AMENDMENTS TO THE VALUE ADDED TAX ACT IN FORCE AS OF 1 JANUARY 2014 As of 1 January 2014 in the Value Added Tax Act (VAT Act) are in force changes that can be summarized as follows: 1. Supply of goods under lease contracts The actual handing over of goods under a lease contract shall be considered for a supply of goods in the following cases: (a) When it is agreed in the lease contract an option for transferring the ownership of the goods; and (b) The sum of the contributions, excluding the interest in Art. 4b, para 1, item 1 of the VAT Act is identical to the market price of the goods as at the date of the supply (Art. 6, para 2, item 3 second proposal of VAT Act). The change is triggered by an incompliance of the VAT Act with the practice of the European Court of Justice (ECJ), namely case C 118/11 that contains mandatory guidance for the application of Directive 2006/112/EU. The new rule shall be applied only in respect of contracts that have been concluded after 31 December 2013. The above change will result in: Taxation of the total amount of the above contracts (excluding the amount of the eventual interest) at the moment of the actual handover of the goods, and The recipient under such a contract shall be viewed as acquiring assets (goods) rather than services (respectively there will be no right to deduct input VAT on passenger vehicles acquired through such contracts). The amended rule could result in disputes such as: Whether the term identical shall be interpreted as precisely the same and what would be the tolerable deviation, as well as Whether and how the value of the additional services included in the lease installments would be taxed (as part of the lease price or as a separate service). 1
2. Taxable amount There has been an amendment in the rules for determining the taxable amounts of barter transactions, improvements of leased assets, available assets as at the date of VAT deregistration, as well as at the taxable amount of import. The above changes are also triggered by the need of harmonization of the VAT Act with EU Law (incl. Judgments of the ECJ). 2.1. Barter The taxable amount under a barter transaction shall be: For the goods supplied: o the taxable amount upon acquisition or the cost of the goods; o for goods acquired through import the taxable amount of import; For the services provided the direct costs for the service; If the taxable amount cannot be determined under the above rules, it shall be determined as the market price; In case of barter transactions between related parties, one of which does not have the right of full deduction of input VAT, the taxable amount is the market price of the goods or services exchanged as at the date of the tax event. The aaccumulated depreciation will not be taken into consideration when depreciable assets are exchanged with other goods and services. Therefore in such cases it is possible that the taxable amounts of the two mutual transactions are significantly different. For example: A depreciable machine with a net book value of BGN 3 thousand (but acquisition cost BGN 10 thousand) is exchanged for goods with acquisition cost of BGN 3 thousand. Assuming that both mutual supplies are taxable, the party providing the machine shall charge VAT on BGN 10 thousand while the party providing the goods shall charge VAT on BGN 3 thousand. 2.2. Improvement of hired assets The taxable amount of the improvement of a hired asset (where the improvement is not mandatory under the rental contract) shall be: The amount of the direct costs incurred reduced with depreciation costs taking into account the usual economic life of the improvement; The market price when the direct costs cannot be identified. 2
Before the change, the taxable amount of such improvements was the value of the direct costs (without taking into account any depreciation). It is expected that the change will lead to the taxation of amounts with closer value to the actual benefit (the improvement) received by the owner of the asset. On the other hand, the assessment of the usual economic life of the improvement could cause ambiguity and disputes. 2.3. Taxation of the available assets upon deregistration The taxable amount of the available assets upon deregistration shall be: The taxable amount for goods in acquisition, importation or the cost of goods, reduced with the waste costs, regarding the normal life of the goods; The direct costs made in acquisition of the services, reduced with the waste costs, regarding the normal life of the services; If the taxable amount cannot be determined under the above rules it shall be the market price. The change is triggered by a decision of the European Court of Justice in the case C-142/12 Sole Trader Hristomir Marinov. The assessment of the normal economic life of the improvement could cause ambiguity and disputes. 2.4. Taxable amount upon import Taxable amount upon import shall be the customs valuation, increased with the following amounts (as long as these are not already included in the customs valuation): Taxes, duties, levies and other charges payable outside the territory of the country, and customs duties, excise duties and other charges, due upon importation into the territory of the country; The costs associated with import, such as commission fees, packing, transport and insurance costs incurred up to the first destination of the goods within the territory of the country. The change aims to clarify the taxation with VAT upon importation. Until now the above amounts also had to be included in the taxable amount of import. However, due to the lack of an express legal provision some suppliers used to issue invoices with 20% VAT for some of the above values, which resulted in double taxation of the latter (i.e. once in the invoice and second time in the customs declaration). 3. VAT refund pursuant to Art. 92 of the VAT Act A faster tax refund procedure is introduced for the cases where tax audits are assigned in connection with the refund of VAT to persons performing: 3
Zero-rated supplies or international transport exceeding 30% of the total taxable turnover; Farmers producing grains and industrial crops (listed in Annex II to VAT Act) exceeding 50% of the total taxable turnover. Within 30 days of the assignment of the audit, the revenue authorities shall refund the amount of the declared VAT, reduced with the additional tax and social security liabilities that are reasonably expected to be assessed. An act for set off and refund (ASR) shall be issued for the purpose. The issued ASR (incl. explicit or silent refusal for refund) may be appealed within 7 days before the Director of the Territorial Directorate of the National Revenue Agency (NRA). The latter shall issue a decision on the appeal within 14 days. The change is aimed at faster refund of the tax to the persons, whose activity regularly results VAT refunds and the amount of the VAT refundable is usually a material operating resource. 4. Reverse charge of VAT on grains and industrial crops A reverse charge mechanism on grains and industrial crop transactions is introduced from 1 January 2014. The change aims a reduction of the tax frauds in the trade with these goods in a short run. The reverse charge mechanism shall not be applied to importation, exportation, intra Community supplies and triangular transactions. The recipient who is a VAT registered person shall self charge the tax, issuing a protocol under Art. 117 of the VAT Act. For purchases from non-taxable persons the VAT Act requires that a collective protocol is issued for the respective month. If the supplier is a registered person, an invoice without VAT shall be issued, mentioning the text reverse charge and Art. 163a, para 2 of the VAT Act. Farmers producing and selling grains and industrial crops (listed in Annex II to VAT Act) exceeding 50 % of their total taxable turnover have the right to refund of the VAT in their monthly tax returns within 30 days of submission (i.e. without carrying it forward in the next two months). 5. Special cash-flow scheme A new special cash-flow scheme has been introduced for a circle of persons. The tax on the supplies falling in the scope of this scheme shall become chargeable on the date of the full or partial payment of the transaction. The aim is to provide tax relief for small and medium enterprises that often have to pay the tax to the state budget before receiving payments from their customers. The new cash-flow scheme is arranged for in the new chapter seventeen a of the VAT Act (Art. 151a Art. 151e). 4
Persons who can benefit from this scheme shall meet certain requirements: Shall register for VAT under the general rules; Shall have taxable turnover up to EUR 500 thousand for the last 12 months; Shall have no tax assessments under Art. 122 of the Tax and Social Security Proceedings Code (TSSPC) and/or Art.177 of the VAT Act entered into force, and shall have no unsecured liabilities unless the latter are deferred or rescheduled. The scheme covers all supplies except those listed in Art. 151a para 2 of the VAT Act, e.g. supplies to non-registered persons, import etc. Generally these are taxable supplies to registered persons within the territory of the country which are payable via bank transfer or other payment service providers or via postal money transfer. In order to apply the special cash-flow scheme the taxable person shall submit a standard form application to NRA and obtain a special permit there from. The period revenue authorities shall decide on the matter is 14 days and the NRA keeps a public register of persons holding such permits. The persons shall apply the scheme from the beginning of the month following the receipt of the permit. The registered person can terminate the scheme voluntarily (not earlier than 12 months from registration) or mandatorily if any of the requirements towards the person are no longer available (e.g. turnover exceeds EUR 500 thousand, the person has unsecured tax liabilities, etc). In certain cases registration under the scheme can be terminated by initiative of NRA (for instance, in non-observance of the requirements of the scheme or some violations of the VAT Act). 5.1. Issuance of documents and chargeability of the tax The chargeable event arises under the general rules of the law. The supplier shall issue invoices inclusive of tax mentioning cash-flow scheme within 5 days of the taxable event. The invoices are included in the sales ledgers and the VAT returns for the period in which they are issued but without participating in the formation of the VAT liability for the period. The published changes in Regulations for Application of the VAT Act and the modified standard forms of the sales ledgers and the VAT returns give the opportunity to report the cash-flow scheme invoices without influencing the monthly result for VAT. Under the cash-flow scheme the tax shall become chargeable on the date when a full or partial payment for the supply is received. A protocol for the tax charged shall be issued by the supplier (apart from the invoice). The protocol shall contain the invoice number and a copy of it shall be provided to the recipient of the supply. 5
5.2. Right to deduction of input VAT The right to deduction of input VAT for a supply received under the special scheme arises when the deductible tax becomes chargeable, regardless of the status of the recipient (i.e. this rule is also applied by persons who are not registered under the special scheme). The right shall be exercised based on the availability of the following three documents an invoice, a protocol from the supplier (mentioned in point 5.1. above) and a payment document. The right to deduction of input VAT for a received supply which is not under the special scheme, but the recipient will use it for subsequent supplies under the special scheme, shall arise in the tax period in which a full or partial payment to the supplier was made. A protocol for the payment made shall be issued by the recipient. In this hypothesis the right to input VAT shall be exercised based on the availability of three documents an invoice, a protocol issued by the recipient (discussed in the previous sentence) and a payment document. The material herein is only of general informative matter and does not represent a specific advice or consultation. Should any additional questions arise please do not hesitate to contact us at tel.: 02/943 37 00, fax: 02/943 37 07, е-mail: office@afa.bg or at: 38, Oborishte Str., Sofia 1504. 6