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VAT in Bulgaria Remains 20 per cent

Sofia Echo Com, Ivan Vatahov, 10.04.2006

The Cabinet adopted on March 30 a draft Value Added Tax (VAT) Bill that would keep the country’s current flat VAT rate of 20 per cent unchanged in 2007. This put an end to previous plans by the previous Government for a VAT cut. In May 2005, the country’s previous Government, led by the National Movement Simeon II, adopted a draft bill that would have cut Bulgaria’s VAT rate, one of the highest in Europe, to 18 per cent in 2007 when the country is scheduled to join the European Union. The Finance Ministry said at the time that the amendment was designed to bring Bulgaria in line with EU VAT rules and give businesses more time to prepare for the union’s regulations. The current Bulgarian Socialist Party-led tripartite coalition cabinet, which took office in August 2005, decided in October to withdraw the draft bills for cuts in VAT and corporate tax rates prepared by the previous cabinet and draft its own versions. It did not say at the time whether the tax rates would be changed. The bill keeps the threshold of 50 000 leva for mandatory VAT registration, but also provides an opportunity for voluntary registration. The designed legislation introduces two new concepts: intracommunity supply, which replaces export to the EU, and intracommunity acquisition, which replaces import. The bill abolishes VAT accounts, introduced in a bid to put an end to VAT refund scams. Finance Minister Plamen Oresharski said that with the abolition of VAT accounts, businesses will save 40 million leva annually from bank charges for VAT transfers. The time limit for VAT refund remains unchanged at three plus one months. Under the currently existing VAT Act, VAT accounts were introduced in 2001 for all VAT registered companies. They can be opened in any commercial bank and their holders use them to either receive or pay VAT on any deal signed. However, the opening of a VAT account is not mandatory. The accounts were introduced for a number of reasons, but mainly to prevent VAT fraud and to enable the tax administration to reimburse the deductible VAT (which comes as a difference between purchases and sales). The tourism sector in Bulgaria will suffer the hardest strike after the enforcement of the new legislation. Tourist packages offered to foreign visitors will start to be charged with 20 per cent VAT. Hotel accommodation for Bulgarians and foreigners will be the only thing to remain subject to a seven per cent VAT as of January 1 2007, which will be gradually increased to 20 per cent over the course of several years. The increase will make Bulgarian tourism services non-competitive on the international market and will prompt an outflow of tourists, the chair of the Bulgarian Association of Hoteliers and Restaurateurs (BAHR), Blagoi Ragin, said. For several months already Bulgarian tour operators and hoteliers have been closing contracts for 2007 without including the higher tax. Sector representatives have contested lately that the state should keep its preferential treatment of tourism as one of the main contributors to the state treasury and the economy. The Finance Ministry, however, argues that the introduction of differentiated VAT rates will open the floodgates for an avalanche of similar demands from other sectors. The tax policy should be directed towards a single, undifferentiated VAT rate for all sectors, the ministry says. Currently, Bulgaria charges only seven per cent VAT on tourist packages for foreigners, including hotel accommodations. However, in line with its commitments to the EU, the country will have to raise the rate to 20 per cent, which is the uniform rate for all goods and services in Bulgaria. According to Oresharski, the country has made the commitment to increase VAT under the finance negotiation chapter with the EU, and attempts to re-open the chapter would be useless. Even if doing so, Bulgaria would hardly achieve better financial terms for the development of its tourist sector, Oresharski said. Sector representatives are suspicious that the EU would not allow Bulgaria to continue competing successfully with its summer tourist product-member countries because of lower VAT. About 80 per cent of foreign visitors come to Bulgaria through foreign tour operators and their packages of hotel, food and other services currently include seven per cent VAT. Sector representatives have said that the state could show other signs of support for Bulgaria’s tourism by spending more money on modernising the country’s infrastructure. They believe that this will encourage the attraction of richer tourists, who will be ready to pay the higher prices that will come as a result of the VAT hike.

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