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11 April 2005

A group of 14 NGOs submitted a request to the Minister of Finance Mr. Milen Velchev to reconsider the instructions on the rules concerning VAT exemption of EU PHARE projects. The NGOs express their readiness to have a discussion with the Supreme Tax Directorate for adopting changes to the existing scheme that guarantee a more effective execution of the obligations of Bulgaria towards the EU undertaken and are more adequate to the activity of NGOs. The request was undersigned by the Bulgarian Center for Not-for-Profit Law, the Bulgarian


Donors’ Forum, the Open Society Institute, Center for Study of Democracy, the Information and Consultation Center, the Center for Economic Development, the Resource Center, the European Institute, the Foundation for Local Government Reform, the BlueLink Information Network, the Programme and Analytical Center for European Law, the Bulgarian Charities Aid Foundation, the “Access” Association and the Interethnic Initiative for Human Rights. The practice so far Complying with the undertaken obligations towards the EU, expenses for VAT related to implementation of projects under the PHARE programme not to be allowed, the practice of the tax administration so far was the Implementing agency to grant NGOs the status of a “coordinating body”. The specific features of the grant scheme (designated funding of projects in favor of society as a whole) place the funded organizations in the role of a coordinating body, instead of a provider of paid services to the Implementing Agency. The coordinating unit issues letters certifying that the deliveries of goods and services provided by the main contractors within a particular project are VAT-exempt. After confirming the status of a coordinating body, the main contractors tax the deliveries of goods and services within a particular project with 0% VAT (instead of 20%).


Thus the goods and services bought by the coordinating body were free of VAT and the NGO wasn’t obliged to have a VAT registration. This principle was in force during the implementation of the “Europe” Program, the “Civil Society Development Programme 2001” and the USAID-funded projects What does this letter come for? Instead of having the good practice legally set forth, the state attempts to change the current scheme through turning the Implementing Agency into a coordinating body and giving to the funded NGOs the status of main contractors. From end consumers of goods and services, not registered for VAT, the funded NGOs are obliged not only to have a VAT registration but, according to the last instructions to issue invoices against the Implementing Agency for the received financing declaring it as a “delivery of services”. Thus the NGOs funded under the PHARE Programme receive a new untypical role in the VAT system despite the scale and character of their projects which contradicts with the tax practice in the EU and creates to various problems.


The more important of them are as follows: 1. The expenses of the organizations which do not have the nature of taxable deliveries are not VAT exempt. On one hand, the state does not comply with its obligations not to allow VAT expenses, which leads to the risk from suspending the funding from the EU. On the other hand the contractors of the grant schemes will have to suffer the losses from not returned VAT which they would not be able to cover. 2. After the end of the project, if not implementing other projects or doing economic activity the organization will have to deregister, but according to the general legal requirement all of its available assets will be levied with VAT even though the organization has not used any tax credit. 3. Mistaking the implementation of the grant scheme with the execution of deliveries to Implementing Agencies creates a great risk from confusion in the differentiation between paid deliveries (taxable economic activity) and gratuitous funding of activities for public benefit (non-taxable statutory activity of NGOs. Introducing the non-profit organizations into the VAT system will lead to new unsolved problems (such as corporate taxation of the implementation of projects under the PHARE programme, levying with VAT the non-profit activity outside PHARE, etc. 4. Even when an NGO has registered under VAT as a main contractor, has issued invoice to the Implementing Agency, has paid the VAT to all its providers and has followed all requirements, it still might not receive reimbursement of the VAT expanses if the tax administration decides that the funding from the Implementing Agency is not given for a done delivery. 5. Every organization despite the scale of its activity should have an administration ensuring that till the moment of deregistration the VAT requirements are fulfilled though provide taxable deliveries are not done. This will significantly increase the administrative expenses of NGOs. We hope, that Minister Velchev will take into consideration our arguments and there will be a good solution of these serious problems.