Reading is fun. Especially if the content grabs you. But how about reading the most boring book in the world? Today I will tell you how spending $10 and time to learn something boring saved me millions.
Being an expert in a particular field is not enough to run a successful business. No matter what your business is, you have to take care of accounting and pay taxes. In some cases, just keeping accounting and paying taxes is not sufficient. For example, if it happens that the product or service you are providing is a subject of regulations (construction, food, pharmaceuticals, defense, and many others), the bureaucratic burden may be a nightmare.
Back in 2007, bureaucracy almost killed ICDSoft. We were selected for a tax review by the revenue authorities in Bulgaria, the first one since ICDSoft LTD was registered in 2002. I started the business in 2000 while living in Hong Kong, and although tax law in Hong Kong was way much liberal, I moved the company to Bulgaria upon my return to the country. We were always, and we still are, keeping a comprehensive accounting. Everything is tidy and transparent, so we did not expect a problem with that tax review. But out of the blue, representatives of the revenue authorities said that we should charge our foreign customers (>99% of all our customers) 20% Value Added Tax. They even stated that we HAD TO charge our overseas customers 20% VAT since the first day we were operating. This outcome was entirely unexpected, since VAT is due only for sales inside the country, and this is a practice in all countries that apply VAT. Moreover, they DEMANDED that we must pay these 20% VAT, no matter we had not charged customers. When we asked for a clarification and explanation, they quoted the VAT law of Bulgaria.
The VAT law is a vast book, and it lists (or attempts to list) all possible goods and services. 20% VAT on any good or service is due when our customer is from Bulgaria, and VAT is exempt when we export goods or services to foreign customers, as was our case. Then why do we have to charge our international customers VAT or pay it ourselves? The very last chapter of the Bulgarian VAT law says, “for any goods or services not mentioned by this law, 20% VAT apply, even on exports”. This way, the lawmakers wanted to make sure that in case they forgot to mention specific goods or services, they would get 20% VAT. They are not missing a dime. What was unexpected also was that they did not mention "Web Hosting" in the long list with goods and services, but probably web hosting did not exist as a service at the time they were writing this specific law. So I had to pay several million (1/5th of my five-year revenue), which was even more than the profit I made during these years – and it was an amount I did not have.
Imagine you are running a successful business, everything goes very well for years, you pay your taxes, and one day your government tells you that it was not enough, and they ask you for some extra millions; millions you never earned. I told them that it was a mistake for not having “web hosting” among all these thousands of services listed, and if they still require all that VAT retrospectively, that would simply kill the company. A company that was making a good profit and was paying huge taxes. It is like having a hen laying golden eggs, and they wanted to make a soup out of it. I also told them that we were exporting our services abroad, and we were competing with other foreign companies that do not have to pay such tax. Should we apply these 20% tax to customers in America and Asia, we would not be competitive anymore, and that generally, this whole situation was foolish. The tax department offices responded that they had to apply the law, and nothing could be done. They gave me a week to pay millions of unexpectedly imposed taxes + interest. The news hit me like a hammer. As you may know, Bulgaria is not a rich country, it is the poorest European country, and our economy is far from being competitive. I was proud of establishing a business that brought millions of dollars per year to our weak economy by exporting something one cannot touch. They wanted to kill my business, blindly following some wrongly-established rules.
I did not inform my colleagues as not to panic them - among all, the boss is to create a safe place for the staff. Instead, I went to the nearby bookshop and purchased the VAT law book. I didn't even waste time to walk back to the office, but sat in the park and started reading. The law consisted of just one-page basic rules + 600 pages of goods and services, arranged in groups, i.e.:
Section I: Live animals, animal products.
Section II: Vegetable products.
...
Section XI: Software, Telecommunications: long-distance calls, live broadcast of TV programs, data transfer... Bingo!
I went back to the office and wrote an official letter to the Bulgarian Communications Regulations Commission – a government body dealing with the state sector policy on telecommunications and postal services. I shortly explained what ICDSoft's business is (servers located in Boston, Hong Kong, Sofia, customers located everywhere and using telecommunication channels to manage their websites) and asked them to state their opinion on whether web hosting is a telecommunication service or not. The answer came in two days - and yes, the Bulgarian Communications Regulations Commission noted that "web hosting is a telecommunication service". With that letter in hand, I went to the revenue department building, found the officer assigned to our case, and handed the letter. It took him a minute to read it, then he placed it in the file of ICDSoft, and said: “Okay, I accept their explanation, all looks good, this case is dismissed”. These few words were worth five million dollars.
If you think that keeping accounting and dealing with revenue departments is a tedious job, think again. There is room for creativity everywhere. I hate bureaucracy, but if you want to have your own business, you have no choice but to play their game.
