“FEAR AND BUSINESS– V²²”
OR
“NICE JOB, BUT DONE BY BULGARIANS!”
Politics is the basics of economics; it is also its concentrated image. Negotiation skills are fundamental for politics; PR is the basics of negotiations. Whenever there is a discussion of important issues, all opinions matter- starting from the opinion of the smallest to the biggest.
Ilya Ehrenburg is considered the father of PR. He was a Russian Jew, who turned the course of the Second world war by altering the methods of propaganda(I will tell you about that some other time). Now, I would like to tell you another true story:
“ A very famous car manufacturing company – a make of cars with good reputation- had a shortage of money. It happens to everyone, well almost everyone. They knew a lot about PR and managed to gather the opinion of all employees about how should money be saved?
One of the night guards presented the most valuable suggestion. He was wondering why the lights were on all night long, every night, even though the production unit was equipped with automated and robotized lines. The light expenses were at the amount of 6- digit numbers; this money saving was actually of greatest contribution for the company to overcome the financial crisis!!!”
For some days I have been reading and listening to some materials, and they reminded me of the above mentioned story. Without the pretence to possess some authorship skills or qualifications, I decided to let the newspaper readers know something about taxes, insurances etc.
Generally, the basic regulations ruling about the Bulgarian citizens self-provision of supplementary pensions, are true, topical and correct. However, they can be determined as one-sided, insufficient and incomplete for the following reasons:
1. The current laws, stipulating t self-insurance with supplementary pensions, are one-sided, and hence practically less effective, as they do not contain the interest and benefit of the state when they are implemented in the financial system. Experience of the recent years shows that the rights and incentives, regulated by law, are partially sufficed, or even hesitatingly, in the last updating of the legal basis. The state financial industry is being developed on this basis. When these rights and financial incentives are to be used, they are just invalidated, distorted or even made senseless by some administrative acts, other peoples’ moves or the moves of other authorities, that deal with budget revenues. From the perspective of law enforcement, such a coincidence should not be possible, but practice shows another reality. Most often this leads to a stalemate in the efforts to increase the depth of insurance penetration are partially or completely blocked through delay and “unanswering” of major questions answers to important questions about the constantly occurring cases. There is a theoretical possibility that those who administer this process experience a positive change of attitude towards the matter. Unfortunately, this probably takes too much time.
2. Legal provisions relating to the insurance process are incomplete. Practically there are no considerations and statements about the life insurance significance, that can be found in the so topical interpretations of the “three-sided insurance” (1- social insurance; 2- additional compulsory pension insurance; 3- additional voluntary pension insurance). There are no arguments for the provision of additional pension. At the same time, the laws contain suggestions for tax incentives not only for the additional insurance, but the premiums of life insurance.
I think that the comment on some aspects of life insurance, can lead to conclusions and effective proposals to the legislature, which can satisfy both sides simultaneously - the state and its financial policy and practice, on the one hand, and those seeking additional pension, on the other. The mutual interest can be of great significance to the public development and the increase of life standards in Republic of Bulgaria. It may seem strange, but the reason for the stalemate is etymological to some extent!
In countries with solved pension problems, there is only one term for pension insurance and long-term life insurance, saving a specified amount of money payable at the end of the insurance. For example, Germany, Austria etc.
In Republic of Bulgaria, life insurance means the coverage of a wide range of risks, specified in details in Unit I, Appendix ¹ 1 of the Insurance Code (IC). There is only one risk attributed to the coverage and provision of additional pension; it is specified in ², p. 1 of the Appendix and is even just a part of the paragraph in question. In order to make correct and precise conclusions, it must be admitted that amongst the risks of Unit ², p. 1 of the Appendix, all short term insurances and non-saving risks must be excluded, except the risk “death”, covered in the so called risk life insurances ( without the element of savings), regardless of their duration. The aim of this is to draw the attention to life insurances, that provide insurance savings and rent-pension.
The present amendment of art. 19, p. 1 and p. 2 regulates up to 10 % reduction of the tax base for voluntary pension insurance and up 10% reduction of the tax base of income taxation of personal payment for:
§ voluntary health insurance;
§ premiums on Life insurance.
It’ s a fact that health insurance and life insurances have one and the same tax incentive at the rate of up to 10 % of the tax base, on the one hand, and – on the other-term “life insurance” includes a number of risks which have nothing to do with the insurance savings, or these risks are coverable at the expense of the savings element when they are calculated within one unitary premium.
These conclusions should generate the first suggestion to the legislature, since the 10 % unity of the tax incentive premiums on life insurances and the voluntary health insurance, is not correct; it’s unfair and is not resourceful for the effects of insurance savings. This appears to be is of great, two-sided( for the state and those who get additional pensions) fundamental significance. I think it’s necessary to make a simple calculation and comparison of the amount of the fiscal relief payments of pension insurance, insurance for pension, insurance for sickness, disability etc. In the case of fiscal relief, four different events should be tax incentive. They can be put in two groups:
Group one:
§ savings life insurance with a pension clause;
§ pension insurance;
Group two:
§ life insurances without pension clause or savings element;
§ health insurance;
With regard to the suggested fiscal relief, the conclusion must be drawn that the events giving additional pension should have equal incentives for both social insurances and insurances.
The events of payments in times of sickness, medical treatment, disability etc, which are the short term life insurances, as well as the health insurance are about 5-10 lower price, compared to the pension insurance. If we take into account the present tax base of 10 % reduction of pension insurance, the rate of fiscal relief for the second group of events- short term life insurances and health insurance- can be 2 % of the individual income.
To those who had the patience to read my article up to now, I will propose a draft of amendment of art. 19 from the Law of Individual income tax:
Art. 19, p. 1. The sum of annual tax bases is reduced with the individual payments during the year on:
p.1. long term, more than 3 years, life insurances, which contain, in the agents’ calculations, savings element and rent clause for payment of the insurance sum under the general conditions of the insurance, which should be at the total amount of 20 % of the monthly income. *
p.2. additional pension insurance at the total rate of 20 % of the monthly income.
p.3. risk life insurances, which do not contain, in the agents’ premium calculations, savings element. This should be 2% of the monthly income.
p.4. additional health insurance, 2 % of the monthly income.
par. 2 Taxable income accrued during the month of employment is reduced by the monthly individual payments made through the employer, on:
p.1. long term, more than 3 years, life insurances, which contain, in the agents’ calculations, savings element and rent clause for payment of the insurance sum under the general conditions of the insurance, which should be at the total amount of 20 % of the monthly income. *
p.2. additional pension insurance at the total rate of 20 % of the monthly income.
p.3. risk life insurances, which do not contain, in the agents’ premium calculations, savings element. This should be 2% of the monthly income .
p.4. additional health insurance, 2 % of the monthly income.
par. 3........................... (the present text)
par. 4........................... (present text)
par.5. (new) The employer is obliged to bank transfer the contribution sums of the insured person, to the insurer. ***
* I think that those tax incentives from the present amendment of art. 19 – of 10% - are the minimum. According to the average age of population in Bulgaria, they do not provide enough accumulation of money necessary for decent pensions. The rate of 10 % is enough for those who are at the start of their employment. The actual amount of tax incentive, in my opinion, is up to 22 % of individual income. They should get a supplementary pension through additional pension insurance and through social insurance.
** the creation of par 5 in art. 19 from the Law of individuals income tax is a necessity since there are many cases in which employers ( especially those from the so called “grey economy”) refuse to pay for their employees contributions, and thus, they hinder the employees’ rights of tax relief.
The realization of the suggested amendment of art. 19 from the Law of individuals income tax, would remove the established incompleteness of the legal framework .
Further on I would like to draw your attention the one-sided legal clauses, as they have been defined as such, and to the genesis of the so-qualified one-sided legal regulation.
Social insurance and long term life insurance are different in their collection bases. They seek one and the same result, however the collection bases of insurers are much more flexible than those of employment social insurance. I belief this flexibility encourages the two-side interest, which have been mentioned earlier.
The insurers work under the principle of the defined insurance contribution. This means that it’s legal to have a minimum percentage of the contribution. This sum should be invested according to the regulated scheme. In the process of their investments, the insurers are trying to get the highest possible income. This is advertised and insured persons from other companies are being attracted. In some countries, as a result, up to 80 % of the insured people change their insurers in one year. Such countries are Spain, Mexico, Chile, etc. in order to attract new insured persons, by taking them form the completion companies, aiming at high incomes, the pension funds are often involved in risk financial operations and investments, implicitly or explicitly. As a result, they are really sensitive to the administrative limitations of high income investment opportunities. This sensitivity does not let them be the appropriate instrument, in the hands of the state budget, for the solution of other factors, which are of financial significance; such factors are current account deficit, inflation, domestic debt . An appropriate instrument to solve the above discussed state issues are the life insurers in long term life insurances with savings element and rent clauses.
In the collective bases, the insurers follow the principle of “defined”( predetermined) pension. In other words this can be defined as using defined technical interest in the collective bases. This interest has been limited from ”above” in the agent’s bases, by the supervising authority. The purpose of these limitations is that insurers are unable to compete, by predetermining high amounts of insurance sums and rents, which may endanger their won financial stability.
The insurance savings can always guarantee the insured persons a higher level of pensions. Of course this should be done with a precise calculation of the death rate with the insured persons. For survivors of the insurance set, death rate mortality may have a beneficial impact, depending on the chosen actuarial combination!
The insurers and the social insurers, in their internal estimates, rely on interest factor shown in the course of time; it accompanied their investments and their main concern is “ whether the subjective actions of the sets will allow its occurrence?”(I mean the long term permanence of the process). Considering the risk “death” in the long term life insurances, the insurers are allowed to sanction the persons who give up the insurance set earlier. It is believed that they think of their own health condition to be “good” and they “put at risk” the rest of the set. Thus, the insurers unlike the social insurers, are more effective in the management of the insurance sets in favour of those who keep on being insured according to the conditions of the insurance contracts. They are nor so sensitive towards the profitability of the investments in the technical reserves coverage.
The abovementioned opportunities for flexible reactions made by the insurers, give the chance to solve the pension problems in Republic of Bulgaria. The law has the capability to offer significant financial resources to the state- which is expected to synchronize the interests:
The limitation of the technical interest of the Bulgarian insurers is at the rate of no more than 3,5% year over year (ÍÐÌÎÒÇÐ). In fact this means that if one insurer manages the equivalent assets from his technical reserves with annual income of 3,5%, then the calculations will be accurateòî; if the insurer has established his collective bases in technical interest rate lower than the maximum and achieve profitability of 3.5%, the insurer will receive surplus funds to cover the technical reserves for the future. If the Law of individuals income tax is changed in such a way that the savings insurances of 15 years and more are not taxable in the end, and if at the beginning one uses a fiscal relief, then we could expect to have a sharp rise in the long term insurance. This may happen out of pure commercial considerations and most probably it will be persistently advertised by the very insurers in order to have profitable savings!
Any concerns that the "boom" in the long-term insurance, which occurred because of the interest and dividends that insurers charge, plus the premium calculated ceded tax that would hurt the state (?!), can easily be compensated by a change in the IC . This change regulates that 50 % of the premium (mathematical) reserves of the income tax relieved insurances, be invested in government securities, which may have an annual profitability not more than 3.5%. This means that the state will have a lot of money for a long period of time- 15 years and more- the desired profitability is not more than 3,5 %. For the practical realization of the above discussed process I suggest the following changes of law:
1. IN THE LAW OF INDIVIDUALS INCOME TAX NEW AMMENDMENT OF:
ART.. 13, par. 1., p. 14. (two more points with this text:)
p.14, subsection 1. insurance benefits when an insurance event has occurred of Section II, Annex 1 to IC.
p. 14, subsection 2. Savings life insurances with pension clause and a validity no less than 3 years- insurance sums payable in the event of death or expiry of validity.
Art. 38, par. 8, p. 1. Redemption or refund of insurance premiums of the life insured individuals.
Art. 46, par. 2. In cases of life insurance redemptions or refund of the insurance premiums to the insured, before the end of the 3-year period- the tax pursuant to art. 38, par. 8 is at the rate of 7 %.
2. IN THE IC I SUGGEST THE SUFFICIENT AMMENDMENT OF ART. 74, PAR. 1, P.3:
Art. 74, par. 1, p. 3. Unlimited assets pursuant to art. 73, par. 1, p. 2, but not less than 50% of the mathematical reserve covering the savings life insurances, whose premiums have tax incentives used by the insured person under the law of individuals income tax or the employer under law on corporate income tax.
If some calculations are made, it would be obvious that it is about a significant financial resource, which will be granted monthly to the state with a future payment obligation after 15 years, with acceptable interest levels. The 50 % of the technical reserves of insurers, which have not been invested in government securities, can be of use or be invested in cases of another profitability, according to their considerations. In order to have some pondering, I suggest the following calculation:
“Assuming that the gross amount of the "Salary" fund in the Republic of Bulgaria, serving as a tax base for imposing of the income tax amounted to 1.5 bln BGN/ month and we add the incomes of all sole traders, as well as the amounts of long-term insurance payable by employers (under the law on corporate income tax) and the distributed profits among individuals, partners in companies - profitable under the law on corporate income tax, it appears that the tax base on which tax relief would spread . The tax base is at the amount of about 3 billion BGN/ month; the insurances payable by the employer help in a separate way for the calculation of reserves, which will be invested in government securities. The amount liable to tax incentives, in this case, would be around 300 million. BGN / month in the current wording of Art. 19 of PITA. If we accept the suggested amendment of art. 73 from IC, it can be assumed that on average, every year the state will be proposed investments in long term and low interest securities, amounts of more than 1 500 000 000 BGN. This sum can be changed( increased) if the insurers are obliged to invest I government securities up to 70% of their technical reserves( a reasonable limit).
We should into account the interrelationship that the increase of incomes will lead to increase in the technical reserve of insurers, which will increase the average annual sum of investments in long term government securities. It is apparent that the proposed changes "will no longer circulate" amounts which will be approximately 2 billion BGN in a the near future annual plan. This enterprise will provide enough money for"old age" and will have disinflationary pressures on the financial system of the country.”
In the course of calculation one should not ignore the fact that after 15 years the future obligations for the payment of amounts accumulated by investment in government securities will be rent-annuity, i.e. the liquidity of assets will occur gradually for a period of no less than 20 years more, if there is a continual ”fresh” flow of newly insured persons.
In conclusion, I think that the recent considerations in the media that due to the implementation of 10 % flat tax on incomes tax incentives on personal life insurance payments and pension insurance -should be banned, are absolutely inaccurate and unfair:
1. life insurances and the pension insurances are the reflection of the compulsory social insurance payments in the NII and NHIF, over the private business area. It is extremely unfair for the compulsory social insurance payments in the NII and NHIF, to be income non-taxable, while the voluntary additional insurance payments are income taxable.
2. the maximum amount of insurance threshold in the NII has always been definite and fixed, i.e. no one has the right to additional insurances in NII, even if they want to. For this reason, the gross nominal amount of payments in NII and NHIF must be equal at least to the voluntary payments of long term insurance or/and additional insurance, which are income tax relieved. If we take into account that at present the compulsory social insurance payments( at the expense of employers and employees) are at the amount of about 30 % of the gross salary of the insured person – the gross incentives of pension insurance plus pension and health insurance are just 20 %, then it is fair to expect that there will be an increase in the tax incentive payments, not the other way round(!!!) regardless of the applied rate of income tax.
EPILOGUE
DEAR LEADERS AND LAWMAKERS ,
The mastery in politics, diplomacy and their derivatives, which we fashionably called PR, relies on the peoples’ feeling that you are standing beside them, not against them. They should feel that whenever it is needed, you are standing behind them, i.e. you are there to support and back them up, and you are not behind them for another reason!
St. John of Rila bequeathed– “ those who want to stand superior and govern the others, should be their servant!”
Boris Georgiev, chairman of SiVZK
