INSIGHT: Bulgaria Tax Forecast—Get Ready for Climate Change

The Bulgarian parliament recently passed amendments to its tax legislation which are expected to enter into force on January 1, 2020. The key driver behind these amendments, which were passed on November 21, 2019, is further implementation of the EU legislation concerning both direct and indirect taxation.

However, lagging behind to an extent are the local drivers to accelerate local tax climate change. The amendments may bring stability, but still fail to address some issues that may require updated regulation or reporting easing for businesses.

Direct Taxation Impacts

Following the Organization for Economic Co-operation and Development (OECD) and EU initiatives related to base erosion and profit shifting (BEPS), and the EU anti-tax avoidance directives ATAD I and ATAD II, Bulgaria will be implementing new rules for taxing trans-border transactions in cases of hybrid mismatches, which exploit differences between tax systems in order to avoid corporate tax payments in any jurisdiction.

Hybrid mismatches often allow companies and individuals to achieve double non-taxation: double deduction, deduction without inclusion and non-taxation without inclusion. The new measures aim at eliminating these arrangements in order to stop tax-base erosion, profit shifting and tax avoidance through the use of hybrid instruments and entities that receive different tax treatment in different jurisdictions.

In order to prevent tax avoidance schemes by transfer of residence, activities or assets out of Bulgaria within other divisions of the same entity outside Bulgaria, the new rules will impose deemed capital gains to tax the potential capital gains the entity would normally realize if it were to exit the country under a transaction with a third-party entity.

Another amendment in the pipeline is the mandatory reporting of cross-border arrangements identified as potentially indicative of aggressive tax planning (the so-called DAC 6 measure) that will require “intermediaries” (such as consultants), or the taxpayer itself, to provide information on such hallmarked transactions to the revenue authorities, which in turn will include this information in the already established channel of automatic exchange of information with other jurisdictions.

New Harmonized VAT Rules

Quick Fixes

With regard to value-added tax (VAT), Bulgaria will be enforcing the so-called quick fixes for simplifying VAT rules for transactions on intra-Community supplies (i.e. supplies traded by EU member states). These fixes include:

• clear harmonized requirements on the evidence necessary for applying the 0% VAT rate for intra-Community supplies of goods;
• simplified rules and new reporting requirements for “call-off stock”; and
• new rules for chain transactions with goods between EU member states.

Call-off stock is a model of supply in the retail business (and others) to shorten delivery times, where businesses usually transfer stock to a warehouse or other location of a customer located in another EU member state. The goods in these cases remain the property of the supplier up until they are picked up by the customer. Currently, if a supplier transfers its own goods to another EU member state, it performs a deemed intra-Community transaction. Then, when the customer picks up the goods, the supplier performs a domestic supply in the country where the goods are temporarily stored. That in turn requires the supplier to register for VAT in that country, creating another reporting obligation.

The new rules simplify the VAT treatment in such a way that only an intra-Community supply to the customer will occur when the goods are picked up. Subject to certain reporting obligations, the simplifications will also mean that the supplier will no longer need to register for VAT in the other EU member state.

If one considers a chain transaction where the supplier (A) supplies goods to a recipient in another member state (C) through an intermediary (B) that arranges the intra-Community transport or has the transportation arranged, currently in practice there could be some debate as to which of the transactions may be deemed an intra-Community supply (which can only be attributed to one link of the chain).

The new general principle is that the intra-Community supply will only be attributed to the A–B supply. As an exception, the intra-Community supply will be attributed to the B–C supply if the intermediary B provides the supplier A with a VAT identification number of the EU member state of dispatch of the goods (i.e. usually A). The other supplies will be deemed local supplies.

Other VAT Measures

Another amendment (this time not driven by the implementation of obligatory EU rules) is that non-established entities involved in the local taxable supply of goods into the territory of Bulgaria will be required to register upfront preceding the local supply. These entities will no longer have to meet the 50,000 Bulgarian lev ($28,350) threshold for registration, which from now on will only apply to Bulgarian entities. Non-established entities will need to register for VAT in Bulgaria at least seven days before they make the local VAT supply or receive an advance payment for this transaction.

Further, following a decision by the Court of Justice of the European Union, the new law introduces clear rules for VAT credits for construction and improvements and repairs of public infrastructure if the taxable person or entity can prove that these developments are directly linked to its economic activities.

Also, according to the amendments, goods entering the area of Bulgaria’s continental shelf and exclusive economic zone will be subject to VAT, and there are now explicit rules for re-exporting goods from these areas.

Still no VAT on Transfer of Shares in Real Estate Entities

The initial draft bill suggested that transfer of shares in entities that primarily hold real estate assets would be subject to VAT. This aimed to terminate the practice of transferring residential property via the transfer of the shares of a special purpose vehicle set up for the sole purpose of holding a real estate asset, the transaction thus falling outside the scope of VAT and local transfer tax. The latter tax is determined by each municipality and does not apply to shares, but only to real estate. Such savings now seem even greater in light of the intention of Sofia Municipality to increase the rate of the transfer tax for 2020 from 2.5% to 3% on the value of the transferred property.

This amendment was rejected by the parliament. Although rightly aimed at terminating aggressive tax planning for residential properties, it could have had a negative effect on the genuine commercial real estate market, where it is a common practice for large real estate investments to be structured under a dedicated entity, for genuine business reasons.

Obligatory Transfer Pricing Documentation

Earlier this year Bulgaria adopted rules for obligatory transfer pricing (TP) documentation. Although in recent years the tax authorities have become increasingly interested and sophisticated in the area of TP rules, Bulgaria had no rules for obligatory TP documentation. The current rules set out quite high thresholds, and obligatory TP documentation must be prepared only by entities that exceed two of the following three criteria:

• net book value of assets—38 million Bulgarian lev;
• net sales revenue—76 million Bulgarian lev;
• average headcount for the reporting period—250 persons.

The tax authorities are however already requiring TP documentation during audits, even for entities that do not formally need to prepare such documentation.

Retail Sales Reporting

During 2019 the revenue authorities made several controversial suggestions for amendments of the rules governing the reporting of sales at retail stores, licensing of enterprise resource planning (ERP) systems for online live reporting of sales, registration of online shops, and regulation of their sales reporting. Following public discussions, fueled by the burdensome requirement for every single retail business to drastically change its ERP system to contend with the new rules, the suggested amendments were relaxed, but still require adjustments for businesses.

Some new developments even suggest simplifications, such as the reporting of online payments with debit and credit cards which now allow for electronic rather than paper cash receipt, but these seem to fall short of a fair compensation for the ever-increasing reporting burden on the retail business.

Preparing for Tax Climate Change in Bulgaria: Planning Points

It is obvious that the most significant amendments are aimed at controlling aggressive tax planning, profit shifting, and otherwise obtaining tax benefits exploiting unharmonized tax rules across jurisdictions. To safeguard against such measures being enforced, businesses may need to reconsider their current or intended structures, or otherwise may risk their structure flashing a red light on the tax authorities’ radar.

As TP becomes a hot topic year upon year, it is time for cross-border businesses to consider their TP compliance in Bulgaria.

Some changes in the VAT system (chain supplies, call-off stock) will also require corresponding changes in ERP systems to adapt to the new environment. Such amendments will also be required for retail businesses.

In a nutshell, a harmonized tax climate continues to settle across the Balkans up to the Black Sea.

Alexander Rangelov is Senior Associate and Head of Tax with CMS Bulgaria.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.