2024-04-01 14:32:58
G20 and OECD proposals to amend existing double taxation treaties
Bulgarians working in Germany should pay tax on their income here. This is provided for by changes in the Agreement for the Avoidance of Double Taxation, which will enter into force on January 1, 2025.
The new rules will certainly apply to seasonal workers who work for several months in Germany. Now they owe nothing either there or here. The reason is that their income in Germany usually does not exceed the non-taxable minimum, and according to the bilateral agreement in our country they are exempt from tax.
The new rules of the settlement will require them to pay tax either where
if they exceed the tax-free minimum,
or to be taxed here if they do not declare tax paid in Germany.
The Ministry of Finance recalled that the Double Taxation Agreement with Germany was signed in 2010. Changes were made to it after the two countries noted that significant changes in the field of international taxation, initiated by the countries, had taken place since then from the G-20 and the Organization for Economic Co-operation and Development (OECD). These changes should counteract base erosion and profit shifting.
The changes are recorded in the Base Erosion and Profit Shifting (BEPS) project of the OECD, on the basis of which the multilateral convention on the implementation of measures related to tax treaties to prevent the erosion of the tax base and shifting of profits was developed. States are invited to join it. Both Bulgaria and Germany have declared their readiness to comply with the provisions of the convention, including bringing their agreements in line with the minimum standards laid down in it.
The Finance Ministry also specifies that the Federal Republic of Germany and Bulgaria have agreed that the provisions of the multilateral convention affecting the minimum standard will be introduced through a bilateral protocol, which was signed on July 21, 2022 in Sofia.
In addition, a clause was agreed introducing the method of ordinary tax credit, which Bulgaria chooses to apply as a method of eliminating double taxation.
A similar change will also occur in other agreements, it will affect tax periods,
starting from 1 January 2024,
and will be released when a full analysis of each settlement to which they relate is ready.
The “exemption with progression” method, which Bulgaria is introducing for those working in Germany, provides that income received abroad will be exempt from taxation in Bulgaria, regardless of whether this income is effectively taxed in the country of source. The application of the tax credit method, in which the tax paid abroad is deducted from the tax due in Bulgaria, is also foreseen.
The changes will burden taxpayers, who will have to have documents on the income received and the amount of tax withheld abroad. They will also burden the tax administration, which will carry out the relevant checks.
The only exception for income abroad for now is for pensions and for income from public service, which the agreement stipulates to be taxed only in Germany. For them, the previous “release with progression” method will continue to be applied, i.e. not to be declared in Bulgaria.
The benefits of double tax treaties have long been proven. Their original purpose was only to avoid double taxation of the same income in two different countries. Currently, however, their role is expanding and they are already introducing rules on non-discrimination, exchange of information, provision of assistance in tax collection, mutual agreement procedures, fight against tax abuse, elimination of double economic taxation and others.
The OECD plan includes a package of tax measures that should be introduced into the Bulgarian legal system both through national legislation and international tax treaties. These are measures aimed at preventing existing tax evasion and non-payment practices and the use of aggressive tax planning and tax evasion schemes.
Our approach in the negotiations for the agreements is to seek a balance that will benefit the entire economy, with a certain emphasis on specific sectors of the Bulgarian economy, the Ministry of Finance states categorically.
The agreements in force are classified into several groups. To the first are countries with which we already have contracts, but they need to be updated.
To the second group of priority importance are our agreements with the member states of the G-20. These are Australia, Argentina, Brazil, Great Britain, Germany, India, Indonesia, Italy, Canada, China, Mexico, Russian Federation, Saudi Arabia, USA, Turkey, France, South Korea, South Africa and Japan. As of now
we have signed agreements with 16 countries
from them. We have not yet with Australia, Argentina, Brazil and Mexico.
In a separate group are the agreements with countries that are simultaneously members of the OECD and the EU. Of the 38 countries in the OECD, we have concluded agreements with 31, and the goal is to add to them those with Australia, Iceland, Colombia, Costa Rica, Mexico, New Zealand and Chile. Of the 26 EU member states, we have concluded agreements with all of them.
In the last group are countries that until now were not among the traditional significant economic partners of our country.
When concluding new or changing existing agreements, several criteria are important for the selection and choice of method: economic relations with the respective country, political system and stability, features of corporate and commercial law, etc.
There are two main models of tax agreement, which are used as a basis for conducting negotiations and concluding new ones. The OECD Tax Treaty Model
allocates the right to tax
between the country of which the person is a resident for tax purposes and the country of the source of the income. The UN tax treaty model is similar to that of the OECD, but gives wider taxation rights in the source country of the income. Both models have specific varieties.
Bulgaria has proposed changes to some of these models. For example, “criterion for severing the relationship” for non-physical persons and the “place of establishment” criterion. Another Bulgarian proposal is to limit the application of tax relief in relation to dividend income, especially if this income qualifies as a hidden profit distribution. For the status of royalties and royalties, we suggest negotiating minimum rates at the source.
Which countries does Bulgaria have an agreement with?
Bulgaria has concluded 70 agreements to avoid double taxation with the following countries: Austria, Azerbaijan, Albania, Algeria, Armenia, Bahrain, Belarus, Belgium, Vietnam, Germany, Georgia, Greece, Denmark, Egypt, Estonia, Zimbabwe, Israel, India , Indonesia, Iran, Ireland, Spain, Italy, Jordan, Kazakhstan, Canada, Qatar, Cyprus, China, Democratic People’s Republic of Korea, Kuwait, Latvia, Lebanon, Lithuania, Luxembourg, Malta, Morocco, Moldova, Mongolia, Netherlands, Norway , United Arab Emirates, United Kingdom, Pakistan, Poland, Portugal, Romania, Russian Federation, Saudi Arabia, USA, North Macedonia, Singapore, Syria, Slovakia, Slovenia, Thailand, Turkey, Uzbekistan, Ukraine, Hungary, Finland, France, Croatia , Czech Republic, Switzerland, Sweden, Yugoslavia, South Africa, South Korea and Japan.