Decision No. 5 of 5 April 2012 on Constitutional Case No. 13/2011
Sixty-one Members of Parliament approached the Constitutional Court with a challenge of the constitutionality of Art. 61q, para 4 and the related para 5, and of Art. 20 and Art. 21, paras 1, 2 and 3 in the part “assessed value according to Appendix 2” of the Local Taxes and Fees Act (LTFA), (DV, No. 117/1997, last amended, DV, No. 39/2011), and of Art. 5, para 3 and Art. 6, para 1, item 2 of Appendix 2 of the LTFA (last amended, DV, No. 98/2010).
Regarding Art. 61q, paras 4 and 5 of the LTFA the MPs upheld that the introduction of the new visitor tax mixes up elements of two categories of direct taxes (income taxes and property taxes) and that the Constitution prescription that taxes shall be proportionate to income had been infringed upon.
Regarding Art. 20 and Art. 21, paras 1, 2 and 3 of the LTFA (amended, DV, No. 109/2001) the MPs insisted that the newly introduced assessed value rates increased severalfold the tax due and thereby infringed on the Constitution prescription that the amount of a tax shall be affordable to the taxable persons.
The Constitutional Court admitted the challenge – its first part only – on the following grounds:
1. On Art. 61q, para 4 and the related para 5 of the LTFA
The amendments to the LTFA create a new local (visitor) tax while they abolish the visitor fee that the LTFA provided for. The change, as indicated in the reasoning that accompanies the bill, was intended to improve the performance of the municipal budget revenue side and to generate conditions for the implementation of municipality-specific policies geared to the tourist trade. The new visitor tax is imposed on overnight stays in a collective tourist accommodation establishment and supplementary tourist accommodation and the taxable persons shall be the service providers (Art. 61р of the LTFA). The amount of the tax due for the calendar month shall be arrived at on the basis of the overnight stays in the preceding month (Art. 61q, para 2). The taxation is based on the number of overnight stays, the service, and is evidently an income-related tax. The circumstance that the tax is stated separately in the document issued by the taxable person to the overnight stay user (Art. 61р, para 4) will not change the conclusion made. The view that this new tax is a property-related tax only is not to be agreed with for the amount is assessed on the basis of the real number of overnight stays and not on the basis of the capacity of the collective tourist accommodation establishment or the supplementary tourist accommodation. However, the minimal amount of the visitor tax due annually under para 4 of Art. 61q of the LTFA has the aspects of a property tax as it is determined by the capacity (number of beds) as a tax is levied on it. That minimal amount of the tax or the respective difference is due providing in a calendar year and on the basis of the number of provided overnight stays the tax paid was less than the sum calculated on the basis of 30% of the full occupancy of the collective tourist accommodation establishment or supplementary tourist accommodation. Evidently the approach is different: Art. 61q, para 2 of the LTFA provides for a real tax assessed on the basis of the real overnight stays, i.e. it is derived from income from a service provided whereas Art. 61q, para 4 of the LTFA provides for a tax assessed on the basis of property – the number of all beds in a collective tourist accommodation establishment and supplementary tourist accommodation.
The above-stated reflections lead to the conclusion that elements intrinsic to property taxes and income taxes alike are used in the legal arrangements of the visitor tax. Such a legislative approach conflicts with Art. 60, para 1 of the Constitution where the concepts “income and property” call to differentiate the income taxes and the property taxes and to disallow elements that are essential to the one category to be shifted into the other (see Decision No. 9/1996 on Constitutional Case No. 9/1996). To make the disposition complete it should be noted that the rest of the motives in the challenge are not to be agreed with as they do not relate directly to free economic initiative or to the law-extended protection on investment and business. Regarding the Constitution prescription about the provision of equal legal conditions for economic activities, it might have been noncompliant with the Constitution if there were privileges in the separate modes of taxation treatment of legal entities; however, no privileges were found. The stated considerations for the adjustment of taxation to the conditions in which tourist activities are carried out while bearing in mind the location of the collective tourist accommodation establishment and supplementary tourist accommodation its operation throughout the year or during one season or several seasons and a number of other factors are relevant in the light of the need of tax concession or surtax. As after this decision visitor tax will be levied on the real overnight stays, the conditions stated become an element of the final result of the activity, yet generally they are taken into account in the assessment of the property tax due on a specific building.
2. On Art. 20 and Art. 21, paras 1, 2 and 3 of the LTFA in the part “the assessed value shall be arrived at according to Annex 2 hereto”
First, it must be made clear that allegations of severalfold increase of the tax seek to challenge legal texts 11 years after their entry into force. It is true that the Constitution does not set a time limit to challenge the constitutionality of a law. However, in this particular case it is a long period of time with continual inflation and respectively a change in the importance of the economic arguments that were valid in 2001. It is essential to note that the Constitutional Court decisions come into force three days after their promulgation and are valid only for the future (ex nunc) (Art. 151, para 2 of the Constitution of the Republic of Bulgaria).
The MPs’ claims of the unconstitutionality of Art. 20 and Art. 21, paras 1, 2 and 3 of the LTFA were based, as indicated, on a severalfold increase of the tax due, respectively the tax assessment. Neither the one nor the other contains standards, rules, adjustors, etc. that directly determine the tax assessment. The texts in question are rather legal normative reference to other pieces of legislation that contain these rules, that is, the challenged Art. 20 and Art. 21, paras 1, 2 and 3 of the LTFA do not contain provisions corresponding with the claimed noncompliance with the Constitution, so that they may be the subject of discussion.
3. On Art. 5, para 3 and Art. 6, para 1, item 2 of Appendix 2 of the LTFA
Art. 5, para 3 of the LTFA sets the basic tax rate of buildings in BGN per square meter with a differentiation for residential buildings (flats and family houses) and nonresidential property. The other “target” of the challenge – Art. 6, para 1, item 2 of the LTFA – determines an adjustor for location of trading places: the adjustor differentiates also between residential, industrial and farm buildings and space and office buildings on the same landed property.
The constitutionality of texts from Appendix 2 of the LTFA is challenged with arguments derived primarily from Decision No. 9/1996 on Constitutional Case No. 9/1996. The decision cited dealt with provisions of the LTFA that was abolished in 1997. When this decision was decreed arrangements were in place other than the existing ones to determine the basic tax rate of the immovable property of individuals on the one hand and the immovable property of enterprises, agencies and organizations on the other hand. With the existing LTFA in force from 01.01.1998 it is the tax assessment that is essential in computing the tax on citizens’ property whereas the property of enterprises is subject to tax assessment or in the event of property of enterprises – the tax assessment or the residual value (Art. 20 and Art. 21 of the LTFA). In both hypotheses (for individuals and for enterprises) the tax assessment is determined according to Appendix 2 with a differentiated approach to the different kinds of immovable property and their functions.
Tax establishment and determination of the size of taxes are an exclusive prerogative of the National Assembly, as provided for by Art. 84, item 3 of the Constitution. Taxes are public receivables that go to the State or a municipality and these receivables are established by law that the Legislature passes to guarantee the taxpayers’ rights. The Constitution prescribes that tax establishment and the determination of the size of taxes, including the breakdown to be subject to a law (cf. Decision No. 3/1996 on Constitutional Case No. 2/1996). In the challenged texts of Appendix 2 to the LTFA the criteria concerning a different approach to the determination of the basic tax rates of residential property (flats or family houses) and nonresidential property and the different location adjustors for commercial outlets and also for residential, industrial and farm buildings is determined in a law in compliance with the Parliament’s exclusive power. There exists no contravention of Art. 60, para 1 of the Constitution of the Republic of Bulgaria inasmuch as the tax is indisputably a property tax and contains no elements related to possible income from such facilities. There exists no contravention of Art. 19, paras 1 and 3 of the Constitution of the Republic of Bulgaria either as the sector of free economic enterprise is not affected or investment and business are not restrained. The provisions challenged do not generate legal conditions that vary from business to business as no privileges exist within the individual tax treatment rules for legal entities. The Constitution enables the National Assembly to grant tax concessions or impose surtaxes solely by law and proportionately to income and property (Decision No. 12/1994 on Constitutional Case No 12/1994). To do that a number of criteria has been set that take into account the type of building and its functions and location. Evidently this is what the public expects from the Legislature, viz. fair taxation and incentives to gear up the industries and trade.
Председател: Евгени Танчев