EU-Report Accession Bulgaria

Chapter 10: Taxation

Since the last Regular Report, Bulgaria has made further progress in aligning its legislation with the acquis. The reform of Bulgaria's tax administration has made limited progress.

In the area of indirect taxation, amendments to the Value Added Tax Law entered into force in January 2002. The amendments introduce the standard VAT rate on the supply of pharmaceuticals and pharmaceutical products and a special scheme for travel agents.

In December 2001 the Excise Tax Law was amended, further aligning legislation in the area of excise duty. In particular, Bulgaria fully harmonised the scope of excise duty on beer, introduced a uniform rate per hectolitre degree Plato and introduced excise duties per tonne on LPG and methane, heavy fuel oils, and gas oil and kerosene used for industrial purposes or heating. Moreover, excise duty levels on filter cigarettes were increased.

In the area of direct taxation, amendments to corporate income tax passed in December 2001 introduced a unified rate of corporate income tax.

As regards administrative cooperation and mutual assistance, there are no developments to report.

Since last year's Regular Report, little progress has been made with reforming and strengthening Bulgaria's tax administration, besides some changes in the top management. Little progress has been made with improving taxpayer compliance, although the amended Administrative Punishments Act passed in February 2002 introduced heavy penalties for violation of or failure to implement an ordinance or act issued by the Council of Ministers in relation to taxation. In the area of tax collection, the term for the repayment of the VAT credit was reduced from 4 months to 45 days for entities using the newly introduced VAT account system.

Overall assessment

Further alignment is still needed in the area of VAT, in particular with regard to special schemes for second-hand goods, travel agents and intra-community transactions. Concerning excise, the minimum rates on cigarettes, alcoholic beverages and certain fuels should be increased to the minimum levels required by the acquis.

As regards direct taxation, legislation will have to be reviewed in order to eliminate potentially harmful tax measures, so as to comply with the Code of Conduct for Business Taxation to the same extent as current Member States upon accession. The Commission's initial technical assessment of potentially harmful measures applied in Bulgaria is ongoing. Further alignment should be pursued in the area of administrative co-operation and mutual assistance.

Significant further efforts are needed to strengthen the tax administration. Bulgaria should develop an updated business strategy for the tax administration and approve other linked strategies, such as audit strategies and the creation of a unified National Revenue Agency. Moreover, Bulgaria needs to improve the effectiveness of tax compliance, collection of revenues and VAT refund management. The administration suffers from a lack of human resources in the tax policy directorate and from a lack of staff with relevant experience in modern human resource management to drive the necessary changes. Further efforts are needed to establish a strong change management structure to guide, structure and support the change process.

Ensuring that the computerised tax information system is fully operational, including links with the customs information system and interconnectivity with EC systems ahead of accession, should also be given priority, as little has been done in this field. It is estimated that Bulgaria may need around five years to enable interoperability, provided that significant steps are taken in the near future. Bulgaria should continue to give high priority to improving administrative capacity in this area.

Conclusion

In its 1997 Opinion, the Commission concluded that the acquis concerning direct taxation should present no significant difficulties, and that, where indirect taxation was concerned, Bulgaria should be able to comply with the acquis on VAT and excise duties in the medium term, provided a sustained effort was made. The Commission added that it should be possible for Bulgaria to start participating in mutual assistance as the tax administration developed its expertise in this respect.

Since the Opinion, and especially over the last two years, Bulgaria has made progress in aligning with the acquis on taxation, although a number of weaknesses still need to be addressed and administrative capacity strengthened. Bulgaria has achieved a good degree of alignment on the tax acquis but further alignment is needed in some areas. Administrative capacity needs significant strengthening in order to be ready to implement the acquis.

Negotiations in this chapter have been provisionally closed. Bulgaria was granted a transitional arrangement concerning the application of the minimum excise duty levels on cigarettes (until 31 December 2009), as well as specific arrangements to continue exempting international passenger transport from VAT with right of deduction, to apply a reduced excise duty rate to rakya produced from fruits and grapes for own consumption (up to 30 litres of fruit spirits per annum per household), and to apply a registration and exemption threshold of 25,000 to small and medium-sized enterprises. Bulgaria is generally meeting the commitments it has made in the context of the accession negotiations.

Bulgaria should focus further efforts on completing alignment ­ except where transitional arrangements have been agreed -- with the acquis in the areas of direct and indirect taxation, including intra-Community transactions, and strengthening its administrative capacity, in particular through pursuit of measures to modernise and reinforce the tax administration.

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