Value Added Tax

Value Added Tax (VAT) has been part of Bulgaria’s tax system since 01.04.1994 and represents the largest source of tax revenue for the state. It is regulated by European legislation and is applied in all Member States of the European Union (EU). In national legislation, it is regulated by the Value Added Tax Act (VATA). VAT is a type of indirect tax, since it is levied on the consumption of goods and services. A key feature of VAT is that it is a multi-phase tax – it is assessed and paid at each stage of the production and sale of goods (services) up to the final consumer. An important peculiarity of VAT is that the person who remits the tax to the budget differs from the person who ultimately bears the tax burden (the final consumer). In this sense, every individual in everyday life, by purchasing goods and using services, is required to pay VAT.

Legal entities and certain individuals (lawyers, notaries, farmers, etc.) have an obligation to monitor the conditions for mandatory registration under the law and to register with the National Revenue Agency (NRA). This register is public and can be found on the NRA website. The above-mentioned individuals may also register voluntarily, i.e. without meeting the conditions for mandatory registration. It should be noted that there are different grounds for mandatory VAT registration. For some of them, it is necessary to reach a certain sales/purchases threshold, while for others no such threshold is set. Only registered persons are obliged to charge VAT and entitled to deduct the tax paid on the purchase of goods and services. In this regard, all registered individuals act as remitters of the tax to the budget, since they are obliged to charge the tax, collect it from the buyer, and remit it to the treasury.

Attention should be paid to the fact that VATA specifies particular goods and services that are exempt from VAT taxation. These are related to healthcare, education, sports, culture, social care and insurance, financial and insurance services, etc.

It is important to note that taxable goods and services are subject to different VAT rates within the EU, with the standard (basic) VAT rate not being allowed to fall below 15 per cent. In Bulgaria, it is 20 per cent. Reduced VAT rates may also be applied, i.e. on the territory of a particular EU member state, specific goods and services may be taxed at a lower rate. In Bulgaria, a reduced VAT rate applies to: hotel services and the like; books, textbooks, periodicals – newspapers and magazines (whether in physical or digital format); goods for babies and young children such as food, diapers, etc. They are taxed at a rate of 9 per cent. In addition, certain goods and services are subject to a zero VAT rate. Some of these are related to EU rules governing taxation in the member state of consumption, while others are aimed at supporting exporters, international carriers of goods and passengers, etc.

Due to the substantial importance of this tax for the budget, most inspections and audits by the NRA authorities are carried out in connection with the application of VATA.

 

Excise Duties

Excise duties are also indirect taxes and form part of the final price of goods. There are various arguments for imposing them, which you should be familiar with in order to understand why excises are necessary and how government policies in this area function. Since excises increase the final price, it is considered that demand (and thus consumption) of excisable goods becomes lower than it would be without excises. But why would the state seek to limit the consumption of goods?

Firstly, it is accepted that excises should be imposed on so-called “demerit goods” in theory. Consumption of such goods leads to negative externalities. These are one of the shortcomings of the free market, which require government intervention in the economy. Such effects arise, for example, from smoking – there are passive smokers who inhale cigarette smoke without wanting to, which risks damaging their health as well.

Secondly, people tend to consume such goods because the immediate effect for them from a single use is positive. However, it is incomparable to the long-term consequences for their health from prolonged consumption. For example, the temporary cheerfulness after drinking alcohol cannot be compared to the damage that regular consumption may cause to the brain, heart, or liver. In turn, such harm requires additional healthcare for the affected person. They may no longer be able to work productively or care for their relatives, i.e. the result for society will again be negative.

Thirdly, energy products and electricity are also subject to excise duty. Here too, consumption should remain within reasonable limits, since energy resources are limited, and many of them are non-renewable. Securing new extraction requires time and huge investments. In addition, energy consumption is linked to harmful emissions that adversely affect the environment. This is yet another reason why such policies are implemented.

In the EU, excisable goods include alcoholic beverages, energy products, and tobacco products. Minimum excise duty levels are set for the entire Union, while specific rates may vary from one member state to another. In Bulgaria, this indirect tax is regulated by the Excise Duties and Tax Warehouses Act. The tax bases for excises are specific – hectolitres (for alcohol), litres, kilograms, and gigajoules (for energy products), pieces and kilograms (for tobacco products). These features do not concern consumers, as the excise tax burden is borne by them, but the tax obligation is remitted by the producers or traders.

 

Customs Duties

In Bulgaria, customs duties are regulated by the Customs Act. As a type of indirect tax, they also form part of the final price. They are levied on the import or export of certain goods into the country. Customs duties are a major instrument in trade relations between countries. Every state has competitive advantages – for example, more natural resources and a stronger extractive industry; a specific climate suitable for particular crops or livestock, or lower labour costs. This also leads to lower prices for goods produced there.

Customs duties help balance price differences between countries’ goods, thereby encouraging and/or protecting the national economy. However, in today’s world, as a result of processes such as globalisation, technological development, etc., many economists believe that free trade should be encouraged. Accordingly, it is best for all if states specialise in producing what they have a comparative advantage in.

An increase in customs duties by a given state usually leads to a reciprocal reaction from its trading partners. Thus arise the so-called trade wars, which often result in adverse effects for both consumers and producers. Sometimes businesses are even forced to relocate production, which can temporarily cause shortages of certain goods.

Within the EU, there is a Customs Union, i.e. free movement and trade of goods has been established between member states, without customs duties being applied. Accordingly, at the Union’s external borders, a common customs tariff is applied for goods from third countries. For verification, the TARIC system can be used.

 

Supply of Goods from the EU and Abroad

When you import or order goods from outside the EU, you should bear in mind that they will be subject to all applicable indirect taxes, and the cost of delivery will also be taken into account (in the calculation of the customs value). Since 2021, the so-called One Stop Shop (OSS) system has been in place, which significantly facilitates consumers when purchasing goods from third countries. When the value of the goods is up to 150 euros, VAT is charged and paid by the supplier at the time of purchase, instead of by the buyer upon receipt of the delivery. Such goods are exempt from customs duties. A zero customs rate also applies to certain product categories – for example, computers, tablets, and phones.

From other EU countries, you can buy and order goods within a reasonable quantity for personal use without any difficulties. However, there are certain restrictions that you need to observe when sending or receiving shipments between private individuals or when travelling between EU countries. These restrictions concern excise goods – tobacco products, alcohol, and fuels – which is why it is advisable to check the specific permitted quantities in advance.

If necessary, check the current levels of indirect taxes in the relevant legal acts.

 

Useful links:

National Revenue Agency

National Customs Agency

EU TARIC Consultation module

Value Added Tax Act

Excise Duties and Tax Warehouses Act

Customs Act