NGOs AND VAT (2004)

The book VALUE ADDED TAX ACT AND NOT-FOR-PROFIT LEGAL ENTITIES has a direct practical line. It aims to clarify some of the more important aspects related to taxation through the Value Added Tax (VAT) of not-for-profit legal entities (NPLE). Its author is Miroslav Tuev, senior legal expert in Methodology and Appeal Department of the General Tax Directorate.

The publication outlines the essence of the value added tax, analyzes the more important legal terms related to VAT, clarifies the mechanism of VAT taxation and the action of the “VAT account”, describes the process of registration and deregistration under the VAT Act (VATA). The booklet covers the issue of exemption of taxable supplies under international agreements to which the Republic of Bulgaria is a party – an issue relevant to a large share of the organizations implementing projects under international donor programs.

A large proportion of the interpretations available in the text are supported by practical examples which makes it a useful manual for persons with an interest in the area of taxation of nongovernmental organizations.

The first part of the booklet briefly outlines the VAT essence as a multi-phase indirect tax where by force of the law the person liable to VAT is given the opportunity to “transfer” the tax to the consumer by including it in the price of the good or service. Thus the burden of the VAT taxation is borne by the consumers rather than by producers or traders. This tax is levied on the consumption of all goods and services on a certain territory barring those which are exempt from tax by law.

The second part of the book explains the main concepts in the VATA, the more important of which are:
– taxable person – any person who independently carries out any economic activity, whatever the purpose or results of that activity;
– independent business activity – any activity performed regularly or by occupation, including any intellectual activity performed freelance;
– supply – the transfer of ownership of goods or other rights in rem over the goods and the provision of services effected for consideration;
– taxable supplies – all supplies of goods or services, where the supplies have been performed by a taxable person and the place of supply is within the territory of the country;
– exempt supplies – those which are expressly mentioned in the law as VAT exempt. The most typical exempt supplies are: social security and health insurance services; health services; educational and cultural services, legal services. Exempt supplies are also the donations of nonexcise taxable goods granted to educational, medical and health institutions, research, cultural, educational, welfare and other organizations supported by the budget or to the benefit of nationally represented organizations of and for people with disabilities, the Bulgarian Red Cross and others.

The third part of the publication covers the very mechanism of VAT taxation. The author explains that for the purposes of the VATA the only persons to register are those that conduct independent business activity with a certain annual turnover from this activity. These persons charge VAT only when they make taxable supplies of goods and services and for each taxable supply they receive the amount of the charged tax together with the payment for the sold goods or delivered service.

A peculiarity of the VAT taxation is that at certain periods every registered person pays in the budget only the balance between the tax charged by it and the tax it was charged by other registered persons or custom bodies for the respective period.

In the “VAT account” section the essence and mechanism of the VAT account are described as a special bank account of the person registered under the VATA which is opened in a trade bank after permission and under the supervision of the tax administration where the funds from the charged VAT are received or paid by the account holder.

Each taxable person is obliged to open a VAT account within 14 days at the latest as of the date of their registration under the VATA.

Each supply recipient is obliged to pay the charged tax on the supplier’s VAT account for supplies which meet all of the following conditions: the recipient is a person registered under the VATA and the charged tax is above BGN 1000.

The fifth part of the book covers the processes for registration and de-registration of NPLE under the VATA. It explains the rules regarding:
– the mandatory registration that NPLE are subject to if their turnover is BGN 50,000 or above and has been implemented for a period of no more than 12 consecutive months prior to the current month;
– the optional registration of NPLE in cases when the conditions for mandatory registration under the VATA are not available and the NPLE has had a total taxable turnover over BGN 50,000 for a period of no more than 12 consecutive months prior to the current month;
– registration at the initiative of tax authorities – when a tax authority establishes that a taxable person meets the requirements for mandatory registration under the VATA but has not applied for registration;
– optional registration when the NPLE is a key contractor under an international agreement.

Furthermore, cases are reviewed when the registration under VAT is terminated:
– at the initiative of the registered person when the total taxable turnover of the registered person for the last 18 months prior to the current month falls under BGN 50,000;
– at the initiative of the tax authority when it observes grounds for mandatory deregistration when a representative of the NPLE cannot be identified, when a registered tax liable person has systematically failed to perform its obligations under this Act or has outstanding tax debts, the total amount of which exceeds the value of its assets net of the outstanding debts.
The sixth part of the survey presents a topic which is very topical to NPLE related to the VAT exemptions of taxable supplies on the strength of international agreements to which the Republic of Bulgaria is a party. The two hypotheses are reviewed: the first, where NPLE is a coordinating body and the second, where NPLE is a major contractor.
According to VATA, the coordinating body is a Bulgarian or foreign legal entity or organization, which is a recipient of supplies of goods and/or services under a contract and implements a program or a project funded with resources in implementation of an international treaty, agreement, covenant, convention and the like. The status of coordinating body is ascertained in the Territorial Tax Directorate – Sofia with a written document signed by the persons nominated by each of the states to implement the corresponding international treaty, agreement, covenant, convention, etc.

When the NPLE is the main contractor of a project or program, in order to have its supplies to the coordinating body taxed with a zero rate, the procedure for VAT exemption needs to be adhered to, which includes submitting a written request to the Territorial Tax Directorate – Sofia for application of Art. 92 of the VATA accompanied by the documents set forth in the law.

The next part of the book is dedicated to the VAT liability of donations received by NPLE and the cases are described when the donations of non-excise duties or services are VAT exempt, when they are made to the benefit of the persons listed in the law, such as:
– education and health care establishments, research, cultural, educational, social and other organizations supported by the budget;
– nationally representative organizations of and for disabled persons;
– specialized enterprises and cooperatives for people with disabilities and others.
Part eight of the publication reviews in brief the VAT liability when importing and exporting goods. It is explained that when goods are imported VAT is levied and assessed in all cases irrespective of whether the person is a registered person under the VATA. The import is exempt only in cases determined by the law such as, for example, when aid is imported with the exception of excise goods by NPLE engaged in activity to public benefit and entered into the Central Register of Not-For-Profit Legal Entities Engaged in Activities to Public Benefit at the Ministry of Justice. As regards the taxation of export, the author explains that when export is accounted for, the VAT is charged by applying a zero rate to the taxable base. In this case no tax obligation arises but the registered person has the right to deduct its tax credit.

The ninth part of the analysis presents the netting, deduction and refund of the VAT. When for a certain tax period the total amount of the tax credit exceeds the total amount of the tax that the registered person was charged, the balance is the result for the period – tax refundable. When the result for the tax period is refundable VAT, the latter is subject to netting, deduction or refund under the terms set out in Art. 77 of the VATA.

The last part of the publication covers some of the more frequently applied penalties for noncompliance of the VATA which are imposed upon the taxable person, such as:
– a fine – for natural persons who are not traders or a sanction – for legal entities and sole proprietors ranging from BGN 1,000 to BGN 5,000 for a person who fails to de-register within the time limits laid down in the law.
– a fine of BGN 250 to 2,500 – for natural persons who are not traders or a sanction ranging from BGN 500 to 2,500 for legal entities and sole proprietors who fail to serve a tax return or serve the tax return beyond the prescribed time limits or state in the tax return untrue data and circumstances leading to increase of the amount of the tax credit;
– a fine – for natural persons who are not traders or a sanction – for legal entities and sole proprietors – ranging from BGN 200 to 10,000 who fail to issue a tax document required under this Act or fail to post the tax document issued or received in the accounting books and in the sales log or the purchases log for the respective tax period, or use accounting documents with untrue contents, counterfeit or false documents leading to a smaller tax.