The Special rules are implemented in the Tax-Insurance Procedural Code (TIPC), through a new section to Chapter Sixteen “Special Proceedings”. The provisions shall enter into force on the 1st of July 2020.
Thus, in the Bulgarian tax legislation Council Directive (EU) 2018/822 of 25th of May 2018 (the “Directive”) amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements is implemented. The rules under Action 12 of the BEPS (Base Erosion and Profit Shifting) Plan for implementing measures to reduce the tax base erosion and transfer profits to the Organization for Economic Co-operation and Development are being implemented.
- Essence and purpose of the new rules
Mechanism is established for disclosure and automatic exchange of information between Member States regarding cross-border arrangements that presents an indication of a potential risk of tax avoidance and more than one Member State or a Member State and a third state are concerned. The reasoning for the implementation of the changes is the need to counteract the move of taxable profits towards more beneficial tax regimes or have the effect of reducing the taxpayer’s overall tax bill. The aim is to strengthen the struggle against tax evasion and aggressive tax planning and to improve tax transparency rules.
- Cross-border arrangement that presents an indication of a potential risk of tax avoidance
According to the reasoning of the bill introducer, a “tax arrangement” shall be understood in its broadest sense. The notion may include any “arrangement, agreement, deal, consent, statement, scheme, plan, transaction, etc., as well as a range of such ones. The tax arrangement may consist of several parts or stages of execution.”
The cross-border character of a tax arrangement may arise from:
- The capacity of a “tax resident” of the participants in another or more than one jurisdiction;
- The fact that one or more of the participants in the arrangement carries on a business in another jurisdiction through a permanent establishment situated in that jurisdiction and the arrangement forms part or the whole of the business of that permanent establishment;
- The fact that one or more of the participants in the arrangement carries on an activity in another jurisdiction without being resident for tax purposes or creating a permanent establishment situated in that jurisdiction;
- Such arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership.
TIPC introduces rather detailed conditions for the cross-border arrangement to meet or at least one of them in order to be considered potentially risky for the purposes of tax avoidance. With view to these criteria and the reasons for the bill, the arrangements are generally as follows:
- Related to the existence of a major benefit;
- Related to potential avoidance of the rules for an automatic exchange of financial information or disclosure of information for the ultimate beneficial owner;
- Related to transfer pricing;
- Related to different forms of hybrid mismatches;
- Others, according to certain explicitly provided criteria.
The existence itself of some of the conditions is not sufficient for the occurrence of an obligation for disclosure of an information. Some of the criteria are taken into account only where it can be established that the main benefit or one of the main benefits which (further to all relevant facts and circumstances) a taxable person can reasonably expect to derive from is the obtaining of a tax advantage.
In any and all cases, the conditions for having a cross-border tax arrangement with a potential risk of a tax avoidance and the obligation for disclosure of information are complex. The application of these conditions requires a thorough knowledge of them.
- Liable persons
The following persons are considered liable for the purposes of disclosure of information regarding cross-border tax arrangements:
- Consultants – two groups of individuals and legal entities
First group: any person that designs, markets, organises or makes available for implementation or manages the implementation of a cross-border arrangement with a potential risk of tax avoidance
Second group: any person who has undertaken to provide, directly or through other persons, support, assistance or consultation with regard to the designing, marketing, organization or making available for implementation or management of the implementation of a cross-border arrangement with a potential risk of tax avoidance. A consultant from this group may provide evidence that he did not know and may reasonably be assumed to have been unaware of his participation in such an arrangement.
Where there is more than one consultant under the cross-border tax arrangement, all the consultants shall be bound to disclose the information, although the obligation may arise in different countries.
- Tax liable persons – in particular cases
Such an obligation arises for a tax liable person to whom such an arrangement has been provided for implementation, is prepared to implement it or has completed the first step of the tax arrangement when the consultant cannot disclose the information (the information is legally protected as professional secret), there is no consultant under the arrangement or the consultant is not related to any Member State.
When such an obligation arises for more than one tax liable person or in more than one Member State the information is disclosed by the person who has agreed with the consultant. If there is no such person, the information shall be disclosed by the person who manages the implementation of the tax arrangement.
- Obligation in Bulgaria
The consultant and tax liable person are bound to disclose information in Bulgaria when:
- They have place of business or a permanent establishment in the Republic of Bulgaria, or
- For the consultant – is incorporated in compliance with or governed by the legislation of Bulgaria for the provision of the services under the arrangement, and for the tax liable person – receives incomes/gains profits in Bulgaria;
- For the consultant – is registered with a professional association related to consultancy services in Bulgaria, and for the tax liable person – carries out activity in Bulgaria.
The information shall be disclosed to the Executive Director of the National Revenue Agency (NRA) when the person has the respective relation with Bulgaria and in the above sequence of countries Bulgaria is at the foremost position.
The disclosed information shall have explicitly legally provided contents.
The Executive Director of the NRA regularly exchanges information about cross-border tax arrangements with the competent authorities of the other Member States.
The information shall be disclosed by the persons in the term of 30 calendar days as from the earliest date among the following dates:
- on the day after the reportable cross-border arrangement is made available for implementation;
- on the day after the reportable cross-border arrangement is ready to an extent, which permits its implementation;
- on the day when the first step in the implementation of the reportable cross-border arrangement has been made.
The consultants under a tax arrangement with standardized contents disclose every quarter updated information which has come to the consultants’ knowledge after the previous disclosure of information.
The consultants who have undertaken to provide, directly or through other persons, support, assistance or consultation (i.e. the consultants under the second group) disclose information in the term of 30 calendar days as from:
- The day following the day on which they provided, directly or through other persons, support, assistance or consultation with regard to the designing, marketing, organization or making available for implementation or management of the implementation of the tax arrangement.
By the 31st of August 2020, the liable persons shall submit information on each cross-border tax arrangement, the first step in the implementation of which took place between the 25th of June 2018 and 30th of June 2020.
- Relief from obligation
The consultant shall be deemed relieved from an obligation to disclose information about a cross-border tax arrangement when they:
- Possess with evidence that another consultant has disclosed the same information about the tax arrangement;
- Possess evidence that he has disclosed the information in another Member State when the conditions for that are at hand;
- Are legally bound to keep that information as a professional secret except in cases when the tax liable person has expressed consent for its disclosure.
The tax liable person shall be deemed relieved from an obligation to disclose information about a cross-border tax arrangement when:
- They have disclosed the information to another Member State provided that the respective conditions are at hand;
- Another tax liable person has disclosed the same information about the tax arrangement.
- Administrative-penal responsibility
Fines for individuals and sanctions for legal entities and sole traders are provided for cases where such persons fail to fulfill an obligation related to the disclosure of information about a cross-border tax arrangement. Fines and sanctions are substantial, and in the case of repeated infringement they are in double amount.
- New definitions
Definitions of the following notions such as “associated enterprise”, “tax arrangement with hallmarks in the contents”, “safe harbour rules”, “hard-to-value intangibles”, “tax advantage” are implemented. Main and additional criteria for association are introduced through management, control, share capital or profits for legal entities or through lineal ascendants or descendants for individuals. The notions follow the Directive.