The article comments on the taxation of income received by individuals from e-commerce (online trading) made through courier companies and cash on delivery or postal money orders. Most often, these are individuals who are not registered as traders but earn income from the sale of items through e-shops, websites, social networks. However, the income may be accepted by the tax authorities as such one received from commercial activity and subject to taxation.
When the activity of these individuals will be considered commercial for taxation purposes?
Individuals who frequently sell goods and receive income from this activity will be treated by the tax authorities as traders within the meaning of Art. 1 of the Bulgarian Commerce Act (“CA”). The fact of the regularity of the deals and the income received will be the determining factor, not the existence of registration as a trader and what the individual has declared.
If the sales are numerous (i.e. they are not occasional and not of items for personal use), then these sales will suggest regularity and commercial nature of the income-producing activity. The tax authorities will then assume that these individuals have acted as traders, carried on a business, should have kept appropriate accounting records and declared this income in the annual tax declarations under Art. 50 of the the Personal Income Tax Act (“PITA”). The application of Art. 13, para. 1, p. 2 of the PITA would be excluded. Income thus realised will fall within the scope of taxable income Art. 26, para. 7 of the PITA as income from commercial activity of an individual who is a trader within the meaning of the CA even without registration as a trader.
How are tax liabilities determined in cases of undeclared income from online trading?
In these cases, the tax liabilities are most often determined as a result of an audit carried out under the special procedure of Art. 122-Art. 124 of the Tax and Social Security Procedure Code (“TSSPC”). Pursuant to Art. 124, para. 2 of the TSSPC, the findings therein are presumed to be correct until proven otherwise. The burden of proof is reversed – the individual should refute the findings of the tax authorities with evidence.
In order for an audit to be carried out under the special procedure of Art. 122-Art. 124 of the TSSPC, the conditions under Art. 124, para. 1 of the TSSPC shall be at hand. The tax authorities shall prove the existence of grounds for the audit to be carried out under the special procedure. In the case of undeclared income from online sales, the specific ground is under Art. 122, para. 1 of the TSSPC, sometimes combined with the ground under Art. 122, para. 2 of the TSSPC. The taxable amount is determined in compliance with Art. 122, para. 2 of the TSSPC.
If the audit has not been carried out under the special procedure for taxation, the income from the e-commerce will be taxed under the general procedure as income from commercial activity of an individual – on the ground of Art. 26, para. 7 of the PITA under the order of Art. 26, para. 1-6 of the PITA with a tax under Art. 48, para. 2 of the PITA on the taxable profit determined in compliance with the Corporate Income Tax Act.
The tax authorities shall correctly determine the taxable individual and the exact amount of the undeclared income in order to ensure that the taxation is lawful. This is often a real challenge, especially in the cases of online trading with courier deliveries and cash on delivery and/or postal money orders.
How may the individuals defend themselves against findings of undeclared income from e-commerce?
The individuals may defend themselves both in the course of the audit and in the appeal of the tax assessment act administratively and, if necessary, subsequently in court. The defence is carried out through submitting written evidence and refuting the findings of the tax authorities, taking into account the order of the audit – the special or the general order. The conduct of the audit itself may also be appealed as to the grounds, procedure and/or procedural steps taken.
If there are grounds to do so, the individual may claim that there was no undeclared income from online trading and/or that the tax liabilities were incorrectly determined by reason, amount, etc.
Online sales of items with courier deliveries and cash on delivery and/or postal money orders present many difficulties in proving or refuting, including regarding:
- the exact person who made the sales;
- the subject and frequency of the sales – so to be established whether it is commercial activity at all;
- the relation between particular sales and the income derived therefrom;
- the amount of income received;
- the costs invested by the individual in the online sales;
- documents available from post offices, courier companies and other third parties;
It may appear from the facts, circumstances and evidence of particular cases that:
- the individual has not acting in his/her personal capacity but as an employee under an employment agreement or as an agent under a power of attorney for some or all of the sales;
- it is the case of sales of personal items with accidental character and it is not the question of commercial activity;
- there was no evidence of income that was not declared by the individual – for example, only tables for internal use by courier companies and post offices were submitted;
- evidence of costs invested by the individual has not been taken into account when determining the tax base;
- receipts with different signatures were kept by courier companies and postal services as being made by the same individual, illegible or incomplete documents are at hand, etc.;
- income appearing to be from undeclared sales is in fact part of other declared income – spare parts purchased when repair services are provided or subsequent sale of goods are made;
- Other.
Findings are made on the ground of all written documents – submitted by the individual himself, as well as collected by the tax authorities from the individual, courier companies, postal services, other third parties after counter-checks of individuals and companies. The success of the defence depends largely on the persuasiveness of the written evidence and the arguments of the individual.
The present article is for information purposes only. It is not a (binding) legal advice. For a thorough understanding of the subjects covered and prior acting on any issue discussed we kindly recommend Readers consult Ilieva, Voutcheva & Co. Law Firm attorneys at law.
