Bulgaria’s Мinistry of Finance recently published the ‘tax package’ for 2024, including proposed changes to all tax laws. Alongside widely discussed cases such as the return of the standard VAT rate for restaurants and bread and non-payment of bills in case of an undeclared cash receipt, the package also includes perhaps the deepest change in business taxation in our country in over 15 years.
It involves transposing Directive 2022/2523 to ensure a global minimum level of taxation for multinational groups of companies and large national groups in the EU from January 1, 2024. The directive’s goal is for large companies with revenues over 750 million euros to effectively pay a 15% corporate tax, limiting the ability of countries (like Bulgaria) to offer lower rates and gain a competitive advantage.
The proposed provisions in the Corporate Income Tax Act (CITA) regulate the minimum effective taxation in the country for multinational groups of companies and large national groups of companies. Minimum taxation applies to constituent entities located in the country, which, during the tax period, are members of a multinational group of companies or a large national group of companies with annual revenues in the consolidated financial statements of the ultimate parent entity of at least 750 million euros.
It is envisaged that these constituent entities in our country will be subject to an effective tax rate of 15%, applicable from January 1, 2024, thereby not owing any additional tax to the ultimate or intermediate parent company in the jurisdiction where they are located.
Bulgaria Loses out on Global Tax
According to data from the automatic exchange of reports by country, cited in the preliminary impact assessment, in 2022, there were 1125 constituent companies established in the country, part of large multinational groups. For these companies, the effect will be direct – as early as next year, the taxation of their profits will increase significantly.
In practice, one of the country’s competitive positions – offering a low tax rate on profit taxation – will no longer apply to large companies, making it more challenging to attract major investors. Additionally, considering that the threshold is fixed in nominal value – 750 million euros – over a few years, the number of companies exceeding the threshold will significantly increase.
In essence, Bulgaria is one of the countries most severely affected by the introduction of the global minimum tax rate. However, instead of protecting its competitive position, Bulgaria is gradually transitioning from a country skeptical about introducing a global minimum tax on large enterprises to a country rushing to implement the new rules without analyzing their effects on the country’s competitiveness, including assessing the possibilities of deferred implementation of the directive.
In addition to indicating the number of potentially affected businesses, the published partial assessment does not provide a clear picture of the dimension of the consequences – additional tax revenues, who and how much will pay, benefits and costs for taxpayer groups, dynamic effects on the business environment, and attracting future investments. There is also no presented or even summarized information regarding large national groups that could potentially fall within the scope of the new framework and higher taxation.
Not coincidentally, we note that the country is rather ‘rushing’ to introduce the new framework without seeking opportunities for deferred implementation. The directive provides options for deferred implementation, with Member States in which there are no more than twelve ultimate parent entities of groups falling within the scope of this directive, being able to choose not to apply the new rules for six consecutive tax years, starting from December 31, 2023.
Countries making this choice must notify the Commission by the end of 2023. Estonia will take advantage of this rule and defer the implementation of the directive until 2030. The Bulgarian government, at the very least out of respect for the country’s traditionally skeptical position towards the new – and higher – global tax, should analyze the possibility and present clear data and arguments on whether the country can take advantage of the deferred implementation rule of the directive.
Solution Lies in Tax Incentive for Investments
In the long run, regardless of whether we have the opportunity to temporarily postpone the implementation of the directive, the global tax will play an increasingly significant role in limiting the country’s ability to maintain a competitive position in profit taxation. This means that if we want to be competitive and grow at faster rates, we need to consider additional steps to stimulate investments, both from Bulgarian and foreign companies.
In this sense, opening up the discussion on profit taxation allows for additional measures to be taken in corporate taxation that support the country’s competitiveness and have much broader long-term effects than those following the mere transposition of the European directive. The framework of corporate taxation in Bulgaria should stimulate investments and innovations to enhance productivity and transform the Bulgarian economy. This can be achieved by imposing a zero corporate tax on reinvested profits in the purchase of machinery, equipment, and new technologies.
Such a change concerns the tax base, not the tax rate, and is entirely possible within European rules. In simpler terms, with changes to the tax base, Bulgaria can achieve a lower effective tax burden on companies that invest and enhance their potential. This step would allow Bulgaria to remain a competitive destination for entrepreneurship, innovation, and growth, despite the introduction of a global minimum corporate tax for large enterprises.