It is common practice for managers of companies and entities to become perplexed when despite the fact the entity’s financial result for the relevant financial period is a loss, same is obliged to declare and pay taxes other than the corporate tax.
There are several categories of costs for which entities are obliged to pay tax regardless of the company's financial result. These costs are grouped into three sectors: entertainment costs, social costs provided in kind, and in-kind costs related to own or leased assets provided for the personal use of staff, persons hired under management and control contracts and owners. They are subject to the so-called "expenditure tax".
For clarity in terminology, here is a detailed description of each cost group and how the tax base thereof is formed:
Mitko DimovDirector accounting services
Entertainment costs are costs associated with the activity performed for entertainment and recreational purposes such as the cost of meeting, staying and sending guests and delegations, accommodation costs, eating and drinking, organizing business meetings, celebrations, entertainment, excursions as well as and drinks such as coffee and water for the company's staff .
Social costs are made by the employer for social and domestic needs of employees. Social costs are described in detail in Chapter 14 of the Labor Code, the most common being the costs of catering, transportation from home to work, and vice versa, providing access to short and long-term recreation complexes, physical culture, sports, tourism and other physical and cultural activities. Social expenditures in kind include costs for additional voluntary insurance, voluntary health insurance and "Life" insurance, as well as expenses for food vouchers. The peculiarity with them is in the categorization of whether we can assume same represent social expenditure or not. To be recognized as social cost for tax purposes, same must be accessible to absolutely all company employees, whether working on an employment contract or on management
and control contracts, including the persons who are on maternity leave or are in a period of temporary incapacity for work; another important feature of this category of costs is that they must provided in kind. Social costs are not provided in kind when the employer or the contracting entity and the persons in favor of whom same have been provided are in monetary relationships in any form whatsoever with regard to the received social benefits. In case they are not provided in kind, they represent income of the natural persons and are taxed according to the Personal Income Taxes Act (PITA).
Costs associated with the provision of own or leased assets for personal use
Another type of costs common in practice are the costs associated with the provision of own or leased assets for personal use by the persons employed under employment contracts, management and control contracts, as well as self-employed persons performing personal labor. The Corporate Income Tax Act divides these assets into three categories: vehicles, immovable property and others (mainly mobile phones, computers and other types of equipment).
Essential condition for the recognition of these costs is to provide documentary evidence. Regarding the documentary evidence of entertainment costs, the legislator allows same be documented only with a cash register receipt without the need for an invoice to be issued for them. With regard to the cost of using privately owned vehicles, besides the primary accounting documents, there also has to be kept track of the ratio of personal use to the use for the independent economic activity. There is no obligation to issue route-sheets when the person has chosen a 50/50 ratio. When documentary evidence is provided, all costs taxed with expenditure tax and tax itself are recognized for tax purposes. Otherwise, these amounts will be treated as unrecognized for tax purposes and will form a permanent tax difference, i.e. the amount of the documentary non- justified cost increases the financial result and is subject to corporate tax.
Exempt social costs
There are situations where social costs can be exempted. For example, the social costs of contributions and premiums for supplementary social insurance and life insurance are exempted when they are up to BGN 60 a month per employee. Here, it is important to say that an enterprise is entitled to use this exemption only if there are no enforceable public debts at the time of incurring the costs.
Also exempted from taxation are also the social costs of food vouchers up to BGN 60 per month if the following conditions are met at the same time:
- The agreed basic monthly salary of the person in the month of providing the vouchers is not less than the average monthly agreed basic salary of the person for the previous three months.
- The taxable person (i.e. employer, contracting entity, etc.) has no enforceable public debts at the time of granting vouchers and
- Vouchers and had to be provided to the employer by a person authorized to place on this activity as operator of the Minister of Finance on the basis of competition.
Here's an example of the first condition: If you received BGN 700 per month for the past three months, the monthly fee for the current month in which you receive a food voucher should not be less than BGN 700.
Exempt from taxation are also transport costs of employees and workers hired under management and control contracts, from their residence to the place of work and back, unless transport is done by car or by extra bus lines. If transporting is done by car, but to inaccessible places and remote areas, and without this cost the employer would not have been able to provide the performance of its activities, this cost, although with the use of a car, is also exempt.
The tax rate of the expenditure tax is 10% of the tax base.
The tax base for determining the expenditure tax is formed as follows:
- Expenses incurred during the calendar year for entertainment purposes;
- The accrued through the calendar year social expenses provided in kind, less the income related to them.
- The excess over BGN 60 for the costs of contributions for supplementary social insurance, life insurances and food vouchers for each employee.
- Accrued in-kind costs in relation to the personal use of vehicles for the calendar year. The amount of these costs shall be determined by multiplying the total cost related to the vehicle by the ratio:
- between the kilometers traveled for private use and the total kilometers traveled by the vehicle concerned;
- between the hours of private use of the vehicle and the total hours of use of the vehicle ;
- by 50 per cent.
- Costs in kind in respect of personal use of real estate for the calendar year. The determination of the amount of such costs shall be made by multiplying the total amount of all costs relating to immovable property by the ratio:
- between the area used for private use and the total area of the real estate concerned;
- between the hours of private use of the respective real estate and the total hours of use of the immovable property.
- 20% of the total amount of all costs associated with other assets (mobile phones, computers, etc.), unless the taxable person justifies otherwise a different amount of the taxable base.
The expenditure tax is due regardless of the tax financial result and is declared in the annual tax return for the respective calendar year until March 31 of the following year and the taxable persons are obliged to submit it within the same term. In the annual tax return, taxable persons declare their choice whether to tax the costs in kind related to assets granted for private use under the procedure of the Corporate Income Tax Act or by the Law on Personal Income Taxes.