ANALYSIS
Binding Opinions Increase
Tax Certainty
Author: Milen Raikov, Executive director, Tax, Law, Bulgaria, Macedonia, Albania, Kosovo &
Co-chairman of AmCham Bulgaria’s Tax and Financial Committee
In the last decade, the Balkan region
has cemented its reputation as a
low tax area. One by one, competing for investments and trying
to compensate for disadvantages
like slow public services and overregulation, many countries in the
region hit minimum levels of taxation. Bulgaria, Kosovo, Montenegro
and Serbia levy 10% corporate tax
rates. Macedonia is also in the club,
though until just recently, corporate
profits in Macedonia weren’t taxed
whatsoever until distribution to
shareholders.
Personal tax levels in most of the
countries are also rather low,
though they are partially buoyed by
social security rate increases, which
seem to be a trend recently. So,
why is this region still far from an
investment heaven? The tax environment is still part of the answer,
in addition to issues like the lack of
a readily available workforce and
low consumption levels.
Some years ago, the Tax and Financial committee of AmCham Bulgaria
asked members which tax incentive other than lower tax rates they
would like to see most. The top
answer was binding rulings. Based
on my experience with a number
of clients in the region, I trust the
answer would not differ greatly
throughout the entire region.
Why binding rulings?
There are many reasons for the
lack of predictability of low and simple taxation systems in the region,
including their short history, lack
of long term tax policy, frequent
changes in the law, frequent changes
of governments and upper-level
tax officials, lack of detailed regulations, legislation lagging behind
quickly modernizing economies that
are open to the West and a lack of
capacity for regulating all changes.
What is the result? In some countries, investors find that all tax laws
added together have fewer pages
than a single EU-country tax law
and are highly insufficient to provide
clear answers on questions key to
their investment. Investors would
seek professional advice or submit
14 Spring 2016 Issue 49
Once issued,these
rulings should bind the
tax authorities with the
treatment prescribed. This
means that they cannot be
revised during a tax audit,
or, if the tax administration
changes its view, it would
not lead to penalties.
queries to the national tax administration, but none of that would
protect them in case of a tax audit.
Thus, though wanting to comply,
investors often have to assume the
risk of non-compliance with tax law,
preventing them from being able to
calculate the tax cost of the investment and thus its return.
In a region where few countries are
in the EU (where extensive court
practices can be relied upon), and
in the context of a lot of exceptions to tax deductibility of costs,
frequent compromises with the
deductibility of VAT, peculiarities in
the treatment of transactions, the
lack of predictibility can be a showstopper. Therefore, despite low
nominal tax rates, many investors’
first concern is the effective level of
taxation.
What are binding rulings,
exactly?
Binding rulings are different from
country to country but have
some common features. They
are interpretative acts of the tax