The decisions of the Supreme Court, the importance of “intention” and “knowledge” and why a professional tax audit is a must…

Negligence by many foreigners about their tax responsibilities in Bulgaria

Foreigners doing business in Bulgaria often underestimate the consequences of fiscal non-compliance. Many tend to believe that eventual non-payment of taxes may result, in worst case scenario, in the necessity to pay the tax with eventual penalty interest on top of it. This is however the best scenario, but not very likely one.

The truth is that the Bulgarian penal code foresees penal responsibility for non-payment of taxes in excess of only 3000 BGN (1534 EUR). On top of that, the Tax procedural code foresees personal liability of the officers of the company (and not only) for the unpaid taxes of the company. We have already covered these situations in our articles:

The importance of and the difference between intentional and unintentional

Or how a professionally furnished tax audit can save you a lot of problems!

In this article, we will be discussing decision № 4/26.03.2014 by the Supreme Court of Cassation of Bulgaria.

VAT – the biggest problems and plenty of criminal cases. The importance of “intention” and “knowledge”.

The biggest problems in practice arise when unpaid tax liabilities are related to indirect taxes – VAT and excise tax. The problems relate to both, determining the criminal result, and the subjective side of the crime. The Supreme Court has indicated that in order to have an intention to commit a tax crime, it is necessary to have an obligation to pay VAT (i.e. knowledge of the income part of the company’s balance sheet of the taxable person), as well as that the right to a tax credit did not actually occur due to the non-existence of the presented transactions for which the taxable person is the recipient of.

The court has accepted that the act is disproportionate (ie not criminal) from a subjective point of view in cases where the person considers at the same time that both types of transactions are real or that both types of transactions are fictitious. In both hypotheses, the person will lack the understanding that there is an obligation to pay VAT:

  1. in the first case – due to the real existence of both types of transactions, he will have the right to deduct the tax;
  2. in the second case – because there will be no tax liability at all.

The court further summarizes that the person’s intention to avoid paying tax obligations must include the awareness of the falsehood of indicating non-existent transactions in the tax/VAT declarations. This is in the event that the person falsely declares non-existent transactions to his company as the recipient on the supply of goods or services and at the same time to know that there are real transactions as a supplier.

The solution to minimize sharply the risk of having to deal with the Prosecutor’s office

One must be tax compliant at all times. But is this easy to accomplish? Not at all. The Bulgarian tax laws are complicated. The fiscal legislation is one of the most complicated field in the Bulgarian legal framework. And with a criminal responsibility engaged at only 1534 EUR, one should be extremely cautious, to put it mildly.

Professional fiscal audit (with no corners cut)

Many business transactions can be complicated from a fiscal point of view. This is especially true when it comes to VAT. We recommend to any foreign business in Bulgaria to order a comprehensive tax audit, furnished by professional auditor, if any serious business transactions are taking place. If a business makes a turnover of over one million Bulgarian Leva, an audit is really a must. Such an audit will not only show the CEO what is allowed and what not, but will also show the degree of intention and knowledge (or the lack of it), if the need arises later.

The audit must be prepared in a special way so that it covers exactly the necessary legal and fiscal parts. A “general audit” won’t do the job.

What if the company is already being checked/investigated?

In this case, the professional audit can be a “life saver”. Unfortunately, the companies don’t usually have the time and resources to do it in a timely manner. Which is unfortunate, because a professionally prepared report can save a lot of money and even a criminal trial with unpredictable consequences.

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