April 8, 2020 - The COVID-19 outbreak and state of emergency announced in Bulgaria by the National Assembly on 13 March 2020 put most companies in a complex financial situation without warning. While the Bulgarian government has proposed several measures aimed to partially reduce the financial losses incurred by companies because of the outbreak, nothing has yet been done regarding invoicing and VAT payments during this extreme situation. As a result, many suppliers of goods or services face uncertainty whether to invoice their clients for due payments when their clients claim suspension of or release from payments due to force majeure. Below we provide an overview of some of the Bulgarian tax law implications that should be considered when deciding how to proceed with invoicing in the current situation.
Invoicing and payment of VAT
If a transaction with a client is subject to VAT in Bulgaria, the supplier of goods or services normally is required to issue an invoice, charge VAT and account for this VAT with the tax authorities. The invoice showing the VAT due on the transaction should be issued by the supplier within five days from the date of (i) the occurrence of the tax event or (ii) the receipt of an advance payment for the supply.
If the supplier fails to do so, the tax authorities could impose an obligation to the supplier to pay the VAT that should have been charged plus statutory interest. In addition, the tax authorities can impose significant fines against the supplier.
Impact of COVID-19 outbreak on invoicing
If the COVID-19 outbreak or anti-epidemic measures imposed by the Bulgarian government are regarded as a force majeure event that prevents the supplier of goods or services to perform, the primary effect will be to postpone the occurrence of the tax event. In such case, the obligation of the supplier to issue an invoice for the price will be deferred and the client could be entitled to suspend payment as long as the supplier is prevented by this force majeure event from supplying the agreed goods or services.
However, if the supplier of goods or services is not prevented from performing his obligations, the supplier can, and is actually obliged by law, to issue an invoice to the client and charge VAT. The fact that the client may claim that it is impossible to pay the price for the goods or services (that have already been supplied or will be supplied in the future) as a result of the COVID-19 outbreak or the measures imposed by the government is likely to be considered as irrelevant by the tax authorities, as it is generally accepted under Bulgarian law that a force majeure event does not absolve a party from its liability to pay.
In such case, however, the supplier might consider whether to retain his performance (if the goods or services have not yet been supplied to the client) until the date when the client pays based on a right of retention, following either the terms of the contract or the mandatory provisions of the law, in which case the tax event will be postponed and the issuance of an invoice by the supplier could be deferred. Alternatively, the parties could contractually agree to amend the deadlines for the performance and payment to reflect the effects of the COVID-19 outbreak, which could also result in a deferral of invoicing.
In any case, the supplier should be able to support with the appropriate documents any deferral of invoicing due to the COVID-19 outbreak or the measures imposed by the government (e.g. correspondence between the parties, annexes to the contract, etc.), as otherwise he could suffer adverse tax consequences in case of a tax audit.
Invoicing in case of dispute regarding payments
Bulgarian law is silent as to whether a supplier of goods or services should invoice a client if there is a dispute with the client whether all conditions necessary for the client to suspend or be released from payments based on force majeure are met. There are several non-binding letters of the Bulgarian tax authorities which state that in case of a dispute, the supplier should invoice the undisputed part of the price and, once the dispute is over (e.g., as a result of a final court decision or settlement agreement), the supplier should issue debit notes or credit notes (depending on the outcome). However, it is uncertain how these letters could be applied in the COVID-19 situation as the tax authorities would require documents substantiating the undisputed amount. Thus, to be on the safe side, the supplier might consider to issue an invoice for the due payments and subsequently amend it through a credit note (once the dispute with the client is resolved). This approach will eliminate tax risks but will cause certain cash flow disadvantages with respect to the VAT that should be paid to the state and subsequently reclaimed.