Bulgarian Startup Association And The VAT Discussion: Tax Changes Would Put Startups At Risk And Push Them To Leave Bulgaria

Editorial note: In an official statement and open letter sent to the Prime Minister of Bulgaria Boyko Borisov, and government representatives, the Bulgarian startup association BESCO expresses concerns regarding new VAT reduction proposals that have been coming from the government in the past two weeks. A similar statement was also published by the Bulgarian software association BASSCOM. The software and tech sector is among the fastest-growing ones in Bulgaria, and for now, less hit from the coronavirus related crisis. As of the end of 2019, the software sector (both product and service companies) has generated revenue of around €2B (3.4% GDP) and has paid a total of 731M BGN (€374M) of taxes, 122M BGN (€62.5M) of which VAT. Below is a translated version of the original official statement of the startup association, you can also read the statement from BASSCOM here.

BESCO – the Bulgarian Startup Association, is following with growing concern discussions on reducing the VAT to 9% for the restaurant industry and for “books” and considers this measure a dangerous precedent without any guaranteed benefits for the end-user We are also disturbed by the warnings of the Ministry of Finance that in order to compensate the losses in the budget due to the COVID-19 related measure, the VAT for all other goods and services should be increased to 24% or the profit tax for business should be raised to 17-18%.

We are concerned that such a tax increase would lead to a loss of over a billion BGN in GDP and between 15,000 and 20,000 people would leave the Bulgarian software industry. The result would be putting at risk the possibility for the Bulgarian IT industry to continue to develop in the country, as it has been so far, and that would cause Bulgaria to be uncompetitive for a long period of time. These people and companies are a key part of the country’s middle class and their loss would damage many related sectors such as the real estate market, the country’s car trade, tourism, technology, and many more.

The 10-years-old tax stability has been one of the main reasons for the development of high-tech and innovative companies in Bulgaria and for the attraction of foreign investment in our country. We believe that, as all that has been achieved, it is wrong to make tax changes without the necessary broad dialogue and without a sufficiently in-depth analysis of the consequences.

Increasing the tax and the administrative burden towards startups would put their survival at serious risk and the huge number of them would leave Bulgaria. After ten years of effort, today we have companies that are already in an advanced stage of development and we believe that the moment when we will see the first Bulgarian technology companies that will reach a market value of one billion dollars is very close. We believe that in the coming years these types of companies will be the fastest growing and will gradually occupy the main place in the economy that is based on innovation, research and development, products and services with high added value, which will reach global markets. This will lead to a multiple increase in attracted foreign investment, exports, GDP growth, and to an increase in the quality of life in Bulgaria. But the companies that can do all this today are still very vulnerable and success is by no means guaranteed. Decisions related to the violation of the tax stability of our country may lead to their liquidation.

Bulgaria needs an environment where business management is flexible, where the needed capital is accessible, where the right people can be easily attracted, where communication with the administration is done electronically and the whole mechanism for technology transfer is developed,  and where entrepreneurship is stimulated in all possible ways. Today we work together on each of these points, but none is as competitive as those offered around the world, which affects the assessments of doing business in our country. We believe that together in the coming years we will change this, but this is today’s reality and stable and competitive tax policy is among the very few reasons for high-tech companies to develop here. We believe that it is very dangerous at this exact moment to make any changes in the value of VAT, income tax, insurance threshold, and everything else that would disrupt the business climate in the country.

It is right to think not only about the survival of the most affected sectors but also about those that ensure growth and will pull the Bulgarian economy forward. Today, we have the historic chance to catch up with many other countries and, with little effort, to achieve significantly greater results than before. Today, we have the opportunity to establish ourselves as a leader in the field of innovation and technology in the region if we take advantage of the crisis and focus on solutions to move forward.

Startup companies, together with the software and the entire IT sector, show a high degree of public solidarity in the coronavirus crisis and many companies continue to provide their products and services for free to support affected businesses, save jobs, provide technological support for campaigns, innovative solutions for the performance of freelance artists, solutions in the field of cybersecurity, donation of devices for distance learning and many more.

We also pay attention to the positive social changes as a result of the coronavirus epidemic, which are related to the increasing confidence in innovation and scientific achievements, as well as boosting digitalization in education, healthcare, administration, trade, event and cultural management, and others.

Nevertheless, the IT industry is not unaffected by the economic crisis. All product or service companies that serve the digitalization of the most affected sectors also suffer heavy losses. This can affect the growth of the entire ecosystem, the Bulgarian economy can potentially lose its future greatest competitive advantage, and our country to lose the image of “Silicon Valley in the Balkans” In this regard, we call for the following:

✓ Withdrawal of the proposal to reduce VAT and prevent an increase of other direct and indirect taxes on operating businesses.

✓ Prioritize policies related to the digital transformation of the economy, as this will help it go more painlessly during the crisis and ensure its competitiveness in the future.

✓ Strengthening the dialogue for the development of the startup ecosystem of Bulgaria.