The story behind
A few years after the Organisation for Economic Development and Cooperation (“OECD”) published on 19 July 2013 its Action Plan on Base Erosion and Profit Shifting (“BEPS Action Plan”) as a major initiative to modify existing international tax rules and consisting of 15 actions to provide the governments instruments to address tax avoidance, one of its actions is now implemented in Bulgaria as another effort to increase tax transparency.
It is action 13 of the BEPS Action Plan, which prescribes that governments should be provided with certain information for multinational enterprise groups (“MNE Groups”). A piece of such information to be provided by MNE Groups is the country-by-country report.
In response to Action 13 of the BEPS Action Plan the Council of the European Union adopted Council Directive (EU) 2016/881 of 25 May 2016, which should have been implemented by Member States, including Bulgaria, by 4 June 2017 (“Directive”) and applied from 5 June 2017. Pacing up, Bulgaria has now taken the necessary steps to introduce and comply with the reporting regime required by the Directive.
Country-By-Country Reporting Adopted in Bulgaria
The country-by-country reporting (“CbCR”) legislation introduced by the Directive is implemented in Bulgaria through significant changes to the Tax and Social Security Procedure Code (“TSSPC”), as recently passed by the Parliament and promulgated today.
Outline of CbCR under Bulgarian Law
In short, CbCR refers to providing of financial and other information on an annual basis by the qualifying MNE Group to the tax authorities in the jurisdictions in which such MNE Group operates. A qualifying MNE Group would be the one having consolidated group revenue of more than EUR 750,000,000 for the tax year preceding the reporting fiscal year, where such threshold is applied for MNE Groups whose ultimate parent entity is not Bulgarian tax resident. If the MNE Group’s ultimate parent entity is a Bulgarian tax resident, the threshold is BGN 100,000,000 (roughly EUR 51,000,000). Because of the automatic exchange of country-by-country reports between the tax authorities of different jurisdictions filing of report for a respective reporting fiscal year by one constituent entity of a given MNE Group would satisfy the filing requirement of all the constituent entities of the MNE Group for that year.
The information to be included in the country-by-country report is predetermined by law. It shall include data on revenues, pre-tax profits/losses, income tax paid and accrued, number of employees, registered capital, accumulated earnings and tangible assets other than cash and cash equivalents aggregated for each jurisdiction in which the MNE Group operates. The report should also list the constituent entities of the MNE Group in each tax jurisdiction and its main business activities.
CbCR Obligations of Bulgarian Tax Resident Companies Part of MNE Groups
Bulgarian tax resident companies could be under the obligation to file country-by-country report for a given reporting fiscal year and would have certain notification obligations towards the National Revenue Agency (“NRA”).
Report Filing Obligation
A Bulgarian company would be obliged to file country-by-country report for a reporting fiscal year if that company qualifies as the reporting entity for a qualifying MNE Group. A Bulgarian company would be reporting entity for the MNE Group if such company is:
a) The ultimate parent entity (“UPE”) of the MNE Group, having consolidated group revenue of more than BGN 100,000,000 (roughly EUR 51,000,000) for the tax year preceding the respective reporting fiscal year, or
b) A surrogate parent entity (“SPE”) i.e. it has been designated by a non-tax resident MNE Group having consolidated group revenue of more than EUR 750,000,000 to file the country-by-country report on behalf of such MNE Group. This applies only if the MNE Group is not Bulgarian tax resident and if at least one of the conditions under c i) to iii) below has been met, e.g. the UPE of the MNE Group has no obligation to file country-by-country report in its jurisdiction, or
c) A constituent entity having an obligation to file country-by-country report on behalf of the MNE Group. Please note that practically the definition for constituent entity is a wide one and includes each unit of the MNE Group included in its consolidated financial statements (or even units excluded from such statements on certain grounds) as well as permanent establishments (“PE”) of such units.
The Bulgarian constituent entity of the MNE Group (including a Bulgarian branch or other Bulgarian PE of a unit of the MNE Group) would have such an obligation for the respective reporting fiscal year:
- if the country-by-country report is not filed through SPE in the jurisdiction of that SPE, or
- if it is designated by the MNE Group to do so,
and at least one of the following conditions is met
i) UPE is not under obligation to file country-by-country report in the jurisdiction of which it is a tax resident,
ii) the jurisdiction of which UPE is a tax resident has an international agreement with Bulgaria in force, but within the deadline for filing the country-by-country report there is no special international agreement effective for the respective reporting period,
iii) there has been a systemic failure of the jurisdiction the UPE is tax resident of to provide country-by-country reports and NRA has notified the local tax resident constituent entity about this.
In Bulgaria the country-by-country report should be filed electronically in a way and format as approved by an order of the executive director of NRA, to be issued not later than 31 October 2017.
Notification Obligations
A Bulgarian tax resident company part of MNE Group shall notify NRA on whether it is UPE, SPE or a constituent entity having an obligation to file a country-by-country report. In case neither of those, that Bulgarian tax resident company shall notify NRA about the constituent entity of its MNE Group which will be filing the country-by-country report on behalf of the group and the jurisdiction the reporting entity is tax resident of.
Deadlines
Deadline for Report Filing
In case the Bulgarian tax resident company will be the reporting entity for a given reporting fiscal year, deadline for filing of the country-by-country report is within 12-month period as of the end of the respective reporting fiscal year of the MNE Group (which is in fact the fiscal year of the UPE of the MNE Group).
The transitional provisions in that respect stipulate that the first reporting fiscal year would be the year starting on 1 January 2016 or later in that year i.e. in case the reporting entity is UPE or SPE. As an illustrative example, in a situation of an UPE of a qualifying MNE Group from Asia having subsidiary in UK, which in turn is the parent of a Bulgarian company, designated as SPE, the latter would be required to file country-by-country report in Bulgaria for the financial year of the UPE starting in year 2016. Thus, if the financial year of the UPE starts on 1st of April 2016 and ends on 31st of March 2017, the MNE Group, respectively the Bulgarian company should file a country-by-country report for the financial year 1st of April 2016 - 31st of March 2017 not later than 31st of March 2018.
In case the reporting entity is a constituent entity, other than UPE or SPE, then the first reporting fiscal year would be the year starting on 1 January 2017 or later in that year.
Deadline for Notification Obligations
The notifications to the NRA shall be made not later than the last day of the reporting fiscal year of the MNE Group.
The transitional provision in that respect stipulates that the notifications in respect to the reporting fiscal year starting on 1 January 2016 or later in that year should be filed not later than 31 December 2017.
Risk of Sanctions
The sanctions for non-compliance with the CbCR would not be negligible.
A reporting entity, which does not file report within the deadline could be imposed an administrative sanction in the range between BGN 100,000 (roughly EUR 52,000) and BGN 200,000 (roughly EUR 102,000).
An administrative sanction in the range between BGN 50,000 (roughly EUR 26,000) and BGN 150,000 (roughly EUR 77,000) could be imposed to Bulgarian tax resident companies for not complying with notification obligations. The sanction for including of incomplete or untrue data in the country-by-country report or not including required data at all is in the same amount.
Bulgarian Companies – What to Do Next
In view of the reporting and notification obligations and their deadlines, Bulgarian tax resident companies part of MNE Group shall promptly take steps towards clarifying their status within the MNE Group in respect to the CbCR. This would allow the Bulgarian company part of MNE Group to prepare on time for notifications to the NRA to be made. The law remains silent on the way and format of the notification, but it could be expected that the Bulgarian tax administration would clarify the practical approach in some form of guidance on that point.
Please note that if not obliged to file the report, Bulgarian companies part of MNE Group shall prepare to assist the reporting entity from their MNE Group by providing the information necessary for the purposes of submitting the group’s country-by-country report and should still notify the NRA which group entity will be filing such report and in which jurisdiction.
In overall assessment, large international groups having Bulgarian presence should also reconsider their transfer pricing policies and what profits from local operations are reported on Bulgarian level, since the aggregated financial information of the group will soon be fully accessible for Bulgarian tax authorities.
Please note that the above is for general informational purposes only and does not purport to provide a legal advice on the topic outlined. As there are number of specifics in the law, a separate legal advice should be sought for each individual case and set of circumstances.