Proposals to reform the tax system are usually an indicator of ineffective budgetary policy. The government deficit, initially caused by an exogenous shock (the COVID-19 pandemic), is about to turn from temporary to chronic for Bulgaria. Starting in 2020 and continuing over the next two years, it is also foreseen in the draft budget for 2023 and in the updated Three-Year Budget Forecast until 2025. The deficit in the State Social Insurance Budget is one of the indicators of this (State Social Insurance, 2023).[2] Imbalances also exist in a number of other public systems.
Long-term deficit budgeting usually leads to a rapid increase in debt (from 22.5% at the end of 2021 to 33.0% at the end of 2025 according to the updated Triennial Budget Estimates). This has a number of serious negative consequences and signals structural problems, especially when it occurs in a context of full employment (unemployment around and below 4%) and low investment (around 20% of GDP).
Seemingly, the easiest option to solve these problems is to increase taxes or complicate tax controls to increase collection. On the face of it, this would not send as bad an international signal as a rapid increase in debt. The question is what are the objectives of increasing taxes. If they do not pursue the objectives of improving the effectiveness of economic policy, but simply aim to fill momentary holes in the budget, this will lead to a deepening of macroeconomic imbalances.
The draft Law on Amendments and Additions to the Tax and Insurance Procedure Code proposed by the interim Minister of Finance in 2023 contains several proposals to be discussed.
Fiscal control measures for high fiscal risk goods.
The Tax Procedure Code provides that specific data for the transport of goods, which starts from the territory of another member state of the European Union or a third country and ends in the territory of the country or starts from the territory of the country and ends in the territory of another member state, as well as transport within the territory of the country, shall be subject to mandatory prior declaration. The persons liable to declare the shipments in advance are to be the consignee/buyer/acquirer of the goods in a three-way transaction or the final consignee in a chain of successive supplies, the supplier, the seller/transferor in a three-way transaction or the first supplier in a chain of successive supplies, respectively the importer, after the customs procedure for importation has been completed.
What are the issues with this proposal?
The planned exceptions to the new, more burdensome regulation for businesses are not enough. In practice, the new regulations will cover almost all shipments (including fast-moving goods that are transported around the clock) and will lead to the need to hire additional staff or delay shipments and deliveries.
Failure to comply with the procedure for prior declaration, which may be due to business overload or negligence without intent, leads to severe administrative consequences under the new regulation. The imposition of precautionary measures or the seizure of evidence and the seizure of goods in respect of a supplier/seller in relation to his obligations to pre-declare details of carriage of goods is provided for. Other administrative and penal provisions are also provided for.
All this leads to an increase in the administrative burden on business and disproportionality of the measures imposed in relation to the targeted results.
The so-called "excess profit tax"
With changes to the Corporate Income Tax Act, it is proposed to introduce the payment of a solidarity contribution for excess profits generated in the period from July 1 to December 31, 2023 (the so-called "excess profit tax"). The proposed solidarity contribution contains the same parameters as the temporary solidarity contribution defined by Chapter III of Council Regulation (EU) 2022/1854 of 6 October 2022 on emergency intervention to address high energy prices and are therefore excluded from the scope of the joint contribution, the persons who pay a temporary joint contribution.
It is also proposed to introduce a mechanism for the advance payment of a joint contribution, providing for the determination and payment of monthly advance payments by the obligated persons incl. for the months from July to December 2023. It is proposed that the monthly advance payment be determined using as a basis the taxable profit for 2022 and the average value increased by 20 percent of the taxable profits for the years 2018, 2019, 2020 and 2021. It is suggested that the equalization of the due solidarity contribution with the paid advance contributions be carried out with the declaration and payment of the solidarity contribution.
What are the issues with this proposal?
On the one hand, according to the proposed period and the part of the basis for determining the solidarity contribution that covers the period from 1 July to 31 December 2023, the new obligations for individuals arise for a future period. On the other hand, however, the advance contributions are calculated entirely on the profits realised in a period that has already elapsed - 2022 - and not on estimated values for a future period.
A fundamental principle with regard to the introduction of taxes or contributions with an effect equivalent to taxes, enshrined in the jurisprudence of the Constitutional Court (in this sense, e.g., Constitutional Court Decision No. 10 of 24.10.2013 in Constitutional Case No. 8/2013) is that citizens should know in advance the taxes and their amount that they will pay.
Advance payments on a financial result that is obtained before the taxpayers are even informed of the intention to introduce a new tax constitute an impermissible retroactive action.
Separately, the introduction of this kind of tax will send a bad signal to investors that the public and fiscal environment is hostile to them. Also, that whenever the government cannot construct a draft budget with a normal deficit, it can invoke the current precedent and impose this supposedly one-off 'excess profit' tax for a second or subsequent time.
Return of reduced VAT rates from 9 to 20%
Amendments to the Value Added Tax Act propose shortening the period of the reduced VAT rate for tourist services to 30 June 2023, which is currently applicable until 31 December 2023.
Through such a measure, it is possible to maintain inflation. On the one hand, as a reason for reducing the period of application of the reduced VAT rate, the Ministry of Finance argues that no effect on consumers through a reduction in the prices of goods and services is recorded for the period of its application. However, this is not entirely true. In 2022, manufacturing inflation was around 40% and consumer (HICP) inflation was 16.9%. As of now, inflation is still stuck at a high double-digit level, and the repeal of the temporary measure may lead to its maintenance.
It is not necessary to repeal a measure that leads to an increase in budget revenue due to a reduced fiscal burden. According to the MoF's data on the implementation of the Consolidated Fiscal Programme as of the end of February 2023, indirect tax revenues amounted to BGN 3 714.8 million (BGN 296.4 million growth, 8.7% compared to February 2022), while VAT revenues amounted to BGN 2 736.1 million (10.7% growth compared to February 2022). According to information publicly disclosed by the NRA, as of 17.03.2023, VAT revenues mark an increase of BGN 211 million compared to the same period of 2022, and the collection rate marks its highest level in the last 5 years.
The early suspension of this measure may also halt the "brightening" of the sectors to which it applies. According to the Employers' Labour Cost Index for the fourth quarter of 2022 published by the NSI, total compensation costs per hour worked increased by 16.1%. Among the economic sectors with the highest recorded growth in total labour costs are "Hotels and restaurants", with 32.9%, and "Culture, sports and entertainment", with 25.2%, significantly above the average growth for the economy, and higher than those recorded in industry, with 21.3%, in services, with 17.8%, and in construction, with 11.0%.
It is evident from the official data presented that during the period of the reduced rate under Article 66a of the VAT Act, there has been an increase in the collection of VAT revenues in the budget and a marked "brightening" of the activity and wage costs in the sectors where it is applicable. Therefore, there is no reason to adopt amendments at the beginning of the second quarter of the current year to shorten the period of application of the reduced rate until 30 June 2023, which is currently applicable until 31 December 2023.
In conclusion...
These are just three of the many tax change proposals being considered in 2023. But they are a graphic example of how tax reform ideas usually reflect ineffective fiscal policy. Rather than aiming for the easiest solution - an increase in the tax burden (which is more suited to a planned economy), the state is best suited to a market economy and reduce public spending, including through accelerated digitalization of administrative services and optimisation of the structure and composition of the civil service.
