War on Cash

The planned legislative changes on cash payment limits are part of the measures in the war on terrorism and the fight against the grey sector and tax evasion.

War on Cash is not a name of Hollywood super production. It is a slogan used by the European press to describe the European Commission’s experience abruptly limiting cash payments in the EU. The goal is by the end of 2018 through legislative changes each country to reduce seriously the limits for cash payments. The planned changes are part of the measures in the war on terrorism and the fight against the grey sector and tax evasion.

Trend in the EU

Pioneers in the effort to restrict cash payments are Sweden and Denmark. It is expected Sweden to be the first to use only non-cash payments in 10 years. In the end of 2016 Spain reduced the cash payment limits from € 2,500 to € 1,000. France has introduced a limit of up to € 1,000. Greece is the most resolute with a limit of up to € 500.

Not all Member States welcome the limitation of cash payments. In Germany recent attempts by the government to set an upper limit of € 5,000 triggered a fierce public reaction. The same happened in Austria.

Experience in Bulgaria

For the first time the limitation of cash payments in Bulgaria has been introduced with law in February 2011. The law set an upper threshold of BGN 15,000. Since then the trend is towards reduction of the limit and today cash payments can be made up to BGN 10,000 without a penalty.

The government is now proposing a new cut in limits in line with the EU short-term program to limit cash payments by the end of 2018. The proposed changes envisage that from 1st August to 31st December 2017 the cashout limit to be BGN 5,000. As of 1st January 2018 to be further reduced to BGN 3,000, and as of 1st January 2019 the maximum cash payment to be in the amount of BGN 1,000.

Sanction for non-compliance

You want to take the chances of an upcoming exquisite reception but you risk a family war if you pay with a card and your husband understands the real price of your dress and shoes. Take a deep breath and head to the boutique. For the outfit you pay in cash BGN 4,000 with a valid restriction of BGN 1,000. The boutique knows about the restriction but does not want to lose you as a client and despite the risk of a sanction accepts cash payment. If the National Revenue Agency establishes this transaction you will need to pay a fine of 25% of the amount of the payment, i.e. BGN 1,000. The boutique being a legal entity shall be sanctioned with a penalty of 50% of the amount, i.e. BGN 2,000. In the case of a repeated violation the fine for individuals is 50% of the transaction value and the property sanction for legal entities shall be 100%.

Bypassing the limit by means of several partial cash payments is not an option since the total value of the transaction it determinative. For example, if you are renting an apartment for a period of 1 year with a monthly rent of BGN 600 each of the 12 monthly installments does not pass the limit, but the interest of the transaction is formed by their aggregate amount for the whole period. Thus, each separate installment need to be done by bank transfer.

Pros and Cons

The fight against the grey sector, the evasion of income, the non-payment of wages and the non-payment of health insurance contributions are part of the motives of the legislators. On a pan-European basis the expected positive effects are curbing the financing of terrorism, reducing the cost of printing banknotes, etc.

A limit of BGN 1,000 for cash transactions will “enlighten” the trade turnover. Or at least that is the idea on paper. However, we could only guess what would actually be the behavior of the participants. Payment in cash in case of non-compliance with the limit does not vitiate the validity of the transaction itself. The violation leads to imposition of a sanction on the participants but only if the latter has been established by the tax authority. If objective control is not ensured the restriction will be more like a “Straw Scarecrow” and will not have the expected positive effect.

The proposed changes are expected to help with the fight against income hindering. Businesses obliged to pay over BGN 1,000 by bank transfer will have to prove the origin of their income. You have paid a tour operator for a trip to Cuba – it costs BGN 5,000 so the amount is ordered by bank transfer. In case of a check the tax authority will analyze whether you can afford this trip with the income you have declared taking into account the cost of a home loan, car lease, children’s school fees, other excursions and holidays you went to, the average cost of living for a household member, etc.

Among the reasons for the changes is that they will make employers pay regular wages and social security contributions. However, this problem is more about how a company is managed and not whether it gets all its payments by bank transfer. With execution of unprofitable transactions and other methods the company could be drained and again at the end of the month no money could be left for the employees.

The new restrictions will certainly result in loss of our personal freedom and the anonymity that cash payments provide. Our personal lives will be subject to greater monitoring by the state because the National Revenue Agency will know in details how, where and what for we have spent our money.

The introduction of a limit of BGN 1,000 seems to be a very restrictive measure that may not have a serious effect on the grey economy. This restriction is more likely to unnecessarily burden the business sector. It will lose the dynamics of trade turnover. Should you visit the village of Parvenets to buy fruits and vegetables for your store and your bill is over BGN 1,000 you must pay by debit/credit card and the market place needs to provide technical equipment to execute the payment.

Such a small limit is likely to encourage traders to look for alternatives to bypass the rules. It will also be a challenge for the National Revenue Agency which would have to monitor effectively huge number of transactions on a daily basis – an unbearable endeavor. The new restrictions will burden citizens and businesses with additional bank charges for larger number of translations. Cyber-security issues will also be raised more and more often and we need to be aware whether we would be able to face these challenges.

In Bulgaria non-cash payments are still not so popular. Cash payment is part of our national-psychology which requires gradual and smooth introduction of the restrictions. Introducing a BGN 1,000 limit till 1st January 2019 is a drastic and sharp change that can bring business and economic hardship. At the same time, the proposed changes are part of the overall EU strategy to limit cash payments. Bulgaria’s declared political will to enter the Eurozone waiting room requires demonstrating will and determination in the struggle with the grey sector, including implementation of such measures.

The article was published in the 24 Hours Newspaper, issued on 19.06.2017 under the title “War on Cash”.

Author: Teodor Todorov, Attorney-at-law