While global businesses are concerned about whether and when the next economic crisis will hit, most companies operating in Bulgaria have been more concerned these past two years about a finance ministry regulation. The Treasury has prepared a new regulation concerning the sales management software at points of sale, the now notorious Ordinance N-18. This has sparked protests by small traders, made large companies invest substantial amounts for an unclear purpose and left popular online platforms wondering whether to move outside Bulgaria.
It all started with the revenue administration's (albeit well-intentioned) plan to prevent tax evasion by restricting the use of software that allows for hiding turnover. So traders are required to only use software licensed by the tax authorities. The problem is that the National Revenue Agency (NRA) did not bother to consult businesses about their operational processes, the systems they use and the effect the requirement would have on them. In practice, N-18 introduced a new expensive super-regulation for companies that use some kind of sales reporting software. Besides, their number turned out to far exceed the 20 or 30 thousand companies estimated: at least 300,000 businesses will be affected. Thus, only days before January 31, when the ordinance had to be enforced, most companies were still uncertain about the practical specifications involved and whether they would do it on time.
The new regulation will probably affect businesses far beyond the expense involved in changing software and fiscal devices. Firstly, the whole burden will be transferred to end-consumers in one form or another. Secondly, starting a business in Bulgaria after N-18 is implemented will be more difficult and more expensive and for some micro traders, it will be almost impossible. Last but not least, that will make Bulgaria less attractive to foreign investors.
It is some consolation that, in Finance Minister Vladislav Goranov's words, the revenue administration will be helping and not punishing companies at the beginning. "The revenue administration has been implementing this reform since mid-2018. It certainly requires much more effort on both sides. We will partner with diligent taxpayers to help them tackle problems. We do not want to ruin businesses. We want to eliminate the grey sector," he said.
The chaos surrounding N-18 illustrates the long-term damage a new regulation can have without a proper impact assessment. When parliament passed amendments to the VAT Act in March 2018, obliging companies that accept cash and bank-card payments to have NRA-approved software for sales reporting connected to a cash register, the fallout was underestimated. The revenue administration said the change would affect about 20,000 points of sale using about 43,000 fiscal devices and that their costs would be about 120 levs per workplace. Back then the new regulation was supposed to cover only those companies deemed liable to hide turnover, i.e. about 25% of businesses - mainly retailers, restaurants, bars and wholesale warehouses.
Two years later, however, it turns out that there is almost no business unaffected by the new requirements. Moreover, there are no blanket software solutions for different types of enterprises. "Unlike previous changes, this one cannot be implemented with additional software, so all companies have to change their basic business management software," said Ivan Arzhentinski of the Bulgarian Association of Information Technologies. It is the IT sector that warned about the problem, whose responsibility it is to develop programs for sales reporting.
"We are worried that deciding what is part of the sales process and what is not is left to the NRA's discretion. There have been interpretations and answers to questions but every lawyer will tell you that this has no legal weight," said Pasko Paskov of the Bulgarian Association for Business Software Development.
"The official explanations, instructions and Q&A's on the implementation of Ordinance N-18 that are published on the website are the NRA's official position. This particular ordinance, as well as most statutory acts in principle, cannot exhaustively cover all real-life hypotheses. Therefore, written explanations stand in this and many other cases additionally clarify the statutory provisions," the NRA pointed out.
paving the road to hell
Tax consultants say that large and small companies face the most serious problems. The result is huge expenses for the former and probably going into the unofficial economy for the latter.
"The information provided to big traders that use expensive international systems like SAP, Navision etc. was controversial. They were first told that their cash register software should be licensed and not the entire ERP system, but then that changed. The situation is particularly serious for companies that are part of an international group that uses the same software in all countries of operation," a tax lawyer said. Such is the case with large retailers that have many stores: their high-paid foreign IT departments have probably worked for months on the Bulgarian issue, incurring expenses of millions of levs.
The tax administration decided, in one of its several hundred official opinions, that when used for invoicing, Excel and Word are point-of-sale sales management software. But Bill Gates is unlikely to visit Bulgaria to license his programs. Thus, all important data are now not saved on a computer but in a notebook, as small traders restore paper invoicing of the past century.
"We have a client, a hairdresser's owner, which uses US software for client reservations. Under the new regulations, this is point-of-sale sales management software. But the US company has no intention whatever of coming to register its product with the NRA. Now the client has to either start working illegally or shut down," Hristo Petrov, manager of Golden Vision accounting firm, says. He also cites a language school using Croatian software to record the number of teachers' lessons. "No company is going to come to Bulgaria and license its software when it is used by four or five companies only."
The ordinance and the lack of clarity about its implementation triggered a protest by dozens of small business owners in front of the Ministry of Finance building. They were concerned about the way the NRA would conduct check-ups, as these could be highly subjective.
The revenue administration said it was training its supervisory officers. "We have no reason to believe our officers are insufficiently prepared and ready to apply the ordinance. Besides, the NRA's acts are subject to administrative and two-instance judicial control," the agency said.
The truth is that after the initial cold shower for companies the tax authorities realized that if they did not work together with businesses the chaos would spread. Finally, the regulation introducing the new rules for sales management software was put on hold for six months. Several working groups were set up including NRA experts and business representatives in a bid to make the provisions of N-18 applicable. As a result, sales reporting for medical practices was simplified and additional guarantees were given to protect confidential trade information, the NRA said. A simplified mechanism for electronic trade reporting is also expected to be worked out.
Meanwhile, Prime Minister Boyko Borissov stated that the changes would not enter into force unless a consensus was reached with the different industry organizations on their implementation. "The process needs to be optimized. We wanted to eliminate the grey sector but that should not be done at the expense of small and mid-sized businesses," he said.