Decision No. 10 of 24 October 2013 on Constitutional Case No. 8/2013
The proceedings conform to Art. 149, para 1, item 2 of the Constitution of the Republic of Bulgaria.
The Ombudsman of the Republic of Bulgaria challenged the constitutionality of Art. 11, para 5 of the Personal Income Tax Act (PITA) (DV, No. 95/2006, last amendment, DV, No. 66/2013), whereby income paid in advance under Art. 38, para 13 of the PITA is deemed to be acquired on the due date of the deposit or on the date of early termination thereof. The novel that is contested was promulgated in Durzhaven Vestnik, No. 94/2012 and took effect on 01 January 2013.
The Ombudsman claimed that the fiction of Art. 11, para 5 of the PITA, viz. of income being gained from interest accrued on maturity, in fact makes citizens pay taxes on income that has been gained prior to the PITA’s entry into force. The retroaction that is imparted to Art. 11, para 5 of the PITA violates the principle as proclaimed by Art. 4, para 1 of the Constitution reading that Bulgaria shall be a law-governed state and shall be governed by the Constitution and the laws of the country whereas the application of this Constitution principle in tax law precludes the retroactive effect of tax prescriptions. The Ombudsman referred to Decision No. 9/20.06.1996 on Constitutional Case No. 9/1996 where the Constitutional Court ruled that “Citizens shall know in advance, before the beginning of the financial year, the kinds of taxes and the amounts that they will have to pay” and thought it was a violation of the principle of legal certainty which is a fundamental tenet of EU law, too.
The Constitutional Court discussed the challenge and the positions of the stakeholders and to make a pronouncement took into account as follows:
So far the personal income from interest accrued on bank deposits was not taxable. The Lawmaker’s understanding changed upon the adoption of the Act Amending the Value Added Tax Act (AAVATA) by the 41st National Assembly. § 57 of the AAVATA Transitional and Concluding Provisions (DV, No. 94/2012, effective 01 January 2013) changed Art. 13, para 1, item 8 of the PITA as it reads that taxability shall not apply to any income accruing from interest payments on bank accounts, with the exception of interest payments on deposit accounts, with any commercial bank and branch of a foreign bank established in a Member State of the European Union or in another State which is a Contracting Party to the Agreement on the European Economic Area. The novel of Art. 38, para 13 of the PITA made them taxable by the imposition of a final tax and in conformity with the amendment to Art. 46, para 1 of the PITA that sets a tax rate of 10% for any income. For the purposes of this kind of taxation, by the passage of the novel of § 1, item 58 of the PITA, the Lawmaker defined the concept “deposit accounts” as bank accounts on which money is kept for a fixed term in consideration of remuneration (interest payment). Therefore such bank accounts have a fixed maturity which is negotiated between the bank and the depositor, in contrast to other kinds of bank accounts like payment accounts and savings accounts where a fixed maturity does not usually exist. The Lawmaker has introduced the maturity as a differentiating criterion in order to fix a date on which the income becomes payable as it is only income acquired as of the maturity on which a final tax shall be levied. The general rules to determine the date of acquisition of income taxable under the PITA are set forth in Art. 11, para 1, item 1, item 2 and item 3 of the PITA. In the first hypothesis the Lawmaker wrote that the income shall be deemed to be acquired on the date of payment in the case of cash payment. The second hypothesis envisages that in case of non-cash payment the income shall be deemed to be acquired on the date of crediting the account of the recipient of the income or receipt of the cheque. The third hypothesis deems the income to be acquired on the date of receipt of the consideration in the case of non-cash income. It should be explained that income from interest accrued on deposit accounts shall be considered to be acquired upon maturity, that is, the tax is due upon the expiry of the term for which the contract was signed by which a deposit account was to be opened. Another hypothesis as advanced in law provides for a depositor and a bank that have negotiated that the payment of interest should be made in advance rather than wait for the maturity. The Lawmaker deems that the hypothesis in question fits systematically into Art. 11, para 5 of the PITA reading that “Upon advance payment of the income under Article 38 (13) herein, such income shall be deemed to be acquired on the due date of the deposit or on the date of early termination thereof.” With this decision the Lawmaker makes the tax-related consequences from the advance payment of the income accrued as interest equivalent to the consequences from the income accrued in the hypotheses of Art. 11, para 1, items 1 and 2 of the PITA. It should be noted that the legal avenues provided by Art. 11, para 5 of the PITA shall apply only in the event of taxable interest assessed by Bulgarian commercial banks or by branches of foreign banks in Bulgaria on the deposit accounts of resident natural persons. For the purposes of taxation the “resident natural person” is defined in Art. 4, para 1 of the PITA which reads thus: “Resident natural person shall be any person: 1. who has a permanent address in Bulgaria, or, 2. who is present within the territory of Bulgaria for a period exceeding 183 days in any twelve-month period, or 3. who is sent abroad by the Bulgarian State, by bodies and/or organizations thereof, by Bulgarian enterprises, and the members of the family of any such person, or 4. whose centre of vital interests is situated in Bulgaria.”
For the hypotheses in Art. 4, para 1, item 2 and item 4 the criteria that were additionally established to define the concept in paras 2, 3, 4 and 5 of the PITA should also be borne in mind. Art. 11, para 5 of the PITA does not encompass the hypotheses where income is acquired by non-resident natural persons from interest payments on deposit accounts with commercial banks.
With such legislation in place concerning the final tax to be levied on the gross sum total of the incomes acquired as per the hypothesis of Art. 11, para 5 of the PITA the Constitutional Court ruled against the reasons given in the challenge of the constitutionality of the text.
The tax that was to be withheld ex tunc 01 January 2013 as tax on income acquired from interest payments on deposit accounts with commercial banks is an income tax that has all the aspects of law-established public state receivables which shall be subject to enforced collection providing they are not paid up voluntarily. The imposition of this tax conforms to the Constitution-proclaimed principle of the legitimacy of the tax in relation to the competence of the authority which imposes it, i.e. the National Assembly that codifies this tax due. The elements of the actual tax composition are cited accordingly: taxable items, tax base, tax unit, tax rate, the relation between taxable items and taxable persons as arranged in the law. Therefore, the Constitutional Court assumed that the Lawmaker’s amendments to the PITA in the parts referred to are fully consistent with Art. 84, item 3 and Art. 60, para 1, and para 2 of the Constitution. So the imposition of the new tax was concordant with Art. 4 of the Constitution.
Regarding the retroactive effect of tax legislation the Constitution does not imperatively prohibit as the penal legislation does – cf. Art. 5, para 3 of the Constitution. The understanding as expounded in the Constitutional Court’s doctrine and practice that are based on Art. 4 of the Constitution which proclaims the principle of the state committed to the rule of law is firm that the substantive tax law shall not be retroactive. The Court’s understanding in principle regarding the effect of the tax law over time has been considered by the Legislature when the new income tax was imposed. Generally, a tax liability exists by virtue of a law and in the case under consideration it is the novel of Art. 38, para 13 read in combination with Art.13, para 1 of the PITA. According to § 58 of the Act Amending the PITA read in combination with § 57 of the Act Amending the PITA, including the part that imposes the new tax, the Act is to go into effect on 1 January 2013 when the new financial year begins despite the fact that it was adopted in the preceding tax year. Therefore, the retroaction of the attacked legal texts as of the day of the Act’s entry into force the tax liability had not occurred. The tax liability occurs ex lege, hence its chargeability is always related to a concrete fact of case as an element of the tax relationship that includes the existence of a taxable base and the date of maturity that structure the chargeability and liquidity of a tax due. Therefore, to make income accrued from interest on a deposit account taxable, it must have been gained, respectively acquired in the meaning of the law. The gross sum total of incomes to be acquired is assessed on the maturity date when an accrual is made of the interest due for the period for which the deposit contract is made. In the typical cases where deposit accounts are opened or cash payments are made, the crediting of the account of the recipient of the income is made upon the expiration of the term cash deposit. Therefore the chargeability of the tax is bound as of the date of accrual of the gross sum total of the interest on the deposit account. The date is fixed by the parties upon the conclusion of the deposit account contract and that date is the maturity of the deposit. A specific feature of the income from interest has to be noted in this regard as it distinguishes it from other kinds of taxable income as per the PITA. Though the payment, respectively the crediting of the account is a onetime event, the gross sum total of the income shall be bound with the lapse of a certain period of time over which the income is accrued. The amount of the taxable income as per Art. 38, para 13 of the PITA is assessable exactly on the maturity date.
Art. 11, para 5 of the PITA treats the cases where income is paid up in advance on the interest of the deposit and upon an earlier closure of the time deposit account. In the former case, the income is deemed to be acquired on the due date of the deposit; in the latter case – on the date of early termination thereof. The legislation that treats the taxation of income that is paid up in advance on the interest whose effect starts over the time for which the deposit contract has been made and after 1 January 2013 does not raise objections either in the field of the unconstitutionality of the prescription. That part of the provision was excluded from the Ombudsman’s challenge.
Article 1 of Protocol No. 1 to the Convention for the Protection of Human Rights and Fundamental Freedoms reads that every person shall be entitled to the peaceful enjoyment of his possessions and the fruit-bearing thereof. In agreement with the principle of balance between individual and public interest the right to property does not extend beyond limits given the option to enforce such laws, in addition to the laws that are deemed necessary to control the use of property to secure the payment of taxes as a source of revenue to enable the State to function for the sake of the need and to the benefit of the citizens and of society at large. In this particular case this is achieved by the amendment to the PITA that was promulgated a month before its entry into force to impose the new personal income tax. Thus the Legislature has transposed the Protocol-set restrictions on the use of property both in terms of substance and the requirements for the preparedness of the holders of this right in view of the pending imposition of a tax due in the next tax year.
As already noted the date of the acquisition of income from interest is the legally relevant fact for its taxation since a taxable basis won’t be available before the maturity. The acquisition of income, if the advance payment of the interest has been negotiated, is an exception to the typical cases that are treated in Art. 11, para 1 of the PITA. In consideration of the differences between the commercial banks’ pursued policies that contain this clause and of unfixed time vis-à-vis the gross final amount of the interest upon maturity, the Legislature codified a standard criterion concerning the date of acquisition of income upon the advance payment of interest. The rule is that the income is deemed to be acquired upon the accrual of the interest on the deposit on the due date of the deposit or on the date of early termination thereof and not on the date of the real payment or the crediting of the account. The legislative tool that may be employed by virtue of Art. 11, para 5 of the PITA to establish equivalence between the legal consequences of the advance payment of interest and the typical case of existing contracts that do not contain such a condition does not invite the conclusion of non-compliance with the Constitution. This is so as a standard rule is imposed in this way to assess the gross amount of the interest accrued and taxable, viz. the maturity of the deposit both in the event of advance payment and in the event of payment on maturity date whenever advance payment has not been negotiated. The guarantee that tax payers will enjoy equal treatment is provided by Art. 11, para 5 of the PITA reading that “Upon advance payment of the income, such income shall be deemed to be acquired on the due date of the deposit or on the date of early termination thereof.” It should be noted that the advance payment of an interest does not provide a tax base which is fit to be taxable since the final amount of the income will be known only as of the running out of the deposit or on the date of its earlier termination. Supposing that a deposit account was opened after 1 January 2013 the Constitutional Court agreed that the permissions to levy a tax on income from the advance payment of interest accrued as per Art. 11, para 5 of the PITA precludes the retroactive effect of that part of the Act. Moreover, the application of the maturity date as a universal criterion that should be complied with in the assessment of the taxable base for all possible cases of deposit accounts conforms, to the highest extent, to the principle of equality of tax payers with respect to the date of the chargeability of the tax. Therefore as an imperative rule with ex nunc effect from 1 January 2013 onwards Art. 11, para 5 of the PITA does not impose, directly or indirectly, a retroactive tax due which would have impinged on fundamental Constitution principles that guarantee legal certainty and predictability as inherent aspects of a state committed to the rule of law.
The challenge of constitutionality should be discussed also in relation to the possibility to apply the mode of taxation as described in Art. 11, para 5 of the PITA for the deposit accounts that have been opened prior to the Act’s entry into force and that entitled to advance payment of interest accrued by 31.12.2012 but that become due after 1 January 2013. Given the above discussed legal resolutions that were adopted, even in these cases there will be a proper tax base which constitutes the gross sum total of the interest accrued, and that only after the Act’s entry into force as of the maturity date of the deposit. Prior to that date there will be no tax base as described in Art. 38, para 13 of the PITA since the sum of the advance payment does not constitute a tax base established by law. Therefore the real advance payment prior to 31.12.2012, respectively the crediting of the account of the recipient is not a legal act that relates to the chargeability of the tax. The chargeable event occurrence is contingent upon the maturity of the deposit, that is, after 1 January 2013, upon the Act’s entry into force. Given this situation a retroactive tax due is out of the question. The adoption of the criteria in the general provision of Art. 11, para 1 of the PITA and the grandfathering where interest was paid up in advance and before 31.12.2012 but with maturity after 1 January 2013 – thoughts that were expressed in some of the positions and in the Ombudsman’s challenge – cannot be addressed by an interpretation or by the declaration of the existing provision of Art. 11, para 5 of the PITA unconstitutional. This is so as the provision challenged is an integral part of the unified legal modality effective ex tunc 1 January 2013 and applicable to the taxation of income in the forms of proceeds from interest accrued on deposit accounts with maturity after the Act’s entry into force.
Since the tax on income from interest is imposed by law, the Legislature is free to determine the legal modality and to that end it must adopt regulations that explicitly prescribe, inter alia, that the so called grandfatherings should be treated as appropriate. The possible legal solution to exclude from the tax base part of the accrued interest or the time deposit contracts that have been made prior to the Act’s entry into force is a matter of legal prudence and for that reason the Constitutional Court could not decide the case on its merits.
The Legislature chose to establish a single tax treatment for all incomes though the taxation of income from interest accrued on bank deposits should have unique specifics mostly in view of the particular aspects of the interest as an accessory income tax payable which is relatively independent of the principal. It is the nature of the interest that calls for a more detailed tax legislation which is not in place. Next, the exposure of the legislation as incomplete is a typical case of a gap that cannot be filled in by the Constitutional Court’s interference.
No doubt, there exists no regulation, at constitutional level, of the taxation of income from interest accrued on deposit accounts. This is explicable in view of the provision of Art. 60 of the Constitution that delegates to the Legislature the power to pass tax legislation, including the assessment of the tax basis which is provided for by Art. 11, para 5 of the PITA. The criteria to define what should be taxable that the legal text provides for don’t make it incompatible with the Constitution. It is the income that is the legal fact in tax law. The income is the basis to proceed from in the assessment of income taxes. Being a category of substantive tax law, the taxable item determines the payment of a tax due. In that particular case it is the personal income from interest accrued. The taxable item is always concretely defined. For the purpose of taxation income is always defined in a way which is different from the generally accepted economic category “income”. In the case under consideration the taxable income is defined in terms of substance and amount as prescribed by Art. 38, para 13 of the PITA. The rate imposed by law sets a taxable base as a legal fact that determines the occurrence and evolution of a tax relationship and that exists on maturity. The preceding liability that results from the deposit account contract is not the law-engendering juristic fact for the needs of taxation. This is explicable mindful of the fact that a contract of the said type does not necessarily achieve the business objective for which it has been made. Before the maturity it is not to be conjectured whether the depositor will acquire income and how big the taxable gross sum total will be. The depositor owes no tax to the Government prior to maturity. Therefore, the PITA does not rearrange the obligation dimensions of the contract by which a bank deposit account is opened. The subject of the law is the accompanying tax event that occurs on the basis of the contracts by which a deposit account is opened and that will exist as long as the primary contractual relationship exists. The content and sequence of the establishment and evolution of the legal relationships bring forth the hypothesis of application of the new piece of legislation to a status quo and such application is not equivalent to retroaction.