It is possible that an obligation under an invoice may not be paid by the recipient of the invoice. However, the supplier, issuer of the invoice and taxable person, has charged and paid the value added tax (VAT), thereby fulfilling its obligations under the Value Added Tax Act (VATA). However, the supplier may never receive the debt or may receive it only partially (non-collectible receivable or bad debt). The question is whether in such a case an adjustment can be made to the taxable amount and charged tax.
I. VATA on the reduction of the taxable amount and charged tax in cases of bad debts
With Chapter Тhirteen „а“ of the VATA, in force from 01.01.2023 and amended thereafter, it was provided that a supplier registered under the VATA can reduce the taxable amount and the accrued tax on supplies with a place of supply in Bulgaria, on which supply the receivable is totally or partially non-collectible.
1. The reduction is carried out under the following conditions:
- an invoice has been issued and the tax has been charged for the supply and
- the recipient and the supplier under the supply were not related parties at the time of supply and/or at the time when a circumstance arose where the VATA considers the non-collectibility to have occurred and
- the receivable has not been transferred against consideration and
- the supplier can prove that it has taken action to collect the receivables under the supply and
- the supplier has notified the recipient, a VAT-registered person at the time of delivery, in writing that the supplier considers the relevant receivable non-collectible due to the specific circumstance provided for in the VATA and has evidence that its notification was sent to the recipient‘s address of management.
2. Non-collectibility under the VATA is at hand in a case of:
- expiry of the limitation period from the moment when the receivable became due – 3 years for a receivable with a 3-year limitation period or 5 years for a receivable with a 5-year limitation period, or
- a court decision has entered into force declaring that the receivable or part of it is not due – the receivable shall be deemed non-collectible only regarding the undue part, or
- the receivable has extinguished by law, or
- the receivable has remained totally or partly non-collectible after the completion of enforcement proceedings, or
- the insolvency proceedings of the recipient of the supply have been terminated by a confirmed reorganisation plan which provides for incomplete satisfaction of the supplier’s receivable – the receivable shall be deemed non-collectible to the extent of the unsatisfied part, or
- 365 days have expired for a receivable of up to BGN 600 from the time when the receivable became due, or
- the recipient of the supply is deleted after bankruptcy or liquidation proceedings have been completed – in the case of a partially unsatisfied receivable, the receivable shall be deemed finally non-collectible up to the amount of the unsatisfied part.
3. If the recipient was a VAT-registered person at the time of the supply, the reduction is carried out by the supplier through issuance of a credit note to the amount of the total or partial non-payment of the supply.
If the receivable has subsequently been paid or settled in return in another way, totally or partially, the supplier shall issue a debit note during the tax period of receipt of the payment or settlement up to the received amount of payment or settlement.
In case of total or partial non-payment of a taxable supply with a taxable amount exceeding BGN 100 000:
- the supplier shall notify the National Revenue Agency (NRA) within 3 months from the occurrence of the relevant circumstance of non-collectible (without the deletion);
- the NRA shall issue a credit note to an invoice with tax charged, but only if the recipient of the supply has exercised the right to deduct tax under that invoice. The NRA shall issue an authorisation or refusal within 60 days as from the receipt of the notification, and a lack of reply within that period shall be deemed a granted authorisation;
- within 3 months of receipt of the authorization, the supplier issues a credit note, submits the reference-declaration and the accounting records under the VATA for the period during which the credit note was issued.
The tax authoruty carries out an inspection for the purposes of the granting an authorization. However, regardless of the authorization granted and after it, the conditions for reduction and the circumstances of non-collectibility are subject to control under the Tax and Social Insurance Procedure Code (TSIPC).
In case of total or partial non-payment of a taxable supply with a taxable amount up to BGN 100 000:
- the supplier shall not submit a notification to the NRA;
- within 3 months from the expiry of the tax period during which the relevant circumstance of non-collectibility occurred (without the deletion), the supplier shall issue a credit note to an invoice with tax charged, but only if the recipient of the supply has exercised the right to deduct the tax under this invoice;
- the supplier issues a credit note, submits the reference-declaration and the accounting registers under the VATA for the period during which the credit note was issued, in compliance with the Regulations for the Application of the VATA.
The supplier may, by means of a qualified electronic signature, electronically obtain information on how a document issued by it is reflected in the recipient’s purchase ledger.
4. If the recipient was not a person registered under the VATA at the time of the supply or was deleted after bankruptcy or liquidation proceedings had been completed, the reduction shall be carried out by issuance of a protocol by the supplier within 3 months from the expiry of the tax period during which any of the above circumstances of non-collectibility occurred. The protocol shall be marked with a sign “-“ in the sales ledger and the reference-declaration in the respective tax period.
The reduction of the tax charged shall be the difference between the tax charged on the supply and the tax credit availed of by the supplier for goods or services received from the supplier directly related to the performance of the supply. The reduction shall be up to the amount of the total or partial non-payment of the supply.
If the receivable has subsequently been paid or settled in return in another way, totally or partially, the supplier shall issue a debit note during the tax period of receipt of the payment or settlement up to the received amount of payment or settlement or the reduction above. The protocol shall be marked with a sign “+“ in the sales ledger and the reference-declaration in the respective tax period.
5. The procedure of item 4 above for a person not registered under the VATA shall also apply for cases where the recipient of the supply has been deleted after the completion of bankruptcy or liquidation proceedings or was a registered person at the time of the supply who used the goods or services received for making supplies for which the recipient has not exercise the right to deduct the tax.
6. The reduction of the taxable amount and the tax charged shall not be made where the supplier knew or had to know at the time of the supply that it would not receive its receivable under the supply. The supplier had to know where the supply is fictious, circumvents the law or is at a price significantly below the market price.
II. The reduction of the taxable amount and tax charged for a bad debt according to the Court of Justice of the European Union (CJEU)
1. Case C-242/18 (UniCredit Leasing EAD) of the CJEU, closed with Judgment dated 03.07.2019.
The order described above was introduced in the VATA after case C-242/18. According to Art. 90 para. 1 of the Council Directive 2006/112/EC (“the Directive”) in cases of cancellation, revocation, refusal or total or partial non-payment, or where the price is reduced after the supply has been made, the taxable amount shall be reduced accordingly in compliance with conditions determined by the Member States. The tax authority shall not charge VAT in excess of what has been received by the taxable person. According to the CJEU, this principle of conformity shall be applied directly. The formalities which the taxable persons have to complete with the tax authorities in order to reduce the taxable amount shall be limited to those which make it possible to prove that, after the supply, the receivable will not be received totally or partially.
According to Art. 90, para. 2 of the Directive, the Member States may derogate from the application of Art. 90, para. 1 in cases of total or partial non-payment. According to the CJEU, the right to derogate follows from the fact that, in certain circumstances and because of the law of the Member State, the non-payment is difficult to be verified or may be only temporary. There is uncertainty because of the non-payment.
The CJEU stated that the non-payment of part of the due instalments before the termination of the agreement is a partial non-payment under Art. 90, para. 1 of the Directive. Bulgaria used the right to derogate, and the uncertainty shall be considered. The taxable person shall:
- be deprived of its right to reduce the taxable amount until the receivable becomes finally non-collectible and/or
- have the option to reduce the taxable amount where he claims that, provided the circumstances, the receivable is likely not to be paid – and if it is actually paid, the taxable amount will have to be increased. The tax authority shall be able to determine the evidence concerning the likely longer duration of non-payment which evidence to be provided by the taxable person – in compliance with the national legislation and principle of proportionality and under the control of the court.
2. Case C-314/22 of the CJEU, closed by Judgment dated 29.02.2024.
The judgment of the CJEU under case C-314/22 also does not comment on Chapter Thirteen “a” of the VATA, but is of great importance for its application.
The CJEU considers Art. 90 together with the rules in the Directive on adjustment of the amount to be deducted and the right of the Member States to implement rules so to ensure correct collection of VAT and prevent tax evasion. The rules under the VATA on the content of the invoice, procedure for its correction, issuance of credit and debit notes as well as the possibility under Art. 129 of the TSIPC for set-off and refund are examined.
In its Judgment dated 29.02.2024 the CJEU states that:
- the Directive does not preclude a legislation of a Member State which provides for a limitation period for the submission of an application for a reduction of the taxable amount in the event of total or partial non-payment. The term starts from the moment when the person could, without showing a lack of diligence, have requested to exercise its right to a reduction. If nothing is provided in the national legislation, the person shall be able to identify the starting point of that period with a reasonable degree of probability;
- the Directive precludes a requirement on the part of the tax authority which renders the reduction in the taxable amount of VAT subject to the condition that the taxable person first corrects the initial invoice and that it communicates to its debtor its intention to cancel the VAT where it is impossible for the taxable person to make such an adjustment in due time for reasons beyond its control;
- The right to a reduction of the taxable amount of VAT entitles the taxable person to a refund of the VAT paid, together with interest for late payment. In the absence of any provision in the national llegislation, the starting point for the calculation of that interest is the date from which the person asserts the right to that reduction in the VAT return for the on-going tax period.
III. Some challenges upon the application of the VATA
The benefit of the introduction in the VATA of a procedure for reduction of the taxable amount and tax in cases of non-collectible receivables is undeniable. At the same time, the determination of the amount of the reduction or whether the supplier knew or should have known that it would not receive the debt may create practical problems. These will have to be resolved administratively or judicially with all the evidence legally allowed.
Other provisions of the VATA, such as the requirement that the supplier shall have given prior notice to the recipient that it considers the relevant receivable non-collectible, are not consistent with the CJEU’s principles on the application of the Directive.
The conduct of the person, including its efforts to collect the receivable, shall be relevant in all cases where a reduction of the taxable amount and tax charged is requested on the ground of a non-collectible receivable. The taxable person may have to prove the lawful exercise of its right and to rebut official determinations of the NRA as to the starting and ending point of the limitation period.
The case law above is also relevant to cases of non-collectibility which occurred before 01.01.2023 – the taxable person will have to evidence that the final non-collectibility occurred before that date or at least a suggestion of such occurred with a reasonable degree of probability.
