EU Member States reach agreement on Directive for global minimum level of taxation
In December 2022 Hungary lifted its veto on the adoption of Council Directive (EU) 2022/2523 on ensuring a global minimum level of taxation for multinational enterprise (MNE) groups and large-scale domestic groups in the Union (the “Directive”). The Directive has followed the ongoing work of OECD in regard to BEPS Pillar 2 initiative aiming to ensure a minimum taxation of 15% for large corporations based on a top-up tax under two mechanisms. The first one i.e., the Income inclusion rule (“IIR”) as the primarily rule operating through a top-down approach will apply at the latest from 31 December 2023. The IIR would be levied when there is no sufficient taxation at the level of the low-taxed constituent entities of the MNE group in scope. Along with that, the Directive introduced Undertaxed profit rule (“UTPR”) as back-stop rule that would make sure a final tax to come to a 15% rate for all undertaxed profits would be charged, coming into effect as of 2024.
The introduction of certain provisions like the qualified domestic top-up tax is left to the discretion of the Member States under the Directive. While some Member States have already submitted draft legislative acts for public discussion, Bulgaria has not yet released any draft or official comments from the competent bodies. Thus, any intentions for implementation of the new regime in Bulgaria remains currently unclear. The options ahead basically come down to:
- collecting 15% tax only from the large MNEs present in Bulgaria (i.e., applying the domestic top-up option)
- changing the base rate of corporation tax form 10% to 15% or higher
- postponing the introduction of the rules with six years envisaged for jurisdictions with less than twelve large headquartered ultimate parent entities
- leaving things as they stand, thus allowing the Member States of the headquartered MNEs to collect the difference in the rates of taxation of their Bulgarian activities
With the tight deadline in place to introduce the Directive which will add significant complexity to the current tax regimes, it is of utmost importance for the large MNE groups to determine whether they would fall in scope and assess how this would impact their tax position and compliance processes in respect of their Bulgarian operations.
Plans of the Swedish Presidency of the EU Council in the tax area
In 2023, Sweden takes over the EU Council Presidency with the ambition to work for greater tax transparency and measures to prevent tax avoidance and aggressive tax planning.
In the field of the direct taxation, priority will be given to the work on DAC8 and the EU list of non-cooperative jurisdictions. Sweden also pledges to continue discussions in the Council on the initiative to fight against the misuse of shell entities for improper tax purposes (i.e., the Unshell proposal) and the Withholding tax initiative although not yet clear what the proposal of the Commission will entail. DEBRA work (i.e., the Proposal for Directive to tackle the debt-equity bias), however, was put on hold at the December ECOFIN meeting until the future tax proposals are presented by the EU Commission.
Amendments to the Germany – Bulgaria tax treaty
Bulgaria and Germany have signed on 21 July 2022 an amending protocol to the existing DTT implementing the BEPS minimum standards contained in the MLI. Among all, Bulgaria includes the PPT and chooses to apply the ordinary credit method for relief from double taxation. The protocol was further ratified in November 2022, but to our knowledge is yet to be endorsed in Germany.
Bulgaria implemented DAC7, while European Commission publishes plans on DAC8
The adopted changes to the Tax and Social Security Procedure Code which transpose the rules of the Directive (2021/514) introducing the automatic exchange of information for both EU and non-EU digital platform operators referred to as “DAC7” have been published in the State gazette on 16 December 2022.
The introduced rules have not differed from those contained in the bill entered for voting to the National Assembly before that and closely follow the Directive. The adopted regime would have a significant impact on digital platforms, if they allow sellers to reach out potential buyers while carry out the so-called relevant activities. This includes in particular the rental of real estate, rental of any means of transport, the provision of personal services and the sale of goods. The first reporting obligations would be for the period 2023 with report submissions by January 2024.
Furthermore, administrative cooperation in the form of exchange of information between Member States has been extended to royalty payments and a legal basis for joint audits has also been introduced.
In light of the increasing economic role of crypto-assets and the recently agreed Markets in crypto-assets (MiCA) Regulation, the European Commission has further released its plans for an update to the Directive on Administrative Cooperation i.e., “DAC8”.
The new Directive will contain a requirement for crypto-service providers to report transactions of clients residing in the EU and financial institutions will be obligated to report on e-money and central bank digital currencies. The proposal will also extend the scope of the automatic exchange of advance cross-border rulings for high net-worth individuals.
Latest initiatives on administrative cooperation on tax matters continue to impose reporting obligations for taxable persons, therefore it is paramount for the concerned companies to consider their readiness and resources to deal with such demands.
Tax authorities may no more be able to reclassify a civil contract into a labor agreement
On 27 October 2022 the Common assembly of the Supreme Administrative Court (“SAC”) provided its interpretation ruling on case 6/2021 to deal with long-lasting dispute around the ultimate power of the tax authorities to reclassify civil contracts into a labor agreement when doubt they conceal employment relationship.
It has been an established practice of the Bulgarian tax authorities to challenge civil contracts as disguising labor arrangements seeking to impose additional tax and social security contributions on the deemed employer. This approach has led to contradicting court decisions, hence the matter was brought before the Supreme Administrative Court to provide an interpretation ruling on the relevant legal provisions.
SAC addressed the question in the negative, stating that solely the Labor inspectorate has the authority to reclassify a contract into a labor agreement. This outcome should eventually provide for more tax certainty for taxpayers in the course of initiated tax procedures where this issue is picked up by the tax authorities.
EU BEFIT will propose a comprehensive solution for business taxation
The European Commission has published for feedback and consultation its Business in Europe Framework for Income Taxation (BEFIT) proposal. BEFIT is the newest initiative for a harmonization of corporate income tax systems across the EU following the Common Consolidated Corporate Tax Base proposals of the last decade.
The scope of the system BEFIT will set up, the calculation of the common tax base and how administration burden will be handled are all yet to be determined. At this time, BEFIT is in its early stages and the initiative has been opened to public consultation from stakeholders until end of January 2023, as Commission adoption is planned for the third quarter of the year.
Bulgaria approved amendments to the Corporate Income Tax Act (CITA)
Amendments to the Bulgarian CITA were published in the State Gazette on 13 December 2022. Most importantly, Bulgaria implemented the windfall tax (solidarity contribution) enacted in EU Regulation 2022/1854 for companies active in the field of natural gas, coal and oil. Bulgaria has elected to apply the windfall tax for fiscal years 2022 and 2023. The solidarity contribution may also be paid in advance instalments, and it shall be a deductible expense for corporate income tax purposes. Following that, the Bulgarian tax authorities has issued a guideline to clarify the calculation of the taxable profits together with instructions for declaring of the tax and making the advance tax payments.
