A legal but immoral practice is about to be terminated. Changes in VAT Act will close the loophole for avoiding the indirect taxation.
Currently, the legal framework distinguishes the payment of VAT, depending on whether the lease is an operating lease (the client only uses the automobile and only pays a rent) or a financial lease (after the expiry of the contract the customer who has paid in all installments is entitled to acquire the vehicle). In the first case the companies are entitled to a tax credit for each monthly payment on the lease. In the latter case, however, companies have to pay VAT or any payment upon receipt of the car and are not entitled to a tax credit . Many companies in recent years, however, have attempted to gloss a financial lease as an operating one to save on payment of VAT.
In a few words the pattern goes like this: the payments that are running are as if on an operating lease and the payments are deducted as an expense, but when there are only a few installments left, the car is transferred to the client at its remaining value. This price is only symbolic and the VAT calculated on it is a tiny amount. This scheme has been explained for the BANKER by an experienced accountant .
Now, however, companies with leased cars will have to pay VAT on the outstanding value of the car at 1 January 2014. This will apply to leasing contracts in which an option has been agreed for the transfer of ownership of the car, even if the vehicle was leased for three or four years. Tax payment for the remaining lease installments will have to be charged by 31 March 2014.
The BANKER sought more detailed information on what exactly lawmakers are cracking down, but the Ministry of Finance declined to comment and explain further from its official statement.
Bulgarian Leasing Association has sent to the Ministry of Finance its opinion on proposed changes to the VAT Act. The management of the association would like to wait for the response of the state administration and possibly then could comment, was the official response to the BANKER’s request to the Bulgarian Leasing Association.
But the BANKER found evidence in a powerful ad campaign for operating leases that are absolutely legal but mean a 20-percent less expensive automobiles for owners who are up to now entitles to a VAT credit, plus deductions in terms of expenditure side for the companies. Moreover, the VAT credit spreads also to the cost of maintenance and operation of the vehicle – fuel, maintenance, spare parts, assembly, and lubricants. So the leasing of a car, except that it is recognized as a company expense and as such reduces the corporate tax is also benefitial as a VAT credit.
However, these lucrative practices will probably go down in history.
The BANKER
