In 2015 Bulgaria introduced in its Tax and Social Security Procedure Code (“TSSPC”) a system implementing the regionally and globally harmonized rules on automatic exchange of financial information in the field of taxation. The participating jurisdictions are the European Union member states under Directive 2014/107/EC amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation (“Directive 2014/107/ЕС”), the United States of America under the intergovernmental Agreement to Improve International Tax Compliance and to Implement FATCA (Foreign Account Tax Compliance Act) and any other jurisdiction, with which Bulgaria or the EU has concluded a treaty for exchange of information. As a result, a whole new section became effective in 2016, regulating the obligations of the financial institutions to collect and submit information and to conduct complex audits. Thus the Bulgarian legislator complied with its EU law and international obligations for fighting against tax evasion. The TSSPC also takes into account the Common Reporting Standard for automatic exchange of financial information (CRS) of the Organization for Economic Co-operation and Development (OECD).
Against this backdrop, the TSSPC aligns with the expectations for compliance with all of the above stated pieces of legislation and should not be regarded as the elephant in the room from comparative point of view especially when put next to other national legislations in the EU.
Further below, one could find an essential overview of the newly established countering tax evasion reporting system.
II. Who is affected?
The persons affected from the new rules on Automatic Exchange of Financial Information are to be differentiated in persons whose accounts are subject to processing and provision of information (i.e. “Reportable Persons”) and the institutions that are under the obligation to collect, process and submit the relevant information for the respective Reportable persons (“i.e. “Reporting Financial Institutions”).
- Reportable Persons
For the purposes of the TSSPC and the Automatic Exchange of Financial Information system a Reportable Person is (i) an individual or entity that is resident for tax purposes in one or more participating jurisdictions under the tax laws of such jurisdiction, or a hotchpot of a late that was resident for tax purposes of a participating jurisdiction. Where the tax residency of an entity such as a partnership, limited liability partnership or similar legal arrangement (except for trusts that are passive non-financial entities) cannot be determined, such entities shall be treated as resident in the jurisdiction in which their place of effective management is situated. The TSSPC provides explicitly that corporations, whose stocks are regularly traded on one or more established securities markets and its affiliated corporations, governmental entities, international organizations, central banks and financial institutions, are to be excluded from the list of persons for which reporting is made. Specific definition exists for Reportable Persons under the FATCA Agreement. A Reportable Person is any US person specified under Article 1, Paragraph (1), letter (aa) of the FATCA Agreement.
- Reporting Financial Institutions
The TSSPC categorizes the persons, who are under the obligation to collect, process and submit the information. The main group of persons refers to the so called “Reporting Bulgarian Financial Institutions”. In general terms these include custodial institutions, depository institutions (i.e. banks), investment entities, and some insurance companies.
Geographic-wise the coverage of the TSSPC spreads to encompass any financial institution that is resident for tax purposes in Bulgaria (excluding branches of such financial institutions located outside Bulgaria) and any branch of a financial institution that is not resident for tax purposes in Bulgaria, if that branch is located in Bulgaria.
III. What type of information would be collected and shared?
The Reporting Financial Institutions are under the obligation to provide to the Executive Director of the National Revenue Agency certain information on individuals or legal entities and their accounts, meeting the conditions for being qualified as reportable. Such information would comprise the following:
- name / company name, address, the participating jurisdiction of which the respective person is a tax resident, the taxpayer identification number, date and place of birth (if an individual) for each account holder, who qualifies as a Reportable Person;
- where the account holder is an entity which, after implementation of due diligence procedures, has been identified as a passive non-financial entity with one or more controlling persons, who are Reportable Persons then the following information is to be provided: name, address, taxpayer identification number and participating jurisdiction or other jurisdiction of which the entity is a tax resident, as well as for each controlling Reportable Person the name, address, participating jurisdiction of which that person is a tax resident, the taxpayer identification number, date and place of birth;
- account number or, where there is no number, the functional equivalent;
- name and identification number of the reporting financial institution;
- account balance or value, including, in the case of a cash value insurance contract or an annuity contract – the cash value or surrender value, as of the end of the calendar year or the date on which the account is closed;
- in the event of a custodial account:
- the total gross amount of interest, the total gross amount of dividends, and the total gross amount of other income generated with respect to the assets held in the account, in each case paid or credited to the account (or with respect to the account) during the calendar year, and
- the total gross proceeds from the sale or redemption of financial assets paid or credited to the account during the calendar year, with respect to which the reporting financial institution acted as a custodian, broker, nominee, or otherwise as an agent for the account holder;
- in the event of a deposit account: the total gross amount of interest paid or accrued (credited) into the account during the calendar year;
- in the event of an account not specified in item 6 or item 7 above then the following information is to be provided: the total gross amount paid or accrued into the account to the benefit of the account holder during the year, with regard to which amount the Reporting Financial Institution has a reporting obligation, including the aggregate amount of any redemption payments to the account holder during the calendar year.
IV. How is it collected?
The Reporting Financial Institutions are obliged to follow specific due diligence procedures in order to acquire and process the necessary information for the Reportable Persons. The procedures for collection of complex and diverse data differ depending on whether the Reportable Person is a legal entity or a natural person and whether the accounts under examination are existing or newly created.
For natural persons it should be noted that there is also a difference in the methods of scrutiny of low value and high value accounts. The relevant threshold for differentiating between low value and high value accounts is USD 1,000,000. Against this background, the TSSPC chose to combine both the permanent residence address test and the indicia search test. The permanent residence address test uses information on the addresses of the Reported Person stored by the Reporting Financial Institution. The indicia search test on the other hand is based on the electronic data held by the Reporting Financial Institution for low value existing accounts. The indicia search test is to be used by the Reporting Financial Institution only where the Reporting Financial Institution does not apply the permanent residence address test. On the basis of such tests the Reporting Financial Institution may qualify a Reported Person as a tax resident of any of the participating jurisdictions. The test applicable for the FATCA Agreement obligations is in fact an adjusted version of the indicia search test, which includes also a check on whether the person is an US citizen and whether the person is born in the United States.
More stringent procedures apply for high value accounts of natural persons. In these cases the Reporting Financial Institution is to use the indicia search test without application of the permanent residence address test. The more stringent review requires the Reporting Financial Institution to scrutinize the electronic dossier of the respective person and the paper dossier for the last five years where necessary (as the case may be).
For the purposes of the FATCA Agreement, the Reporting Financial Institutions have the discretion not to implement the due diligence procedures and not report on the following already existing individual accounts:
- a pre-existing individual account with a balance or value not exceeding the BGN equivalent of USD 50,000 as of 30 June 2014;
- a cash value insurance contract or an annuity contract with a balance or value equal to or lower than the BGN equivalent of USD 250,000 as of 30 June 2014;
- a deposit account with a balance equal to or lower than the BGN equivalent of USD 50,000 as of 30 June 2014.
Finally, with regard to individuals and for their newly created accounts, as a general rule, a self-certification procedure applies, which aims at collecting the necessary information for determination of the tax residency of the respective person on the basis of a sample declaration.
Regarding existing accounts of legal entities the TSSPC introduces a threshold below which the Reporting Financial Institutions are not obliged to perform the due diligence check. Nevertheless, they retain their full right to do so. The threshold is the BGN equivalent of USD 250,000 (for the purposes of the FATCA Agreement the relevant sum is the BGN equivalent of USD 1,000,000) as of 31 December 2015 (for the purposes of the FATCA Agreement the relevant date is 30 June 2014). However, if the value of the accounts is over the threshold or exceeds at certain point in time the threshold the account would be subject to review.
With respect to accounts for which a due diligence check is performed, the Reporting Financial Institution should carry out an examination on whether the entity(ies) holding the account is a Reportable Person or a passive non-financial entity.
The Reporting Financial Institutions analyze available documentation and information in order to determine whether the entity is a Reportable Person. The TSSPC provides that the Reporting Financial Institutions could use the information kept for regulatory or customer relation purposes, including information submitted for compliance with the anti-money laundering legislation and the self-certification method.
The Reporting Financial Institution must determine whether the entity is a passive non-financial entity with one or more controlling persons who are reportable persons. This check is made on the basis of the information that the Reporting Financial Institution already has on the entity, including information provided for anti-money laundering purposes and also on publicly available information. If any of the controlling persons of the passive non-financial entity is a Reportable Person, then the reporting financial institution must treat the account as a reportable account. Specific rules for determining passive non-financial entities exist for the purposes of the FATCA Agreement.
For newly created entity accounts, a check needs to be performed by the Reporting Financial Institution whether the entity is a passive non-financial entity with one or more controlling persons who are reportable persons, similarly to the checks of existing accounts. Two of the main differences between the due diligence procedures for existing accounts and for newly created accounts are: first for the latter no thresholds apply and secondly the collection of the necessary information is made through the self-certification method (i.e. through submission of a sample-form declaration). For the purposes of the FATCA Agreement specific due diligence procedure applies.
V. Temporal Reach
From temporal standpoint 2016 is the first year for which automatic exchange of information would be effected between the National Revenue Authorities and the competent authorities of the participating jurisdictions. This, however, is subject to exceptions agreed under an international agreements for automatic exchange of financial information (i.e. in situation where such international agreements provide for other relevant dates). For instance, regarding the exchange of financial information with the competent authorities of the United States, the earliest starting year, as of which an exchange of information is to be performed, is 2014. Thus, depending on the data to be exchanged and the regime under which it is exchanged, it is possible that an exchange is performed retrospectively.
Last but not least, it should be recognized that the financial institutions providing information should complete the review of existing accounts of individuals of high value until 31st of December 2016 and existing accounts of individuals of low value until 31st of December 2017. A high value existing account under the TSSPC is an account with total amount or value that exceed the BGN equivalent of USD 1,000,000 as of the 31st of December 2015 or 31st of December of each subsequent year. For the purposes of FATCA Agreement the relevant dates for estimation of whether the threshold is met or exceeded are 30th of June 2014, 31st of December 2015 or 31st of December of each subsequent year. An existing low value account of an individual is one with total amount or value below the BGN equivalent of USD 1,000,000 as of 31st December 2015. For FATCA purposes the date is 30 June 2014.
The review of existing accounts of entities (legal entity or legal arrangement, including company, partnership, trust or foundation) with total amount or value exceeding the BGN equivalent of USD 250,000 should be completed until 31st of December 2017, and for FATCA purposes until 30th of June 2016.
The Reporting Financial Institutions should supply the collected information to the National Revenue Authorities on an annual basis in electronic manner by 30th of June of the year following the year of collection of the financial information.
The TSSPC implements the idea of introducing a somehow uniform standard in the automatic exchange of financial information. The TSSPC relies on three main methods in the process of collection and processing of the relevant data. These are the permanent residence address test, the indicia search test and the self-certification method. The first two tests count mainly on the anti-money laundering and know your client data bases kept by the Reporting Institutions. Nevertheless, all these methods of collection and processing of information and the possibility of having the obligation to make a retrospective examination of accounts and persons in fact affect both the economic operators acting as Reporting Financial Institutions and their clients, namely the Reportable Persons. They create burdensome administrative obligations for both service providers and clients, the effectiveness of which is yet to be seen. Thus, the assessment on whether this new system is proportionate to the aim of countering tax evasion and whether the same results can be achieved through less restrictive and less burdensome measures is also yet to be made.
 Reportable account means a financial account that is maintained by a reporting financial institution and is held by one or more reportable persons or by a passive non-financial entity with one or more controlling persons that are reportable persons, provided it has been identified as such pursuant to the relevant due diligence procedures.