been fully harmonised with the acquis communautaire, and that the bill streamlined the principle of accounting result adjustment.
A report by Bulgarian news agency BTA quoted Oresharski as saying that the bill did not provide for revisions of the tax rates because this would be discussed when the draft national budget was tabled in Parliament at the end of October.
Petar Dimitrov, chairperson of the parliamentary committee on the budget, said that the BSP-dominated Coalition for Bulgaria wanted to see a reduction of tax on reinvested corporate income.
Milen Velchev, the deputy chairperson of the National Movement Simeon II and a former finance minister, said that a proposal to tax business entertainment and similar expenses at 15 per cent seemed incongruous considering the reduction in corporate income tax.
Expenses on fringe benefits, paid in cash, will attract personal income tax rather than corporate income tax. The rate of tax on expenses on fringe benefits will be 12 per cent, and the rate of tax on business entertainment expenses and on operation of means of transport is to be increased from 10 to 15 per cent. The threshold of relief for expenses on voluntary retirement and health insurance and life assurance premiums is to be raised from 40 to 60 leva a month per person insured. Donations to beneficiaries outside the range qualifying for tax relief are to be treated as unrecognised expenses, rather than attracting an income tax, the draft proposes. Dividends paid by Bulgarian subsidiaries to parent companies within the EU, and dividends received from parent companies in Bulgaria to subsidiaries in the EU, will be exempt from withholding tax subject to compliance with the conditions which are fully consistent with the thresholds set in the directive. The relaxed treatment will also apply to transactions in Bulgaria and within the EU. For a transaction that does not fall within the scope of the relaxed treatment, including where a company is from a non-EU member state, the difference between the market price of the assets and liabilities and their tax-assessed value at the time of the transaction will be taxed.
Losses incurred through a permanent establishment abroad from profits derived by the enterprise in Bulgaria will not be subject to carry-forward where double taxation is avoided through the method of exemption with progression. The alternative tax on gambling, which is now levied at two rates, 12 and eight per cent, is to be levied at a single 10 per cent rate. The bill introduces a uniform tax treatment of accounting errors, regardless of whether they are material or minor, applying to all the effective tax treatment of material errors. The accounting income and expense resulting from revaluation of biological assets and agricultural produce will be allowed for tax purposes in the year of their accounting because of the specific methodology of such subsequent revaluation, the bill says.
Positive goodwill resulting from business mergers will not be allowed for tax purposes. Legal persons will be liable for corporate tax (within the exception of such liable for alternative taxes) regardless of whether they carry out activities falling within the scope of those subject to licence tax and whether they meet the relevant turnover requirement. Licence tax will be levied only on natural persons, including sole traders, where the requirements of the Personal Income Tax Act are fulfilled. Enterprises which submit their annual tax return and annual financial statement by electronic means not later than March 31 of the succeeding year will enjoy a rebate.
Meanwhile, controversy attends a proposal adopted at a recent BSP plenum to levy personal income tax at a rate of 28 per cent on incomes of more than 1400 leva a month.
In an interview with Bulgarian-language daily 24 Chassa, former economy minister Lydia Shouleva said that when the BSP could not give, it should at least refrain from taking. It was inappropriate to label people earning more than 1400 leva a month as “wealthy” especially given that such incomes were far below standards elsewhere in Europe. “To call these people rich and to claim that this would resolve the problem of the poor...this will not only not improve the situation of the poor, it will boost the grey economy,” Shouleva said.
Lachezar Bogdanov of Industry Watch said that the 1990s trend of cutting direct taxes, which included abatement of personal income tax, corporate tax and the social security burden, should continue.
On August 27, budget committee chairperson Dimitrov said that it was likely that in 2007 the tax threshold would be set at 220 leva. This would be good for business and the country as a whole, he said.
He said that the government wanted, by the end of its term of office, to further reduce corporate tax. At the moment the lowest corporate tax in the EU was paid in Ireland, 12.5 per cent, Dimitrov said. “We want to reduce its rate in Bulgaria below that figure,” he said. Some believed that it could be safely fixed at 10 per cent, which would help attract capital.
Deputy Social Minister Goran Bankov told Bulgarian-language daily Trud that the ministry would support the idea of a tax threshold of 220 leva, because those with the lowest pay would be relieved of income tax and this would increase their disposable income.
