Bulgaria May Hold Referendum on Direct Taxes in 2013

Bulgaria, which has the lowest personal and corporate income tax in the EU at 10%, may change the levels of direct taxes after a referendum in 2013, a bill of the finance ministry suggests.

"Should the bill be adopted, the citizens will be given the power to define the government's tax policy as of 2013," Finance Minister Simeon Djankov told journalists in parliament, adding this would be a big step forward.

"This is a measure, which will show that Bulgaria is not only the country with the best financial discipline in Europe, but also the best European country with the best financial discipline," the minister commented.

Referendums on the level of the taxes are being held in Switzerland and a few countries in Latin America.

Bulgaria has the lowest personal and corporate income tax in the EU at 10%, which was introduced at the beginning of 2008, replacing the previous system, which combined several different tax rates - between 20 and 24%, depending on income.

Bulgaria also has the lowest social security rates, which coupled with a 10% flat rate, makes it very attractive for physical entities, employers and potential investors.

Bulgaria's Prime Minister Boyko Borisov has denied reports that a hike in tax rates may be looming after the government scrapped its plans for a VAT increase last year, which was hoped to plug a budget gap that has thwarted the new EU member's euro efforts.

At the beginning of 2010 the government chose to keep direct taxes unchanged as it strives to make Bulgaria more competitive in the battle for the shrinking flow of foreign investments. The increase in the indirect taxes – excise duties and VAT - seemed to be less painful.

Prime Minister Boyko Borisov and Finance Minister Simeon Djankov made it clear in April that the prospect of a hike in the value-added tax (VAT) rate, which now stands at 20%, is quite likely in a bid to shore up the budget.

Thanks to the VAT hike, the cabinet expected to collect an additional BGN 540 M of revenues by the end of the year, which would have accounted for one third of the sum, needed to patch up the budget gap.

The government however abandoned the plans for a VAT hike after representatives from all business sectors cautioned that the hike in the value-added tax in Bulgaria should be a last-ditch measure, introduced only together with an overhaul in state expenditure and structural reforms.