In Focus

Position of the NRA regarding the liability to withholding tax on interest income and the declaration under Art. 142, para 5 of TSSPC

April 19, 2013

I. In recently developed practice of the National Revenue Agency - NRA (Interpretation Letters with Ref. No 07-00-185/17.06.2011 and No 24-34-189/09.10.2009 and Letters in response to submitted written queries with Ref. No 5_53-02-293/24.10.2011 and No 23-29-58/13.05.2011) the revenue authorities express their position that the liability to withholding tax (WHT) on interest income of tax non-residents under the Corporate Income Taxation Act (CITA) shall be determined with reference to the moment of the interest income accrual, but not the moment of its payment.

As the tax legislation does not contain a legal definition of the term “accrual” the revenue authorities have adopted its meaning for accounting purposes. NRA supports the position that the liability to withholding and payment of WHT on interest income shall arise as from the moment in which the respective interest income is recorded as expense in the accounting books of the income payer in accordance with the accrual basis concept.

Further to the abovementioned arguments there is risk that the NRA may claim WHT due on accrued interest income irrespective of the fact that it shall be paid to the interest beneficiary in its full amount in a later stage/following tax year.

Negative effects may arise either if WHT is effectively due (e.g. in cases where no Double Tax Treaty (DTT) is applied or a DTT is applied but the tax rate provided for interest income under the DTT is lower than the tax rate under CITA) or if the interest income of the tax non-resident is exempt from taxation in Bulgaria on the grounds of applicable DTT. The revenue authorities may claim that WHT at the respective amount and/or penalty interest is due if the legal term for payment of WHT and/or evidencing the applicability of DTT is not met as from the moment of the interest accrual.

In our opinion, the prudent approach that may guarantee the avoiding of disputes with the revenue authorities is to apply the procedure for regularly declaring and payment of the respective WHT amount on the accrued interest income. In this connection, for the cases where a lower WHT rate or exemption from WHT is applied under a DTT, evidence for the application of DTT shall be collected from the tax non-resident beneficiaries of the income for each year in which interest income is accrued (i.e. not to delay the collection of evidence for the moment/year of the actual payment of the interest). Nevertheless, the fact is that DTTs refer to “interest paid” which actually intends that the interest income is at the creditor’s disposal (see the Commentary to Art. 11 of the OECD Model Tax Convention) in accordance with the contractual arrangement between the parties. This questions whether the position expressed by the revenue authorities (i.e. to determine WHT liabilities on the basis of the moment of accrual, but not payment of the income) is in line with the spirit and provisions of the effective DTTs concluded by Bulgaria regarding the cases where the obligation for payment of the interest is deferred for the end of the loan period or the interest is payable at a maturity date in a future period/year.

II. Practical issues arise in connection with the new standard form of the declaration under Art. 142, para 5 of the Tax and Social Security Proceedings Code (TSSPC) for 2012, which was due for submission by the deadline 1 April 2013

Our understanding is that the purpose of the information required to be stated in the declaration is for NRA to collect the data regarding the types and amounts of income and the tax relieves under DTTs for the cases where the circumstances for DTT application are evidenced by the tax non-resident beneficiaries before the Bulgarian income payers (i.e. and not before the NRA by submission of a request for issuance of an official DTT statement).

In this respect the declaration shall contain information about the amount of income accrued but not yet paid in 2012 (including the accrued interest income commented in section I. above) for which DTT relief is granted – i.e. no WHT is withheld or WHT is withheld and paid at reduced amount.

Difficulties in the practical application of this understanding arise after on 19 March 2013 – only some days before the expiry of the legal deadline, an amended standard form of the declaration under Art. 142, para 5 of TSSPC was published on the NRA website with a new wording of column 11 “Amount of income paid” (in the old standard form – “Taxable base”). In our experience there are cases where “0” (zero) amount of income paid was indicated in the quoted column but interest expenses were accrued in total amount in accordance with the accrual basis concept. In particular, the NRA has refused to accept declaration under Art. 142, para 5 of TSSPC prepared duly by the company (loan recipient) as explained above (with interest income accrued but “0” amount of interest paid stated in column 11).

The practice with the commented declaration is still limited. In our opinion, it is still not clear whether the content of the declaration shall be limited only regarding income paid in 2012 and tax relieves provided on income paid in 2012. Nevertheless, in our opinion, a risk of disputes with the revenue authorities is more likely to arise if in the future it is clarified that the information provided in the declaration is incomplete, rather than if information about wider scope of income (i.e. accrued but not paid income) is included.

In any case, an express ruling or clarification by the NRA regarding the concrete information which is aimed to be provided with the declaration under Art. 142, para 5 of TSSPC would be of a great benefit for the persons obliged to submit this declaration.

Should any questions regarding the information in the present newsletter arise, please do not hesitate to contact us at tel +359 2 9433700, fax +359 2 9433707, e-mail: office@afa.bg or at the postal address: 38, Oborishte Str., 1504 Sofia.

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