Rules, Regulations and Transaction Costs in Transition Bulgaria

have increased by 15 to 22% as compared to 1999. This results mainly from the increased tax and social security
burden after the entry into force of the Code of Compulsory Social Security and the increased amount of
minimum monthly salary in the country (See Table 33).
Table 33
Monthly income
in Levs
Health
insurance
premium
6%
Pension
premium
32%
Income
after
deduction of
premiums
Personal
income tax
Net income Total tax
and social
security
burden
Second half of 1999
250 15.00 21.44 213.56 34.53 179.03 28.39%
500 30.00 21.44 448.56 95.63 352.93 29.41%
750 45.00 21.44 683.56 152.83 530.73 29.24%
First half of 2000
250 15.00 80.00 155.00 15.40 139.60 44.16%
500 30.00 160.00 310.00 55.70 254.30 49.14%
750 45.00 240.00 465.00 101.10 363.90 51.48%
Source: Calculations of IME
Under the Code of Compulsory Social Security, as from 1 January 2000, all persons registered as sole
proprietors must mandatory pay social security contributions amounting 32% per month. The income for social
security purposes equals the taxable income declared in the annual tax return but cannot exceed 10 minimum
monthly wages. The increased level of income chargeable for social security purposes results from the type of
pension system in the country. At present, the Bulgarian pension system is of the pay-as-you-go type, i.e. the
contributions paid by today's employees cover the pensions of today's pensioners. The problem stems from the
adverse proportion between employees and pensioners which is 100:90. In order to make 100 employees to be
able to support 90 pensioners, either collection should be improved, or the amount of contributions or of the
chargeable income should be increased. As the National Social Security Institute manages to collect only 75% of
the contributions due, it regards the increase in the chargeable income as the easiest and painless method of fund-
raising. Thus, the tax and social security burden in 2000 has reached the absurd level of 50% per month. This will
naturally drive the sole proprietors to concealing their income and transferring a large portion of their operations
to the grey sector.
III.C Contractual costs (entering into and performance of contracts)
The contractual costs could be attributed to several stages:
1. Costs of preliminary studies of the future partner, unless this is the State;
2. Costs to participate in public tenders under the Law on Public Procurement;
3. Costs to prepare, negotiate and enter into contracts;
4. Costs to ensure contractual performance.
The poll has shown that Bulgarian firms usually do not engage in studying their partner prior to making a contract.
Only 6.7% of the entrepreneurs interviewed sought information about their future partners in the Commercial
Register at the court or at the BULSTAT Registry. This cost them 5 Levs at the minimum and 10 Levs at the
maximum and the information was obtained for a minimum of 1 day and a maximum of 5 days. Preliminary
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