Bulgaria’s ruling party under siege over deposit interest tax plans

Written by on October 12, 2012 in Bulgaria, Business, News - No comments

Two days after Bulgaria’s Cabinet announced the plans to introduce a 10 per cent tax on all income from deposit interest starting January 1 2013, the country’s ruling party GERB remains the only supporter of the initiative, as the opposition, trade unions and general public have loudly voiced their disapproval.

On October 12, the ruling party made a massed assault on breakfast TV shows – Finance Minister Simeon Dyankov appeared on private channel Nova Televizia, his deputy Vladislav Goranov on public broadcaster BNT, while the chairperson of Parliament’s budget committee Menda Stoyanova was at private station bTV.

All three spoke of the social fairness of taxing interest income – but not why other types of capital gains remained tax-free. Dyankov stayed close to the argument he made on October 10, when his ministry unveiled the plans for the new tax (having previously denied them), saying that Bulgaria was the last European Union country to introduce the tax and that it was unfair not to tax deposit interest while even the minimum wage was subject to income taxes.

Goranov echoed Dyankov’s words, while offering some reassurances that the Government would not investigate the source of the money. “I think that the issue of removing an unfair feature of our tax system is overdramatised – to keep deposit interest tax-free and tax the income from the minimum wage is unbalanced. Some people might be worried that they cannot easily show where their deposit money came from, but I can assure them that the National Revenue agency will only be receiving information about the size of the deposit and the interest, not the source of the money,” he said.

Social fairness was the main thrust of Stoyanova’s argument, who said that “the bulk of the deposits taxes are in a relatively small number of accounts.” About 26 billion leva, out of 34 billion leva total deposits in Bulgarian banks, were being held in about one million accounts, less than 10 per cent of the total number of accounts.

The Budget revenue from the introduction of the new tax is estimated by the Finance Ministry at 120 million leva – and it could be an overly conservative one, with some analysts and banking industry sources pegging it closer to between 160 million leva and 180 million leva.

The Government needs the money to pay for the higher pensions to military and police personnel, as well as the higher pensions, set to rise by an average 9.3 per cent from April 1 2013.

The two biggest opposition parties, the socialists and the predominantly ethnic Turk Movement for Rights and Freedoms (MRF), warned that the measure could strain the resources of Bulgaria’s banking sector as customers will seek to withdraw their deposits.

Stoyanova rejected the argument, saying that banks offered depositors a stability that they could not find in other instruments or if they kept the money in cash at home. “I don’t think that people who have small deposits will feel a great tax burden,” she said.

Stoyanova also rejected the accusations of double taxation – made most often on bulletin boards and social media. “There is no double taxation, because people have already paid a tax on the principal of the deposit, while the interest that they receive is additional income.”

But the ruling party has yet to find a convincing rebuttal for another oft-repeated argument from the opponents of the new tax – that the deposit interest mainly offsets inflation and provides little additional income.

“Inflation in Bulgaria is relatively high. The interest income is not net income, a part of it compensates high inflation,” Democrats for a Strong Bulgaria leader Ivan Kostov told Bulgarian National Radio.

According to economist Georgi Angelov, who has also made the inflation offsetting argument, there was another good reason why Bulgaria was among the few European Union countries not to tax capital gains from deposits – accumulating domestic resources to fuel economic growth.

“Foreign investment has been scarce in recent years and if we tax the domestic source, how will we reach economic growth in the long-term?” he said.

The Conference of Independent Trade Unions in Bulgaria, one of the two large trade union blocs in the country, said that it did not agree with the tax, which “should not be suffered by that part of the population that saves in order to have something on the side, but by those who use the deposits for quick and risk-free enrichment.”

President Rossen Plevneliev has avoided offering an unequivocal assessment of the proposal, but said that he expected a reasoned in favour and against the initiative in Parliament, based on facts and figures rather than political dividing lines. “I want to hear arguments in Parliament, because the issue deserves a serious debate,” he said.

(Photo: Sanja Gjenero)

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Alex Bivol is the news editor of The Sofia Globe.