The proposal for a 33% tax on the so-called excess profits in 2027 and the plans to almost double the maximum value of food vouchers pose new questions for business and consumers. According to the trade sector, such measures can discourage investment, increase companies' costs and ultimately put pressure on prices. Nikolay Valkanov, executive director of the Association for Modern Trade (SMT), spoke to FACT.
- Mr. Valkanov, the Ministry of Finance is proposing a 33% tax on the so-called excess profit of retail chains, banks, telecoms and other sectors. You define this idea as “absolute nonsense”. Where do you think is the most significant problem in the way the state defines what excess profit is?
- The main problem is that two numbers are compared without looking at what is behind them. This creates a risk that some companies will be punished for efficiency and growth, while others will be treated more favorably solely because of the peculiarities of the selected base period or because of a different business structure. Specifically in our sector, I will give you an example – a company may not have increased its profit margin (let it be 3% of revenue, for example), but may have expanded its store network, generating a higher financial result through expansion, but it will be “punished” with the extraordinary tax, while another business model – for example, affiliated companies, trade alliances or simply chains with fewer than five locations that register a higher profit margin compared to the reference period (for example, from 3% to 5%) should not be taxed, because the formula excludes them a priori.
And this is nonsense, firstly because the profit margin in food retail has been falling in recent years and secondly because with all the restrictions on free pricing that have been imposed recently (the so-called “justified” increase, for example) you not only cannot generate excess profit, but it will be increasingly difficult for you to cover your costs.
- The Ministry proposes to take the average profit for the period 2020-2025, increased by 20%, as a basis. You give an example of a company that has increased its stores from 100 to 150 and has increased its total profit accordingly, without increasing the profit from a single store. Why do you think this methodology penalizes investment and job creation?
- Imagine a company that increases its stores from 100 to 150, hires additional employees, invests in logistics and builds new infrastructure, but maintains the same profit per store. Its total profit increases by 50%, without this meaning that it has realized an extraordinary return on its existing business. If the tax compares the total profit with a historical base, it can tax the result of the expansion. This means that the more you invest and create jobs, the greater your additional tax expense can become. Economically sound policy should encourage business expansion and productivity, and not create an incentive for companies to postpone their investments.
- The government expects additional revenue for the budget from this measure. What real revenue can be collected from the trade sector and is it sufficient to justify such a change in taxation in your opinion?
- I would not commit to an exact number, but for retail we are talking about several million euros, which, against the background of the projected deficit, would fill the hole in the budget of approx. 0.04-0.05%. Therefore, the measure seems more image-oriented, punitive, but its revenue effect is negligible. Moreover, the most affected will be a company that has been most active in expanding its store network. The remaining market players may not be affected at all, which further distorts the business environment.
- You claim that the costs that merchants cannot bear can be "sooner or later passed on further down the chain". Does this mean that the consumer may ultimately pay part of the cost of the new tax through higher prices?
- Theoretically - yes, there is such a risk. But if the "punished" is only one or two, this will only worsen their market positions, as their competitors will continue to push prices down.
- Let's get into the topic of food vouchers specifically. Why do you think that processing a voucher is more expensive for the merchant than paying in cash or with a regular bank card. How exactly is this price formed and who receives the fees along the chain?
- When paying in cash, there is no fee for processing the transaction itself to a payment operator. Although there are costs - for cash availability, collection and security, they are relatively low. With a regular card payment, the costs depend on the contract with the bank or payment operator, the type of card and the terms of service. With food vouchers, however, there is a separate organizational and contractual chain - employer, voucher operator and merchant, and depending on the model, fees may arise for acceptance, processing and settlement. It is these conditions that burden the cost and make electronic food vouchers the most expensive payment instrument on the market from the merchant's point of view. Since the state creates this business by setting a quota, which represents a discount on the employee's tax and social security contributions, it has the right to limit settlement fees according to the ZCPO. However, it does not do so.
- What are the real costs for a merchant when paying with a food voucher compared to paying with a bank card and in cash? And why has the system not become cheaper after the digitalization of vouchers, and in your opinion is even more expensive?
- The difference in the best case is 1.5 euros for every 100 purchases, but it could be higher.
- You warn that increasing the maximum value of food vouchers from 102 to 200 euros could automatically lead to higher prices. What is the economic relationship between the higher value of the voucher, the cost to the retailer and the final price of food products?
- Increasing the maximum value of vouchers almost twice means that nearly 15% of the retail market will go through vouchers, respectively, will collect higher payment fees. These costs could at best only be partially borne by retailers, who are already sufficiently pressured by administrative price regulation.
- Currently, the state is simultaneously seeking more revenue by taxing the so-called excess profit and proposing a significant increase in the size of food vouchers. How does the combination of these two measures affect large retail chains and prices for consumers?
- Both measures can simultaneously create pressure on the profitability and operating costs of retail companies. On the one hand, additional taxation can reduce funds for investment and development; on the other hand, if the higher value of the vouchers increases the costs of servicing payments. The effect can easily be passed on to prices - such a possibility, however unpleasant, is likely. If the goal is to support the purchasing power of workers, it must be ensured that the mechanism for this does not create additional costs that subsequently undermine the benefit for consumers.
- What do you think should be the model in which the state simultaneously collects the necessary revenues for the budget, does not discourage investment in the commercial sector and ensures that any changes to food vouchers will not ultimately be paid by the consumer?
- First, budget revenues should be provided through a predictable and generally valid tax policy, and not through an arbitrary determination of “excess profit”. It is worth noting here that large international companies are already taxed at the higher 15% rate under the global corporate tax rules. If the state believes that there is a reason for extraordinary taxation, it must present a clear economic justification, an impact assessment and evidence of the specific problem it solves. However, we should not forget that the budget has both a revenue and an expenditure part. Additional efforts should also be made on the expenditure part.
Secondly, with food vouchers, transparency of fees, comparison of costs for different payment instruments and effective competition between operators are necessary. The state has the mechanisms for controlling this business that it has created, but it does not want to use them. The state could explore an option in which the vouchers could become a mechanism solely for social assistance. Currently, they are not such a tool, as they are not targeted.
Third, any change must be assessed in advance in terms of investment, employment, competition and final prices, and the results must be monitored after its introduction. Our position is that social goals and budgetary stability are important, but they must be achieved with economically justified instruments that do not create hidden costs for consumers and do not punish companies for investing and developing.
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Nikolay Valkanov is the Executive Director of the Association for Modern Trade (AMT), which includes the leading retail companies in Bulgaria.
He graduated with a degree in "European Studies" from Sofia University "St. Kliment Ohridski" with profiles in "Economics" and "Law". He has completed training at the
Agribusiness Center of California State University within the framework of the „Cochran“ program.