Connecting fiscal devices to the National Revenue Agency, Bulgaria
The severe drop in state revenues following the economic crisis of 2008 led to a renewed public interest in the undeclared work debate. Since 2008, Bulgaria has experienced high revenue losses and a higher level of tax evasion. To address this situation, the government decided to connect the fiscal devices of all trade entities with the computer system of the National Revenue Agency in real time. The measure aims to strengthen the government’s administration of taxes and curtail informal activities.
The pre-crisis period was characterised by a sharp increase in revenues (especially tax revenues on goods and services) and large capital inflows that fuelled employment growth between 2001 and 2008. Yet in 2009, tax and non-tax revenues slumped. This trend confirms the suggestion that as businesses suffer through the recession, they become more likely to not declare part of their revenue and economic activities in order to avoid paying taxes and social security contributions. The existing surveys and control inspections registered a relatively high level of tax evasion, especially by small trade and construction companies, many of them using tax evasion as a means for surviving in times of crisis.
It should also be mentioned that the increased controls in 2009 and 2010 have not prevented the hidden economy from increasing.
Concealing turnover and VAT fraud have become widespread practices requiring adequate measures to overcome it. According to the National Revenue Agency (NRA), between 60% and 70% of trade entities conceal some part of their turnover. The figure is even higher for small shops, at about 85%. The annual loss due to hidden turnover of SMEs is estimated at BGN 20 million. The proposal to connect companies with the NRA came from the Bulgarian Industrial Association, which in 2007 initiated the ‘Come into Light’ initiative in partnership with other employer organisations and the media.
This measure aims at preventing the concealment of turnover, fostering compliance with the tax legislation and combating tax fraud in a systematic and structured way.
In accordance with the latest amendments to Ordinance No18/2006 on the Registration and Reporting of Sales on Commercial Premises through Fiscal Devices, all trade entities should have connected their fiscal appliances with the NRA’s computer system in the period 2011 to March 2012. The measure is meant to strengthen the government’s administration of taxes and curtail tax abuse and evasion.
The provisions of the amended Ordinance 18/2006 set up a statutory requirement for a remote connection of all trade entities in three stages – first, for all petrol stations (up to 1 January 2011), for pharmacies (up to 31 August 2011) and then for grain traders registered under the VAT Law (30 November 2011). The rest had until 31 March 2012.
In case of non-compliance, the fine is BGN 10,000 and activities are to be closed until the requirements are fulfilled. The penalty for not issuing a receipt is BGN 3,000.
Through this measure, the tax administration is maintaining control over the companies’ turnover in real time and is detecting the offending companies.
National Revenue Agency (NRA)
Outcome of evaluations; lessons and conclusions
Achievement of objectives
The results show that the introduction of the remote connection with the NRA and the tight NRA control is a promising tool for combating the informal economy, as tax violations decreased.
The NRA registered growth in the taxable VAT base, with BGN 4.3 billion for the second quarter of 2012 (since all companies were connected) compared to the same period of 2011. According to the tax administration, the main reason for this increase is linking fiscal appliances with the NRA.
Information from fiscal devices is automatically available to NRA, allowing for remote access to data and instantaneous inspections. The software analyses and monitors data on turnover in different sectors and areas in the country using 20 risk criteria and detects the offenders. Thus, the system provides for improved risk assessment and avoids unnecessary inspections of compliant traders. Since the introduction of the measure, about 2,000 companies have been found to conceal turnover. The most common tax offenders are small shops, catering and entertainment companies, and construction companies.
According to information from the NRA, the latest inspections carried out in June–July 2012 found few violations and improved tax discipline.
However, although such a measure might be considered positive from the perspective of reducing the informal economy, its overall economic effect is unclear.
Obstacles and problems
Some businesses resisted the new measure complaining that it was an additional financial burden in times when the companies were feeling the impact of the crisis.
The first successful results of the introduction of the measure have proved that the government can achieve fiscal consolidation and avoid increasing taxes to reduce its debts through different measures for reducing tax evasion and tax fraud in a systematic and structured way.
The results show that after the introduction of the distant connection with the NRA, violations decreased. The declared turnover in the second quarter of 2012 increased 10% compared to the same period of 2011. Since the beginning of 2012, more than 320,000 fiscal appliances have been connected to the NRA.
Forty new petrol stations have been ‘detected’, while another 400 have been temporarily suspended from operation because of failure to connect to the NRA system.
However, as with most of the measures proposed by the government, there has been no cost benefit analysis of this measure.
The measure is easily transferable to other Member States in line with their national circumstances.
Concealing turnover and VAT fraud became widespread practices in times of crisis, requiring adequate measures to overcome it. The measure described above places the businesses in a clear and equitable situation. While it will not completely eliminate informal work, working in compliance with the rules will significantly reduce opportunities for concealing turnover and tax evasion. The NRA system provides for better risk assessment and more effective inspections.
Nadezhda Daskalova, ISTUR