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ECONOMIC IMPACT OF THE ACTIVITY OF NGOs IN BULGARIA FOR THE PERIOD 1991-2001 (2002)

November 2002

The research has been prepared by Maria Zhetcheva, Plamen Kaloianchev and Todor Todorov

Introduction

The research has been prepared upon BCNL request and has two main objectives: First to analyze the nonprofit legal entities activity and to assess their role and importance for the development of the economy in Bulgaria through the period of 1991-2001 and second to research the tax regime of nonprofit legal entities and the effect from eventual tax benefits upon the consolidated state budget.

The research consists of three parts. In the first part the nature of noncommercial organizations classified with respect to their institutional affiliation and economic activity is presente.

In the second part the development of the sector of noncommercial organizations through the period of 1991-2001 is presented. The employment in the sector has been analyzed through the period of 1998-2001, as well as the structure of the incomes and expenditures of these organizations.

In the third part of the study the tax regime of nonprofit legal entities – noncommercial organizations, whose activity is regulated by the Non-profit legal entities act has been examined. An assessment of the expected effect of some of the proposals for amendments to the Bulgarian legislation of nonprofit legal entities has been also made.

Part one. Noncommercial organizations

I.1. Essence and types of noncommercial organizations The national accounts system (NAS 93 and ЕСС 95) defines noncommercial (nonprofit making) institutions as juridical units, created with the aim of goods and services production.

The status of noncommercial organizations does not allow them to become a source of income or other financial profit for these, who create, control or fund them.

NCOs are divided into market and non-market producers depending on the prices the sell their products or provide services.

Non-market producers provide their production gratuitously or on prices (fees) that are economically insignificant. Consequently in order to cover their activity expenses NCOs count on other sources as membership fees and transfers from other economy sectors. 

In that group are included the non-profit legal entities.
From the institutional structure of economy point of view, non-market NCOs are divided into two groups: 1. NCOs that are controlled and funded mainly by State and serve the businesses and/or households and 2. NCOs that are primarily funded by nongovernmental sources (households, corporations or outer sector). The organizations from the first group classify toward the sector of state government, and the second forms a separate sector of National accounts system – NCOs, serving the households. This group involves NCOs as professional unions, political parties, associations of consumers, religious communities and social or sport clubs.

The noncommercial organization notion is used in the research for notifying the whole majority of NCOs, despite of the type of activity they are performing. The notion “non-profit organizations” is used in a narrower sense. Here are included only the NCOs from the groups business organizations and organizations of the employers; professional unions and organizations; creativity unions; other noncommercial organizations – foundations, associations, chitalishta, as well as NCOs, working in the field of education, professional qualification; healthcare and social activities; culture, art, science-technical information; physical culture and sport activity. One sub-group of nonprofit organizations has been examined, from which chitalishta and nonprofit organization, performing physical culture and sport activity. We accept that the activity of that nonprofit organizations subgroup is regulated by the Non-profit legal entities act.

I.2. Indicators for measuring the activity of NCOs In the research for measurement of the NCOs activity are used several groups macroeconomic indicators: data of the produced production, intermediate consumption and added value in the sector; occupancy and bursaries data (for the period of 1997-2000); incomes and expenditures of NPOs report data.
Up to 1997 accounting standards do not allow accounting of the special operations for realization of nonprofit activity. Since 1998 were implemented separate types of incomes and expenditures reports – separate accounting of nonprofit and economic activity, which gave the chance for more précised analyze.

Part two. Development of NCOs in Bulgaria trough the 90s

II.1. Production and added value During the period 1991-1998 the share of noncommercial sector in the Gross domestic product is low, but relatively stable – around 0.15%. Through the next years amore favorable macro-economical and institutional conditions for the functioning of NCOs have been created. In 2001г.the add value in this sector is 62.8 million BGL and forms 0.21% from the Gross Domestic Product of the state.

In 2000 the add value only of non-profit organizations is 31.8 million BGL and represents 0.12% оf the GDP of the state. If the group of NPOs exclude chitalishta and sport organizations, the add value is 23.1 million BGL, and the share of NPOs in the GBP decreases to 0.087%.

Although the insufficient contribution for the economic development of Bulgaria through the 90s of 20th century and the beginning of 21, during the years of economic and financial crises (1996-1997) the NCOs sector increase its net financial assets due to the received transfers. This shows that the sector could turn into an important factor for a long-run growth of economy in an appropriate economic policy for its further development.

II.2. Employment and salary

In the last five years the number of the persons occupied in the NCOs gradually went down – from 16771 in 1996 to 11502 in 2001. Above the half of the occupied in the sector work in NCOs dealing with chitalistha activity.

In 1996 the average salary in the noncommercial sector is significantly below the average salary for the country (with 36%), but during the last years it increased relatively faster and in 2000 is 2433 BGL, only with 11% lower than the salary for the country.

The occupancy analysis in the noncommercial sector shows that during the last years the number of the occupied in the NCOs decreases along with the increase of the norm of unemployment in the State. Besides that tendency in 2001 together with the increase of the add value in the sector has been marked an increase of the occupied in the sector persons.

II.3. Incomes and expenditures of the NCO for the period 1998-2000

The nominal incomes of NCOs from non-economic and economic activity in total are 180 274 BGL and 238 426 BGL respectively in 1998 and 2000. Their share in the GDP in the state increased up from 0.8% in 1998 to 0.89% in 2000.

The non-economic activity incomes form about 85% of NCOs incomes. The current legislation does not encourage the economic activity of NCOs.

General income source of non-economic activity are the donations, followed by the incomes from regulated non-economic activity. In the period 1998-2000 in the incomes structure from non-economic activity gradually decreased the share of donations (from 34.2% to 37.4%) mainly due to the relative decrease of the membership (from 14.1% to 6.2%).

The donations sources for NCOs are primarily the external sector, non-financial sector and households. The most incomes from donations are made to NCOs working in the sphere of education and qualification and in the group “Other NCOs”. The state budget subsidies are directed primarily towards NCOs performing chitalistha activity, education and qualification and the group “Others”.

The NCOs expenditures are formed of the non-economic and economic activity expenses of these organizations. The non-economic activity expenditures present about 85% of all NCOs expenditures for regulated activity, administrative costs and financial expenses. The main component of the regulated non-economic activity expenses is the donations.

With respect to NCOs incomes and expenses the following conclusion could be made: the noncommercial organizations structure is various – some of them count primarily on donations and membership fees, others on state subsidies, depending on the specific activity.

The economic activity incomes are insignificant. NCOs perform redistributing function, but contrary to the state budget the incomes flow towards NCOs has non a mandatory, but voluntary character.

Part three. Tax treatment of NCOs

Since the beginning of 2001 entered into force the Nonprofit legal entities act, and later were adopted new tax benefits for the nonprofit organizations, which prolongs the process of formation of new legislative regime for their activity.

Law on Corporate Income Taxation (LCIT) According to the current legislation in Bulgaria, the non-profit organizations may perform supplementary economic activity under the conditions envisaged in art. 3, sub-art.3 of LNPLE . While performing such activity, the nonprofit legal entities get the status of taxliable persons according to art.6, sub-art.1 in relation to art.4, sub-par.1 LCIT and are obliged to pay tax for municipality and tax on profit. If the tax on profit and tax for municipality are disposed fully to the public benefit nonprofit legal entities, therefore the budgets losses will be equal to the incomes received up to now from this tax (in the table is given information for the organization in mutual benefit).

Income from tax on profit and tax for municipality from non-profit organizations*

1997

1998

1999

2000

2001

2002

In thousand BGN**

1 351.8
1 289.7
1 135.8
792.0
980.8
848.7

in % from the total income from tax on profit and tax for municipality
0.124
0.154
0.161
0.116
0.092
0.115

In % from the total income for the consolidated budget
0.021
0.014
0.012
0.007
0.008
0.007

*before 2001 this position has been “income from organizations with non-profit purpose”

**The data is in denominated; for 2002 the data is approximate

Domestic juridical persons owe 15% tax on dividends and liquidation shares, calculated in the benefit of organizations with nonprofit aim (Art.34, sub-art.1), which is also taxed at hte source. If accept that the share of the created by the NPOs gross add value in the general add value for the economy is relatively equal to the share of the income of the tax, calculated in the benefit of the NPOs dividends and liquidations shares, in the total income from this tax. If the provision of art.34, sub-art.1 is amended in away that public benefit NPOs are excluded form its scope, the budget incomes loss will be equal to about 0.04 million BGL annually (based on 2002) or 0.0003% from all expenses.

The donations, accounted as expenses, are taxed with 25% tax at the source, which is recognized as activity expense. If this percent is decreased to 15%, the possible loss of budget incomes will be approximately 0.6 million BGL or 0.0045% of the total incomes.

Law on physical persons income taxation (LPPIT) In the Law on physical persons income taxation (LPPIT) is provided a benefit for donations made to public benefit NPOs. In the Law on physical persons income taxation (LPPIT) is provided a benefit for donations made to public benefit NPOs.

The individuals receiving incomes under labor or other equal to labor contracts are excluded from the group of persons enjoying the right to use the tax deduction from the taxable income with the donations. If these persons were excluded from the group of persons, enjoying the tax deduction, the loss of income for the consolidated budget from the total income from the tax will be equal to 2.5 million BGL – 0.29% from the revenue from the income tax paid by physical persons having labor and equal to them contracts or 0.02% from the income in the consolidated budget.

Conclusion

  • Arguments for facilitating nonprofit organizations in public benefit: 
  • Perform public benefit activity;
  • Accomplish an important socializing role and facilitate the replacement of political with civic structures
  • Replace and supplement state in providing some public goods They are efficient in proving certain public goods and in their local work with municipalities
  • Facilitate the fiscal decentralization
  • Draw in additional support for their activity in the form of donations and voluntary work
  • Means for NPOs financing:
  • Domestic and foreign donations;
  • Subsidies;
  • Economic activity profit;
  •  Main activity profit, including membership fees;
  •  Income from dividends and liquidation shares;
  •  Interest income;
  • Income from exchange rate differences;
  •  Others.
  • Limitations and control over the activity of non-profit organizations according to the current legislation 
  • May perform additional economic activity only if it is related to the subject of main activity they are registered for
  • May use the additional economic activity income only for accomplishment of the defined in the statute goals 
  • Do not distribute profit 
  • NPOs face difficulties while financing their additional economic activity 
  • Public benefit NPOs are entered in a Ministry of justice register 
  • Public benefit NPOs are subjected to independent audit, if the amount of¬ balance assets from the previous year is bigger than 0.5 million BGL or the amount of the income from their activity and net amount of sales, and the financial incomes for the previous year exceed 1 million BG
  • Public benefit NPOs are obliged to prepare an annual activity report
  •  Public benefit NPOs are subject to constant control on behalf of the Ministry of Justice
  • Proposed changes in the tax treatment of the Public Benefit NPOs and motives for their necessity:
  • Equalizing the tax treatment of the different income sources, as they all should be used for accomplishment of the public benefit goals of the organizations
  • Widening and equalizing the stimuli for donations, as in the scope of persons, eligible for tax preferences in case of donations are included the ones receiving incomes under labor contracts.
  • Change of the donations taxation philosophy – donors with higher willingness to donate to be taxed less
  • Real elimination of the taxation of donations in the form of share participations in domestic legal entities or non-personified association

    The stated above reasons for non-profit sector development stimulation and the motives for NPOs tax treatment changes, their insignificant influence over the realization of the consolidated state budget gives a clear basis to think that the general effect from the realization of the proposed legislative amendments will be positive.

Appendix:

Calculating the income loss for the consolidated budget based on the proposed changes in the tax treatment of NPOs in public benefit.

Proposal 1

Adoption of additional paragraphs in art.61 of LCIT with which to remise the profit tax and municipality tax of NPOs performing public benefit activity. The transferred sources to be accounted as reserves and the transfer will be valid, if they are used for the accomplishment of the regulated in the Statute goals.

The income loss resulted from this amendment of LCIT will be equal to annual incomes from profit tax and municipality tax, paid by NPOs performing public benefit activity. Due to the lack of précise information on these incomes, the closest indicator will be used – profit tax and municipality tax incomes by NPOs (including organizations in mutual benefit as well), which will overvalue the loss size. For 2002 these incomes are expected to be 848.7 thousand BGL or 0.0068% from the total incomes and aids in the consolidated budget.


Proposal 2

Dividends and liquidation shares, paid to public benefit NPOs to be placed outside of the scope of art.34, par.1 of LCIT.

The dividends and liquidations assets tax is final and due at the income source. There is no information in the Ministry of Finance of on the income from this tax, levied on dividends and liquidation shares paid to public benefit NPOs. The loss for the consolidated budget might be assessed indirectly. For that purpose we will accept that the part of the income, which is a result of the dividends and liquidation shares paid to public benefit NPOs, is equal to the percentage in GDP, formed by NPOs. The value of this indicator for 2000 is 0.087%.
Its stability gives us a reason to use its value for 2000 while calculating the loss of income, using the expected level of income from the tax on dividends paid by local and foreign legal entities for 2002 – 47.9 million BGL.

Loss = 0.00087*47887.3 = 41.662 000 BGL (0.0003% of the expected incomes and aids in the consolidated budget)

Proposal 3

The decrease of the rate of tax under art.48, par.1 LCIT in connection with art.35 to 15%, for donations to public benefit NPOs, accounted as expenditures.

The expected revenue from the tax on donations and the tax on sponsorship in the consolidated budget is 4.628 million BGL in 2002, which at the tax size of 25% forms the total size of donations, accounted as expenditures 18.512 million BGL. About 30% of the donations are directed towards organizations with charitable, social, environmental and other activity, which are close to definition for public benefit NPOs. The decrease in the tax rate with 10 % up to 15 % under art. 48, par. 1 in the case of donations to public benefit NPOs will lead to a loss of income for the consolidated budget of 555.360 thousands BGL (0.0045% from the expected incomes and aids in the consolidated budget).

Loss = 0.3*18512*0.1 = 555.360 thousands BGL (0.0045% of the expected incomes and aids on the consolidated budget)

Proposal 4 Including in the scope of taxable subjects under LPPIT, who have right to use the given tax deduction in case of donation to public benefit NPOs persons, receiving income under labor or equal to labor contracts.

Based on preliminary data of NSI, the individuals employed on labour contracts at the end of March 2002, were 1 905 647. The expected average monthly wage in 2002 is 278.2 BGL.

Upon making a donation (10% of the taxable income after deduction of the personal social security tax), the tax burden over the average monthly income goes down with 2.15 percents, the revenue from the income tax – with 6.0 BGL, and the disposable income of donor decreases with 18.9 BGL or 8.70 percents. Due to the low population income and the great decrease of the disposable income, the donations’ size is very small with respect to the taxable income. In 2000, for self-employed individuals, the donations made are about 4% from the total size of donations, with which the taxable income can be decreased. Therefore for 2002 with respect to persons having labor relationship we will accept an average ability to donate – about 6% from the maximum amount of the donations, with which the taxable income can be diminished. In accounting this ability, the tax burden over the average wage decreases with 0.13 percents, the total income tax – with 0.4 BGL, and the disposable income of donor decreases with 1.1 BGL or 0.52 percents. If we use again the assessment that public benefit NPOs attract about 30% from the donations, the total maximum loss of income for the consolidated budget (basis 2002) will be:

Loss = 1905.647*0.4*12*0.3 = 2 459.466 thousands BGL (0.0197% from the incomes and aids in the consolidated budget).

The total maximum loss from the proposed amendments in the legislation, dealing with public benefit NPLE on basis 2002 will be: loss = 848.700 + 41.662 + 555.360 + 2 459.466 = 3 905.188 thousands BGL (0.0313% from the total incomes and aids on the consolidated budget).

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