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LEGAL ASPECTS OF THE PRIVATE SECTOR IN BULGARIA
III. TAXATION
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Up to 1988 the legal framework of taxation
was formed by numerous legislative and government acts - the
Constitution of the People's Republic of Bulgaria, tax laws, acts
of the Council of Ministers. In practice, however, it was also
subject to continual modifications and specifications by various
regulations, instructions, etc., on an administrative level. Until
the end of 1988 the legal persons liable by law to pay taxes were
the state-owned and municipal economic organizations and the
cooperatives. Taxing of public organizations was limited, as few of
them were engaged in economic activity.
The period of extremely centralized state
regulation of the national economy was characterized by the use of
the so-called "two-channel tax system" - turnover tax and
contributions to the state budget. After the establishment of a new
management system in 1965 there followed the introduction of other
tax payments, with the fiscal aspect being of secondary importance,
while the chief purpose was to use them as "economic levers" in
orienting the activity of the enterprises towards a specific goal.
Each new model of the economic mechanism changed the name, content,
size and organization of these tax payments. Tax legislation was
thus marked by legislative instability.
The incomes of individuals carrying out
some sort of economic activity were charged according to the Income
Tax Law.
As of January 1, 1989 and the introduction
of the so-called "company organization", along with the major
taxpayers - the state-owned and municipal companies, there appeared
new entities - private companies, branches of foreign persons
licensed to carry out economic activity on the territory of
Bulgaria, as well as joint ventures.
The adoption of Decree N 56 on Economic
Activity and the provisions for commercial companies marked a new
beginning for the system of commercial entity taxation.
The conditions and organization of
accounting in private one-man and collective companies, as well as
the taxation of the personal incomes of their members and employees
were provided for by Ordinance N 3 on the Organization of
Accountancy in the One-Man and Collective Companies of Citizens,
issued by the Ministry of the Economy and Planning and the Central
Statistical Direction (State Gazette 50/1989).
Private partnerships organized their
accounting in the manner established for legal person
companies.
Despite the principle proclaimed by art.
4, par. 1 of Decree N 56 that all companies are granted equal
business conditions, in practice private companies were placed on
an unequal footing in terms of taxation, moreover, at the very
beginning of their economic activity.
Thus, for instance, instead of removing
taxation on that part of the private company's earnings which is
spent on the acquisition of built-up real estate for industrial
purposes, the practice remained of charging the entire income.
Typically, the chief source for purchases of real estate,
constituting a fixed asset of every company, used to be the
provisions for depreciation. However, that placed the newly created
private companies on an unequal footing since only state-owned
companies had acquired fixed assets up to then (for instance, real
property - land and buildings), moreover, mostly granted to them
free-of-charge by the state. On that basis state-owned companies
were entitled to provide for depreciation on the total fixed asset
value and use that free of tax allowance to buy new fixed assets,
etc.
The newly created private companies had no
fixed assets and consequently no basis to make deductions for
depreciation. This led to absurd situations when a private company
wished to buy real property from the income received in the end of
the year and was required to pay profits tax even on the money
spent for the purchase, since the state taxed the entire
earnings.
Another serious problem for the
development of private companies was the fixed depreciation rate of
1 per cent, determined in accordance with the Ordinance N 3 on the
Organization of Accountancy in the One-Man and Collective Companies
of Citizens. All allocations above that percentage were taxed,
which posed another obstacle to the normal development of the
business, more specifically accelerated depreciation and
renovation.
According to Art. 64 and 78 of the then
acting Constitution, taxation was determined by law, and not by
government acts and regulations. However, Ordinance N 3 required
one-man and collective companies to pay the due tax monthly, while
according to art. 33, par. 1 of the Income Tax Law (in its version
at the time), the tax was paid annually.
Furthermore, the newly formed companies
were granted no preferential treatment - for instance, reduced
taxation or tax exemption in the first few years of their
existence.
All of these tax regulations placed
private business in a disadvantageous position, and on the other
hand prompted it to seek ways of sidestepping the law and tax
evasion.
Since the adoption of the Constitution of
the Republic of Bulgaria in 1991, taxation has been based on the
provision of art. 60 of the Constitution, according to which
citizens are liable to pay taxes and duties fixed by law according
to their incomes and property, with tax concessions and
discriminatory taxes being established only by law. The National
Assembly determines taxation and the amount of payable taxes
according to Art. 84, Paragraph 3 of the Constitution. The process
of building up a tax system in a position to meet the needs of the
transition to market economy is currently under way.
Presently our tax system includes the
following types of taxes, almost all of which apply to the economic
activity of the private sector as well.
Direct property taxes:
Built-up Real Estate Tax.
This tax has been regulated by Art. 5-21
of the Law on Local Taxes and Tariffs. Sole traders and private
companies which own buildings are liable to pay the respective
taxes.
Inheritance Tax.
It has been provided for by Art. 22-32 of
the Law on Local Taxes and Tariffs.
The category of direct property taxes used
to include the so-called rent tax, or land tax. It was regulated by
art. 87, par. 1 of Decree N 56 and used to be charged only on legal
persons engaged in economic activity and having been granted the
use of farm land. Farming cooperatives, sole traders, and farmers
were exempted from that tax. The rent tax has been abolished as of
October 1, 1993, with the repeal of the respective provisions of
Decree N 56.
Direct income taxes:
Income tax.
It is imposed by the Income Tax Law. The
tax is charged on all personal incomes (from contracts of
employment and contracts of services, rentals, dividends to
shareholders of cooperatives or companies), the incomes of sole
traders, and of non-profit organizations.
The persons liable to pay income tax
are:
- all Bulgarian citizens, irrespective of
domicile and place of residence;
- foreign citizens, with the tax being
charged only on the incomes received in Bulgaria;
- sole traders- the tax is charged on the
incomes received from their business activity;
- foundations and non-profit
organizations.
The incomes charged under art. 13 of the
Income Tax Law include incomes from private business activity,
registered under the procedure prescribed by Decree N 35 of the
Council of Ministers on the Adoption of Rules and Regulations on
the Collective and Personal Labor of Citizens for Additional
Production of Goods and Services; the income from the business
activity of sole traders, with a mandatory requirement of keeping
accounts in accordance with the Accountancy Law.
Profits tax.
This tax has been regulated by art. 87 of
Decree N 56 on Economic Activity. It is charged on the annual
profits as the difference between total revenues and the expenses
under sections I, II, and III of the Income-Outcome Statement
(addendum to art. 40, par. 1, sec. 2 of the Accountancy Law). The
resulting net profits are subject to restructuring under art. 73,
par. 5 of the Rules for the Implementation of Decree N 56 on
Economic Activity.
The profits tax is charged at a rate of 40
per cent, the banks and persons specified under art. 1, par. 4 of
the Bank and Credit Activities Act pay at a rate of 50 per cent,
and the State Savings Bank at a rate of 70 per cent.
The following tax concessions are
presently given to private legal persons under art. 87, par. 4 of
Decree N 56:
- companies pay at a rate of 30 per cent
if their taxable annual earnings do not exceed BLV 1
million.
- companies reduce their taxable earnings
by the amount spent and/or payments on bank loans for the
acquisition or creation of tangible or intangible fixed assets in
the country. The tax reduction applies upon acquisition of the
following assets: commercial and industrial buildings and land,
provided that a licence has been obtained for the construction of
such buildings; facilities, machinery, and equipment; means of
transport (excluding automobiles) for cargo and passenger
transportation and supply of services; productive and draught
animals.
Up to 1991, the provision of art. 90, par.
2 of Decree N 56 allowed in the case of certain manufactures and
activities specified by the Council of Ministers for payments on
the principal and interests on investment loans to be made from the
earnings prior to charging the profits tax.
On the other hand, under the existing
regulations until 1991 - art. 90, par. 4 of Decree N 56, the
Council of Ministers could grant full or partial tax exemption to
certain activities or territories. Thus, for instance, up to 1991,
manufactures and services in built-up areas with up to 1,000
inhabitants were exempted from profits tax. Where the population
was between 1,000 and 5,000 people there was a 20% reduction of the
charged profits tax for activities in the trade and services
sectors, according to Decision N 138 of the Council of Ministers of
May 31, 1991. Decree N 97 of the Council of Ministers of May 29,
1991 exempted from profits tax manufactures and activities in
specific built-up areas along our southern and western borders.
Decree N 130 of the Council of Ministers exempted from taxes
companies in the border zones licensed to trade in foreign
currency. According to par. 6 of the Transitional and Final
Provisions of the Rules for the Implementation of the Law on the
Ownership and Use of Farm Land, the legal persons who are
agricultural producers of vegetable and animal products are
exempted from profits tax.
Currently the concessions with respect to
the payment of profits tax are established in art. 20, par. 2 of
the Law on Political Parties, art. 15 of the Law on the Academic
Autonomy of Higher Education Institutions, art. 6 of the Foreign
Aid Agency Law, art. 12 of the Bulgarian Academy of Sciences Law,
art. 26 of the Bank and Credit Activities Act.
A number of tax concessions used to be
provided for foreign subsidiaries and companies with foreign
participation, but have been abolished with the amendment to Decree
N 56 of October 1, 1993.
One such provision, for example, was found
in art. 107 of the Decree, according to which the profits of
subsidiaries of foreign persons or companies with foreign
participation above 49 per cent and above USD 100,000 or the
equivalent in some other currency, were charged at a rate of 30%.
The provisions were also abolished according to which profits from
economic activity on the territory of the duty-free border zones
were exempted from profits tax in the first five years, and were
subsequently charged at a rate of 20 per cent. The provision of
art. 112 of the Decree was equally abolished, according to which
companies with foreign participation and the subsidiaries of
foreign persons were exempted from profits tax for a term of five
years following their registration, when their economic activity
was in certain high-tech fields specified by the Council of
Ministers, in agriculture, and the food-processing
industry.
Tax on Pay-Roll Increase
This tax has been regulated by art. 87,
par. 1 of Decree N 56. It is charged on the size of the pay-roll
increase for each trimester of the current year and payable by
companies with state or municipal participation over
50%.
Indirect taxes:
Turnover and Excise Tax
This tax was imposed by the Law on
Turnover Tax and Excise Duties. It was charged on the sale of goods
and services. Liable to pay this tax were companies, state-owned
and municipal enterprises, sole traders and private persons
producing or importing taxable goods and services.
With the introduction as of April 1, 1993
of the Value Added Tax Law, the Law on Turnover Tax and Excise
Duties has been abolished.
Any commercial entity importing raw
materials, materials, finished products, regardless of their
designation - whether for sale in the domestic market or further
processing - is liable to pay duty. The legal regulation is
contained in the Customs Law, the Rules for the Implementation of
the Customs Law and numerous government acts on the control,
procedure of collecting, and the customs tariff. The frequent and
numerous changes in the customs regulations is one of the reasons
for the evasion or the delayed collection of payable
duties.
Other contributions to the
budget.
There are a number of provisions in Decree
N 56 requiring companies and sole traders to make additional
payments to the state, called contributions, such as:
- legal persons with state and municipal
participation over 50% carrying out commercial activities as
defined by art. 1 of the Law on Commerce make obligatory
contributions to the municipalities amounting to 10% of their
taxable profits, and to the Meliorations Fund amounting to
2%;
- employers make obligatory contributions
to the Professional Training and Unemployment Fund to the amount of
7% of the accrued payroll, excluding benefits and
bonuses;
- obligatory contribution to State Social
Security to the amount of 35% of the accrued payroll;
In conclusion, it should be noted that the
tax reform has not been carried out consistently since
1989.
At one point tax concessions did not apply
to private legal persons, with the exception of foundations and
cooperatives, but only concerned private persons.
On the other hand, the considerably
delayed introduction of the value added tax and charging of the
turnover and excise tax created a number of problems, both in terms
of the prompt collection of payable taxes, and in impeding the
activity of companies.
The requirement for taxation of citizens
and commercial entities to be established by law has not as yet
been fully met. The legal framework of taxation of commercial
entities is still set by the repeatedly amended Decree N 56. There
still exist a great many government regulations which in fact
allows for constant tax modifications on the part of the executive
power.
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