Easing the administration of paying taxes for small companies

Last week the Budget and Finance Commision of the Parliament passed on second reading Draft of the Law on Corporate Income Taxation (LCIT). One of the proposed amendments is that companies with an annual turnover of less than 200,000 levs will not pay taxes in advance, as it is according to the currently applicable Law. The motivation behind this proposals are clear and logical "The change will lead to reduction of the burden of the taxpayers (which will save money and time) as well as reduction of the tax administration from the National Revenue Agency".

Actually paying taxes in advance is a very bureaucratic procedure, which not only reduces the liquidity of the businesses but requires time and expences. According to data provided by the Ministry of Finance, published in the mass media, the companies which will benefit from this amendment will be at least 164 000. To that number we should add the number of newly set up companies. According to the current Law companies which have become profitable during the previous year must make monthly advanced payments, while companies, which were at a loss, as well as newly set up companies must make quarterly payments[1]. If companies do not obey to the rules, they must pay interest on the sum of delayed taxes.

Cost-benefit Analysis

The benefits for business include:

• § Time saved as a result of filling less payment forms and making less calculations. Although up to now not all companies observed this requirement, if we assume that 89% of the 164000 companies have followed the requirements of the bill and on the average it takes them about half an hour to calculate the amount of the due taxes, to prepare the payment documents and to put them in the banks (some of the companies use Internet banking, which significantly simplifies the process), the time saved will be 590 thousand men-hours. In monetary terms, under these conservative assumptions, the costs saved will be at least 1,3 million levs. For some companies the expenses related to tax payments are even higher than the usual, because they have to consult with experts and accountants. In order to estimate more accurately these costs it is necessary to perform a study among the companies.
• § Costs saved from bank charges – they will be over 1 million levs. The exact amount vary again according to the condition of the various banks and the number of companies which use Internet banking.

The benefits for the public sector include simplification of tax administration procedure. This may lead to optimization of administrative structure and savings of time and money. The exact calculations of these benefits also require more data and information from the public organizations themselves.

Expenditures of the budget

The budget will not lose the revenues from the advanced payments, there will only be a delay of receiving the funds.  As the only loss one could account is the interest lost, which is calculated on the companies which have not paid in advance their dues. They are, however a very small amount and their role is not to generate revenues for the  government, but to achieve an educational effect on the debtors.  The largest revenue from corporate taxes the government recieves in March, when the companies complete the accounting for the year and pay the remaining taxes. According to data provided by the Ministry of Finance during March 2007 they have recieved 524,8 million levs of revenue from corporate taxes, which is 35% of the revenues from corporate tax up to October, including. On the other hand the companies which fall into the range of less than 200 000 levs of annual turnover are 13% of the total number of active companies, according to BULSTAT.

It is clear that the benefits are much greater than the expenditures. Thus remains the logical question why the range had not been extended (as proposed by Martin Dimitrov from UDF for example, companies with an annual  turnover of less than 1 million to be freed from advanced payments). According to the Law for Small and Medium Enterprises the companies with a turnover of less than 200 thousand levs fall into the category of mirco- companies. These are companies with a turnover (or value of their assets) up to 3 900 000 levs., while the small companies are those with an annual turnover of up to 19,5 million levs.

According to an international study of the World Bank and PriceWaterhouse Coopers "Tax payments in 2008"[2] Bulgaria is at the 88^th place according to the general index for paying taxes, which takes into account the size of the tax rates, the number of tax payments and the time it takes to cover tax obligations, with respect only to the "time required to pay taxes" parameter Bulgaria is at the 160^th place out of 176 countries., i.e. our country is at the bottom of the ratings in that category. It takes an average size company 616 man-hours to fill the required documents, collect and prepare the necessary data and at the end to pay its taxes. Part of the reason for that are the rather complex and difficult bureaucratic procedures, which unnecessarily burden the business and create work for the tax administration. For that reason the simplification of the administrative procedure of the tax payment process is very important and must undergo revues together with size of the tax rates.  

In this order, the reduction of the dividend tax from 7% to 5% is also a positive development, but more was possible as well.  Dropping out the tax (according again to the proposal of Martin Dimitrov) will "cost" approximately 50 million levs, but against it there are costs of administration and costs for the business to calculate it and adhere to the regulations. With respect to simplifying the procedure of paying taxes there is a long way to go. We could apply some of the good practices of other countries – for example in Singapore it takes on the average 49 man hours for an average company to pay all its taxes, in Switzerland – 63 hours, Ireland – 76 hours (according to the study quoted above).   

[1]According to art. 84 and art. 85 from the LCIT.

[2]The study is available here: http://www.doingbusiness.org/taxes