I recently relocated from Kraków, Poland, to Sofia, Bulgaria. Kraków was a charming town, but Sofia has more business opportunities to offer. Partly the result of Bulgaria’s low tax regime, there is a lively startup scene in Sofia. Also Bulgaria has many well-educated programmers and other IT specialists, making it an attractive base for internet businesses. Being in high demand, the IT guys can live like kings at the low cost of living, while still providing a bargain to their foreign clients or employers.
If you’re a (digital) nomad and can work from anywhere, it makes sense to think about the tax implications of your home base. I’m not talking ‘Panama Papers’ and such schemes. Rather, I think that taxes are just part of the cost of living in a certain place. (And just like with other expenses, it varies from country to country how much value you get for that cost.) It’s easy though to overlook the hidden costs that come with the tax regime of a country.
Bureaucracy in BulgariaFor the past weeks I’ve mostly been dealing with the standard items of moving to a new country: setting up my business, getting an appartment, and dealing with various government requirements. In the process I observed that Bulgaria is incredibly bureaucratic, compared to my home country (the Netherlands). Many things have to be done in person, require waiting in line, dealing with an official who is less than helpful, and going from one office to another to get the necessary stamps and signatures. I spent a day going around town with my accountant just to get all the required documents, stamps, and signatures to set up my company.
When I discussed the local tax accounting practices with him, I was appalled to learn how rigid they are. Invoices need to conform to very strict standards and be filed within five days of delivering a service. Claiming back VAT isn’t a near-automatic part of filing tax returns, but needs to be done separately a few times per year and inevitably results in a tax audit. Original contracts have to be produced for every invoice to be legitimate. And every document needs to be translated into Bulgarian—a language that uses the Cyrillic script—in order to be valid.
All of these bureaucratic procedures have a number of effects. First of all, they create jobs. Without them there would be little need for the armies of tax inspectors, accountants, notaries, legal translators, and other workers that service either the bureaucracy or the companies that need to deal with them. It’s the same way in which America’s overly litigious society creates jobs for an absurd number of lawyers and their staffs.
For companies and individuals–especially those not familiar with local practices–this is annoying. But it’s not necessarily bad for the country. Bureaucracy is one way to redistribute wealth from where it’s created to the wider population, by creating a plethora of ultimately useless but paid jobs. It’s arguably better to have people work pointless jobs than to have them be unemployed and collect benefits.
However, this also removes the opportunity or incentive for them to do something more fruitful with their lives. Having people perform meaningless paid tasks only makes sense in an underdeveloped economy, where there just isn’t enough economic activity for the size of the population. And there is a chicken-and-the-egg-problem here. If people weren’t occupied moving paper from one window to another, they might do something creative that would add to the economic potential of a country.
The cost of doing business
Aside from job creation, an unnecessary amount of bureaucracy also affects companies, both foreign and domestic. I discussed with my accountant the amount of work he would have to do on my company, and it amounted to about three times as much as it would have taken for the same company in Holland. The rigid rules for tax administration also result in extra costs: either the non-tax-deductibility of expenses, or the need for additional legal advice, or the fines imposed by the revenue service. In total I estimate that I will pay around 4-5% of my annual earnings on ‘needless hassle’.
Now in Bulgaria that is not too bad. Its 10% flat-rate corporate and personal income tax is one of the lowest in Europe. Add four to five percentage points to that, and it’s still a relative bargain. But instead of this money going to various bureaucrats and consultants, the country could have charged a higher tax rate instead, if it were more efficient. That money could have been spent directly on things that make its citizens’ lives better rather than worse: education, healthcare, and infrastructure (all of which are lacking in Bulgaria). Those expenditures, too, would create jobs.
For domestic businesses the outcome is arguably worse. Foreign companies can readily afford the costs of dealing with bureaucracy from the savings they make on taxes in their home countries. Local businesses are less competitive because of the extra costs of complying with the manifold Kafkaesque procedures. I talked to a local entrepreneur who had been forced to close down the gym he was running, because it was too expensive to deal with the VAT administration at the prices his customers could afford. Curiously, I noticed the lack of any gym in the neighbourhood where I’m staying.
Many Northern-European countries have succeeded in increasing the efficiency of their governments and in reducing the hassle of doing business. This is (a small) part of the explanation of how they can afford their expensive welfare states. Some developing countries are trying to attract businesses with low wages or favourable tax regimes. But they overlook how much more competitive they could be by simply reducing bureaucracy. As a (digital) nomad, I hope you won’t overlook it when choosing a place to move to.