COVID 19:  Challenges in applying the Value Added Tax Act (VATA) 

The crisis resulting from COVID 19 and the imposed state of emergency put to a test many economic sectors. Irrespective of the situation, the obligations related to declaring and payment of VAT have not been changed, which made the companies face several challenges.

1. Delay of payments or nonpayment from clients

The delayed payment or nonpayment from clients, which are in a difficult situation because of the state of emergency may put under pressure cashflows as, regardless of the delay/nonpayment, the company shall pay to the budget the VAT charged by it. The Bulgarian legislation does not provide for a possibility to adjust the VAT charged by a supplier in case of partial or full nonpayment by the client. This might cause a chain effect and more and more companies to suffer difficulties due to the increasing indebtedness of their clients. In this respect the decision of ECJ of 08.05.2019 under case С-127/18 regarding the application of Art. 90 of Directive 2006/112/EC shall be recalled. According to this decision legislation that does not allow adjustment of the taxable base in case of partial or full nonpayment from a client is not in compliance with the mentioned provision.  

The delayed settlement of VAT liabilities by clients or suppliers might on the other hand lead to more often application of Art. 177 VATA in case any person in the chain of supplies is not able to pay to the budget the VAT payable declared.

 2. Change in contractual conditions

In relation to the preventive measures against infection spread was ordered closing of commercial sites, offices and other premises, where business activities are carried out. As a result, the lessees of such sites were denied of the opportunity to perform their activities and generate cash flows and to use the premises for the purposes for which they were rented.  In some cases, this might require renegotiating of conditions under rental contracts and provision of more relieved conditions to lessees for the period of state of emergency and closure of the respective site. The argumentation of such agreements would be of great importance for reducing the risk of future disputes with the revenue authorities.

Renegotiation of terms might be necessary also in relation to other periodic or continuous supplies (delivery of materials, services, etc.), especially with respect to payment terms during state of emergency. As according to Art. 25, para 4 VATA the taxable event in case of periodic or continuous supplies is dependent of the agreed payments date, the changes in the contractual conditions shall be well grounded.

 3. Implications from making donations

Many companies are contributing to the fight against COVID 19 by providing the necessary resources to hospitals and institutions engaged in identifying and assistance to sick people. The provision of support in the form of cash has no VAT implications. When the donation is however in the form of goods (pharmaceuticals, consumables, equipment, etc.) Art. 70, para 1, s. 2 VATA does not allow deduction of input VAT for the donated goods. In case input VAT has been deducted at acquisition, respective adjustment shall be made at the time of donation.       

 4. Destruction, shortage and scrapping due to force major

Not all cases of destruction, shortage or scrapping during the state of emergency could be treated as due to force major. In order the company to rely on force major the damage incurred shall be direct result and consequence of the actions and measures during the state of emergency (e.g. spoil of goods because of delay of transportation due to strengthen border controls or because of closure of the enterprise by a state authority for the purposes of prevention of the infection spread, etc.). These circumstances shall be duly documented by protocols issued by independent persons/bodies in order the company to benefit from the exemption from input VAT adjustments under Art. 80, para 2, s. 1 VATA.

 5. Sale at a loss

During the state of emergency, it is probable some companies to sell goods or products at prices much lower than acquisition cost. Although VATA does not require that the taxable base is higher than acquisition cost (except for supplies between related parties where the supplier or the client does not have right to full deduction of input VAT), such supplies might be treated as gratuitous supplies under Art. 6, para 3, s. 2 VATA, deemed as made for consideration and additional VAT charge to be claimed. Such an approach could be grounded on the provision of § 1, s 8 of the Additional Provisions of VATA, according to which if the value of the property provided exceeds considerably the amount received, the supply shall be deemed as gratuitous.

It shall be reminded that ECJ, in its constant practice on similar cases (e.g. decision on case  С-621/10 and С-129/11), accepts that in compliance with Art. 73 of  Directive 2006/112/EC the taxable base of the supplies of goods/services for consideration is the amount of compensation actually received by the taxable person with respect to them. Therefore, the tax administration shall not collect VAT at an amount exceeding the one received for the supply, except in the exceptional cases provided by law.

The above are only examples of the challenges imposed by COVID 19 to all of us, which we will overcome together.

This material is not exhaustive, but rather has general information nature and does not constitute specific advice or consultation. Should you have questions, do not hesitate to contact us at Tel. + 359 2 9433700,Fax + 359 2 9433707, e-mail: or at the following address: 1504 Sofia, 38, Oborishte Street.