"Bulgaria's ruling party GERB is preparing legislative amendments, which will make it possible for the government to change direct taxes levied on physical and legal persons only if the nation votes yes in a referendum," Simeon Djankov said from the parliamentary rostrum on Thursday as the MPs started debating a motion for a confidence vote on the overall policy of the center-right government of Boyko Borisov.

The percentage of GDP, which may be used for public expenses, will also be fixed by a law, which is now in the pipeline.

The government also plans legislative changes, which will deal with the amount of the budget deficit and the threshold it should not exceed as a percentage of the gross domestic product, the minister said.

Bulgaria's budget deficit will total BG 2.76 B or 3.9% of gross domestic product at the end of the year, beating the government's target of 4.6%, the minister pointed out, citing preliminary data.

The annual data for the fiscal reserve is also expected to be better than the projections in the revised budget and may well exceed BGN 6 B.

Bulgaria has the lowest personal and corporate income tax in the EU at 10%, which was introduced at the beginning of 2008, replacing the previous system, which combined several different tax rates - between 20 and 24%, depending on income.

Bulgaria also has the lowest social security rates, which coupled with a 10% flat rate, makes it very attractive for physical entities, employers and potential investors.

Bulgaria's Prime Minister Boyko Borisov has denied reports that a hike in tax rates may be looming after the government scrapped its plans for a VAT increase last year, which was hoped to plug a budget gap that has thwarted the new EU member's euro efforts.

At the beginning of 2010 the government chose to keep direct taxes unchanged as it strives to make Bulgaria more competitive in the battle for the shrinking flow of foreign investments. The increase in the indirect taxes – excise duties and VAT - seemed to be less painful.

Prime Minister Boyko Borisov and Finance Minister Simeon Djankov made it clear in April that the prospect of a hike in the value-added tax (VAT) rate, which now stands at 20%, is quite likely in a bid to shore up the budget.

Thanks to the VAT hike, the cabinet expected to collect an additional BGN 540 M of revenues by the end of the year, which would have accounted for one third of the sum, needed to patch up the budget gap.

The government however abandoned the plans for a VAT hike after representatives from all business sectors cautioned that the hike in the value-added tax in Bulgaria should be a last-ditch measure, introduced only together with an overhaul in state expenditure and structural reforms.

Tags: social security rates, income tax, fiscal reserve, budget deficit, Boyko Borisov, Prime Minister, value-added-tax, VAT, Bulgarian, Bulgaria, greece, Romania, Greek, Romanian, Bulgaria, lower taxes, business conditions, IMF, loan, Simeon Djankov, confidence vote