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New rules regarding automatic exchange of information and mandatory disclosure of cross-border arrangements are being introduced in Bulgaria

02 December 2019

Draft amendments to the Tax and Social-Insurance Procedure Code (TSIPC) provide for adding a new Section VII named Specific Rules on the Mandatory Exchange of Information on Cross-Border Tax Arrangements.

The purpose of the bill is to align the Bulgarian legislation with the requirements of the Council of the European Union Directive 2018/822 of 25 May 2018 amending Directive 2011/16/EU regarding mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements (the Directive).

The Directive has been adopted on the basis of the recommendations given by the Organisation for Economic Cooperation and Development (OECD) to the Member States with regards to establishing rules for mandatory disclosure of information on “aggressive cross-border tax arrangements” which may have the effect of an unjustified reduction in the tax burden for certain groups of persons – mainly large multinational groups.

The bill introduces an obligation for certain groups of persons (collectively referred to as consultants or intermediaries according to the English version of the Directive) to report to the respective revenue authority on “cross-border tax arrangements” which have been developed and implemented by such persons. On the other hand, the EU revenue administrations will have to exchange information on such arrangements every quarter. A central European register of the disclosed cross-border tax arrangements will be compiled where each arrangement will be assigned a unique identification number.

The scope of the new legislation explicitly excludes the following:

1. value added tax, customs duties and excise duties;

2. compulsory social security contributions;

3. fees for issuing certificates and other documents issued by state and local authorities;

4. receivables under contracts, including remuneration under contracts for services of public interest.

Thus, the focus is on cross-border tax arrangements related to corporate taxation.

1. Which arrangements are reportable?

The definition of a tax arrangement is quite broad, but in general terms, for a tax arrangement to fall within the scope of the new rules, it must contain certain features (called hallmarks in the English version of the Directive), as well as a cross-border element (i.e. the participants in the arrangement are taxable persons in two or more jurisdictions).

The arrangements are divided into 2 large groups:

- tax arrangements designed to reduce the tax burden for a person through transfer of assets and profits to other jurisdictions with lower or zero tax rates – in this case the reporting obligation applies if established that the main benefit or one of the main benefits is the taxable person to obtain a tax advantage;

- tax arrangements designed to circumvent automatic exchange of information rules, disclosure of the beneficial owner or involving the use of unilateral safe harbour rules – in these cases the reporting obligation applies on general grounds.

It is important to note that the arrangement is not necessarily an illegal act, nor does it constitute a crime. In case it contains one of the listed features, it will be subject to reporting pursuant to TSIPC. In this sense, the concept differs from tax evasion, which is a crime and is prosecuted under the general penal rules.

The bill explicitly stipulates that even where the tax administration has not taken measures regarding a particular arrangement, such an arrangement is not confirmed to be a legal one.

2. Who should report?

The person obliged to provide information is mainly the consultant, and in certain cases – the taxable persons participating in the respective arrangements.

Consultant as defined in the bill means any person that designs, markets, organizes or manages the implementation of a cross-border arrangement. The definition also covers any person assisting such activities (i.e. have partial participation) if it could be assumed that such person possesses the necessary knowledge and competence. In this case the person shall have the opportunity to submit evidence that he/she was not aware of and did not have the necessary knowledge to participate in the tax arrangement.

The bill provides for the option to exempt certain consultants from the obligation to report where the reporting obligation would breach professional privilege (e.g. lawyers). In such a case, however, the taxable person is the one who is obliged to report to the tax administration. The consultant, on the other hand, is obliged to remind the person concerned of this obligation, as well as to provide information on the identity of the person to the National Revenue Agency (NRA).

3. Time limits for provision of information

Information regarding the respective arrangement is to be provided within 30 days from the date of designing the arrangement, the date of making it available or the first stage of its implementation, whichever occurs first.

Even though the bill provides for entry into force as of July 1, 2020, the aforementioned reporting obligations are assumed to have retrospectively entered into force – reports will cover arrangements where the first step is implemented after June 25, 2018.

4. Penalties

Monitoring and controlling compliance with the introduced rules will be carried out by the NRA with a number of penalties for failure to fulfil the new obligations being prescribed. The bill provides for administrative penalties for non-fulfilment of the obligation by the consultant and by the participants in the arrangement. The heaviest penalty is in the amount of up to BGN 10,000 (app. EUR 5,000) and it may be imposed for failure to fulfil the reporting obligation.

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