2006 NTE UPDATE FOR BULGARIA

UNCLAS SECTION 01 OF 08 SOFIA 001950

SIPDIS

STATE FOR EB/MTA
USTR FOR GLORIA BLUE
GENEVA FOR USTR

E.O. 12958: N/A
TAGS: ETRD EFIN ECON KIPR BEXP EAGR PGOV BU
SUBJECT: 2006 NTE UPDATE FOR BULGARIA


1. The following is Embassy's input for the 2006 National
Trade Estimate (NTE) report for Bulgaria. The text --
including the ranking of barriers -- has been sent
electronically to USTR and State (EB).

RANKING OF BARRIERS: The following are general range
estimates of what the increase in U.S. exports to Bulgaria
would be if barriers were removed:
--FAS-Sofia estimates losses in potential U.S.
agricultural-related exports at USD 10-15 million
due to the applied trade regime. Tariffs and tariff
rated quotas cause losses of about USD 10 million for
poultry and about USD 5 million for pork products.
--The Association of American Pharmaceutical Companies
in Bulgaria (AAPCB) estimates that if barriers to trade
were eliminated for U.S. pharmaceutical imports,
increased annual imports would be about USD 10-25
million. AAPCB estimates the pharmo-economic analysis
used in composing the positive list could result in an
additional loss for American Pharmaceutical Companies
of USD 15-20 million. Three US companies (Merck, J&J and
Pfizer) estimate that the reduction of the patent life of
their innovative medical products in violation of
international standards would result in a loss of USD 29
million over the next two years;
--The Business Software Alliance (BSA) estimates
losses to U.S. producers of business applications at
USD 16 million for 2004, with a piracy rate of 71 percent;.
--A U.S. information technology (IT) company (Microsoft)
estimates that if the Bulgarian government eliminated
administrative barriers to the sale of its products and
adequately protected IPRs its overall exports to
Bulgaria could increase more than four times or by USD
80-100 million;
--U.S. Recording Industry representatives estimate
that losses from sales in Bulgaria of pirated/smuggled
CDs were USD 6.5 million in 2004;
--An American insurance firm estimates that a lifting
of government procurement barriers for insurance could
generate contracts worth USD 10-25 million (about 25 percent
of the market);
--The Distilled Spirits Council of the United States
(DISCUS) maintains that high tariffs on U.S. distilled
spirits encourage smuggling and counterfeiting (we do
not have an estimate for such losses, but place it
under USD 10 million);

(Note: In general, increased exports if barriers were
removed are hard to quantify. U.S. investments also draw
U.S. exports, so problems with the investment climate spill
over to export potential. The following are some general
matters negatively affecting U.S. exports to Bulgaria:
-- The 2005 constitutional amendment on foreign
individuals' property rights in Bulgaria favors EU over
U.S. investors and puts US citizens at disadvantage;
-- U.S. investors are disadvantaged by not having an
avoidance of double taxation agreement with Bulgaria.

TEXT OF NATIONAL TRADE ESTIMATE SUBMISSION
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Begin Text

BULGARIA

TRADE SUMMARY

((To be provided by USTR))

IMPORT POLICIES


Tariffs
Bulgaria's trade policies are shaped primarily by its World
Trade Organization (WTO) membership and by its status as a
candidate for EU membership. Bulgaria has a preferential
trade agreement with the European Union (EU) under its
Europe Agreement, and free trade agreements with the
European Free Trade Area (EFTA) countries. It also has free
trade agreements with its Central European neighbors
(CEFTA),Turkey, Macedonia, Albania, Serbia and Montenegro,
Bosnia and Herzegovina, Israel and Moldova.

Upon accession to the EU, Bulgaria will be required to
renounce its Europe Agreement and the other free trade
agreements, and to align its tariffs with those of the EU.
US exporters/investors will benefit overall from Bulgaria's
EU accession since Bulgaria will join the EU's trade policy
regime - a single set of trade rules and customs procedures.
US exporters will benefit from lower tariffs as well.
Average most favored nation (MFN) tariff rate, for example,
would come down from its current level of 11.55 percent to
an average of 6.5 percent.

For 2005, Bulgaria's average import tariff is 11.48 percent;
the average level for industrial goods is 8.58 percent and
the average level for agricultural goods is 22.89 percent.
The maximum ad valorem level for agricultural goods, which
is applied on 0.38 percent of tariff positions, is 75
percent. Bulgaria has eliminated all tariffs on industrial
imports from the EU under its association agreement with the
European Union. Industrial exports to Bulgaria from the rest
of the world face tariffs following their approval, expected
in mid-December. (Note: Post will provide information on
Bulgaria's 2006 customs tariffs following their approval,
expected in mid-December.

Bulgaria's agricultural trade regime is characterized by
high MFN tariffs, particularly for red meat and poultry, and
by preferential agreements with the EU and CEFTA. Ad valorem
duties and minimum customs charges of more than 100 percent
serve as incentives for smuggling and fraud. Cargoes are
often improperly identified, and falsely labeled and
declared in an effort to avoid customs charges. The
Bulgarian customs service also uses minimum import prices,
which appear to be applied arbitrarily, to calculate customs
duties, particularly on poultry shipments.

FOREIGN TRADE BARRIERS

Bulgaria provides the EU with preferential tariff rates and
reciprocal duty elimination on numerous agricultural
products, as well as on wine. These preferences are hurting
U.S. agricultural exporters who face higher MFN rates. In
particular, the high import tariffs favor Bulgaria's
inefficient domestic chicken and pig meat industries. Import
tariffs on U.S. chicken are 68 percent, with frozen cut
parts subject to a 74 percent tariff.

The U.S. Government is currently reviewing Bulgaria's
continued eligibility for the U.S. Generalized System of
Preferences (GSP) program in view of the preferential
treatment it affords to the EU. The U.S. has urged the
Bulgarian government to lower MFN tariffs on a range of
items to reduce the tariff differential and its negative
effect on U.S. commerce.

Non-tariff Barriers

In general, customs regulations and policies are reported to
be cumbersome, arbitrary and inconsistent. Problems cited by
U.S. companies include excessive documentation requirements,
slow processing of shipments, and corruption.

Bulgaria uses the single customs administrative document
used by EU members.

STANDARDS, TESTING, LABELING AND CERTIFICATION

The registration processes for pharmaceutical products and
for drug pricing and reimbursement, including the process by
which the National Health Insurance Fund classifies drugs,
are cumbersome and non-transparent. Newer drugs are often
arbitrarily classified with their older, generic versions
for pricing purposes, thereby limiting companies' ability to
recover their research and development costs.

Although the Bulgarian Drug Agency (BDA) has made
progress in bringing the process of registration closer
to the EU requirements, Bulgaria still requires batch
control for each individually imported batch and does not
allow for an inspection of the foreign production site.

Today U.S. and other foreign pharmaceutical companies
consider that Bulgarian pricing and reimbursement decisions
are not based on objective and verifiable criteria as
required by WTO and EU principles. In addition, no appeal
procedures for government pricing and reimbursement
decisions and no timeframes for reimbursement are provided
in the Bulgarian law.

The Bulgarian price approval system hampers the ability
of foreign companies to compete effectively, as the
regulations impose the lowest registered price of the
EU member states and do not allow companies to recover
importation costs. In addition, price regulations
provide for a tacit refusal of reimbursement, which is
against EU legislation. Bulgaria's bureaucratic
reimbursement process requires multiple approvals, lacks
objective criteria, and does not provide for an appeals
process.

Health care providers and pharmaceutical industry
representatives criticize the government's prescription drug
coverage policy for its complicated and lengthy selection
process, inappropriate criteria, inconsistent methodology,
and susceptibility to corruption.

The Bulgarian government's drug supply mechanism constitutes
a major market access barrier to pharmaceutical companies'
exports. Under the new drug legislation, pharmaceutical
companies are required to commit to pay any liquidated
damages in case a distributor fails to supply the right
medicine. Thus, the burden of responsibility for
distributors is being shifted from the government to the
pharmaceutical industry.

GOVERNMENT PROCUREMENT

Bulgaria is an observer but not a signatory to the WTO
Agreement on Government Procurement (GPA). In its accession
to the WTO, Bulgaria committed to accede to the GPA and to
submit an offer by June 1997 and complete negotiations by
December 1997. However, the Bulgarian government did not
initiate the process for GPA accession until 2000, and has
not yet submitted an offer. Upon its accession to the
European Union, Bulgaria will be required to comply with the
GPA.

Although Bulgaria's government procurement legislation
underwent a substantial reform in 2004 to align the system
with WTO and EU rules, bidders still complain that tendering
processes are unclear - and subject to irregularities and
corrupt practices, and court appeals are long and
cumbersome.

Even though the goal of the 2004 Public Procurement Law was
to introduce a more efficient, transparent and accountable
system for public procurement, the business community
considers it deficient in a number of areas. The law
transferred procurement appeals from the administrative to
the civil procedure and introduced an Arbitration Court
under the Ministry of Economy and Energy. This quasi-
arbitration is not popular among businesses, because out-of-
court dispute resolution is new to Bulgaria and because all
bidders have to agree to join the arbitration. However, the
biggest obstacle stems from the fact that an appeal that is
essentially administrative is to be resolved through a civil
procedure.

The Bulgarian government has prepared amendments to the 2004
Public Procurement Law in order to incorporate new European
legislation in the area of public procurement and further
streamline the national procurement process. The law,
however, offers little in the area of court appeals and has
yet to be approved.

The Bulgarian government supported by the US Government
succeeded in energizing the state Public Procurement Agency.
Its management capacity and communication with businesses
and the judiciary has increased significantly over the last
year. However, its capacity to provide methodological
guidance to government and essential non-central government
entities such as hospitals, universities, municipalities,
etc. is not sufficiently developed.

Defense procurement activities are subject to a lack of
transparency and corrupt influences, and fail to comply with
international standards. The purchasing, pricing, and
reimbursement processes for drugs under Bulgaria's national
health system are not transparent. The government can use
the price-approval mechanism to regulate the market for any
product, and bureaucratic barriers can limit patients'
access to new products.

Government procurement practices in the energy sector appear
to disadvantage foreign insurance companies. According to
U.S. industry, procedures for awarding insurance contracts
for companies within the energy sector are not transparent.

INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION

In May 2004, Bulgaria was placed on the Special 301 Watch
List for the first time in five years. The 2005 US
government inter-agency review retained Bulgaria on the
Watch List. Over the past few years, there has been a steady
resurgence of piracy, mainly in the sale of pirated optical
disc media (ODM). Today, the level of open and massive
music piracy and copyright crime on Bulgaria's domestic
market is unacceptably high and enforcement at all levels is
inadequate. Although industry's forensic evidence indicates
that pirate facilities are operating once again in Bulgaria,
the Bulgarian authorities have not adequately recognized or
addressed the possibility of piracy production.
Furthermore, Bulgaria is still widely used for transshipment
of pirate CDs from Ukraine and Russia to the Balkans,
Greece, and Turkey. CD-R piracy has been increasing
significantly, and the local music business in particular is
feeling the brunt of this phenomenon.

Although Bulgarian IPR legislation is generally adequate--it
includes modern patent and copyright laws and criminal
penalties for copyright infringement--industry
representatives believe effective IPR protection requires
improvements in certain pieces of legislation, including the
Penal Code and the Penal Procedure Code.

Parliament approved in September 2005 the long awaited Law
on Administrative Control over the Manufacture and
Distribution of ODM, which now requires SID codes on blank
optical discs (OD) produced in Bulgaria and strengthens the
import/export regime for raw materials and equipment
involved in the ODM production. However, the new law does
not allow the right holders' organizations and their
representatives to participate in the inspections and
excludes from the registration regime goods in transit,
which sets the stage to transform Bulgaria into a transit
and dispatch center of pirate production from manufacturing
countries (e.g. Russia., Ukraine,) to other territories.

The new ODM law further weakens enforcement by restricting
the authorities of state officials. State control bodies
are not allowed to require inspection of the manufacturing
facilities in operation, to seize copies of documents
(contracts, raw material supply contracts, etc.),to
require and seize samples of the inspected carriers and to
seize raw material, manufacturing equipment, matrices,
samples or ready product and documentations with the purpose
of establishing facts and circumstances related to the
inspection.

Yet another major drawback of the new ODM law is that
persons who furnish forged documents or documents with false
content are not being held liable.

The ODM law also introduces several requirements that have
the potential to create serious trade barriers, according to
industry representatives. The law requires that all ODs
containing sound recordings or films and other audiovisual
works imported to Bulgaria have a SID code which is
practically impossible as in developed countries SID codes
are not required.

Parliament is currently debating amendments to the 1993 Law
on Copyrights and Related Rights, which will align
Bulgaria's copyright legislation with the European
requirements. In particular, the proposed amendments will
implement two directives of the EU in the area of
copyrights: Directive 2001/84/EC of the European Parliament
and of the Council on the resale right for the benefit of
the author of an original work of art; and Directive
2004/48/EC of the European Parliament and of the Council on
the enforcement of intellectual property right. Also, the
amendments will establish the mechanism regulating the
administration of the newly-established database and
copyright information sharing system sponsored by the EU.

Despite some successes by individual agencies, enforcement
greatly suffers because of the lack of overall coordination
between agencies and inadequate resources and legal
loopholes. The government lacks sufficient institutional
capacity and will to effectively address major enforcement
problems, especially in combating and prosecuting organized
crime groups.

Software piracy continues to be a serious problem, although
industry legalization/enforcement campaigns have made
noticeable gains against unauthorized software. Local
software industry representatives report that, along with
good cooperation from Bulgarian law enforcement authorities,
the piracy rate has been contained to 71 percent of the
products in the market in 2004. The amount of lost revenues
due to piracy, however, has increased by 27 percent, from
USD 26 million in 2003 to USD 33 million in 2004. The lack
of actual prosecutions and court decisions has kept the
piracy rate at a high level. Between October 2004-October
2005 only five criminal and one civil judgment have been
ruled by the Bulgarian judiciary, but the verdicts against
the offenders are inadequate and non-deterrent.
Distribution of unlicensed software on computers continues
and it is becoming increasingly difficult to effectively
address this problem as computer resellers install
unlicensed software at the customers' premises. Also, the
domestic market offers enormous amounts of illegal CD-ROMs
containing a full range of different pirated software.
Internet distribution of illegal software is also a growing
problem.

The US government has formulated an action plan, which will
assist in focusing attention on immediate and effective
implementation of the new Optical Disk Media (ODM) Law and
the amended Copyrights and Related Rights legislation,
enforcement actions and ministerial-level coordination,
designing training programs and improving efforts to address
counterfeiting of U.S. spirits.

The Bulgarian government included in its 2003 drug law a
provision to provide protection for confidential test data
submitted for marketing approval by pharmaceutical products
companies. The law, however, links data protection to a
valid patent. Bulgaria joined the European Patent Convention
on July 1, 2002 and has obtained observer status in the
Administrative Council of the European Patent Organization.

The Association of American Pharmaceutical Companies
in Bulgaria (AAPCB) has told us that the Bulgarian
government's practice of shortening the patent life of
innovative medical products in violations of the Bulgarian
patent legislation and the TRIPS Agreement could constitute
a major barrier for their exports to Bulgaria and
investments. The industry has reported that in several
cases generic copies of the original drugs have been granted
marketing authorizations, registered retail price and
applied/received access to reimbursement prior to expiration
of the patent of the original pharmaceutical product.

Industry has told us that the Bulgarian government's
inability to protect trademarks is a significant barrier to
investment and legitimate domestic economic development.
U.S. businesses have noted significant difficulties in
obtaining relief against trademark infringement. Even if
courts understand the law and issue orders, the entities
charged with enforcement often cannot be relied upon to
carry out the court judgment. Under Bulgarian law, legal
entities cannot be held criminally liable. Therefore, the
criminal penalties for copyright infringement and willful
trademark infringement are limited.

There is evidence of significant counterfeit production in
Bulgaria and illegal import of counterfeited U.S. brand
distilled alcoholic spirits. Some spirits companies have
estimated that almost 10 percent of the products sold in the
Bulgarian market may be counterfeit.

SERVICES BARRIERS

As in other EU candidate countries, Bulgaria's 1998 Radio
and Television Law requires a "predominant portion" of
certain programming to be drawn from European-produced works
and sets quotas for Bulgarian works within that portion.
This requirement, however, is only to be applied to the
extent "practicable." Foreign broadcasters transmitting into
Bulgaria must have a local representative, and broadcasters
are prohibited from entering into barter agreements with
television program suppliers.

INVESTMENT BARRIERS

The U.S.-Bulgaria Bilateral Investment Treaty (BIT) took
effect in 1994 and provides guarantees for U.S. investors of
both national and MFN treatment, the right to make financial
transfers freely and without delay, international law
standards for expropriation and compensation, and access to
binding international arbitration. In 2003, to address
several actual and potential incompatibilities between BIT
obligations and EU law, the United States exchanged
interpretive notes with the governments of Bulgaria and
seven other European countries expected to join the EU over
the next few years. The United States and the prospective EU
Member States also agreed to make several narrow amendments
to the texts of the relevant BITs. Both the United States
and Bulgaria have ratified the BIT amendments, but the
amendments will not enter into force until Bulgaria joins
the EU.

The 2005 property rights constitutional amendment, which
comes into effect on January 1, 2007 and will lift the
existing ban prohibiting foreigners to buy land in Bulgaria,
favors EU over U.S. investors. While EU citizens and
entities will be allowed to acquire property directly by
virtue of Bulgaria's accession treaty, all other foreigners
will be able to do so only on the basis of an international
agreement ratified by the Bulgarian Parliament. In the
meantime, the constitutional prohibition against ownership
of land by foreign individuals remains in force. However,
foreign-owned companies registered in Bulgaria are
considered to be Bulgarian persons. U.S. owned companies
that register in Bulgaria therefore may acquire land in
Bulgaria.

Local companies in which foreign partners have controlling
interests must obtain prior approval (licenses) to engage in
certain activities: production and export of
arms/ammunition; banking and insurance; exploration,
development, and exploitation of natural resources; and
acquisition of property in certain geographic areas. There
are neither specific export-performance requirements nor
specific restrictions on hiring expatriate personnel,
although residence permits are often difficult to obtain.

A recent Bulgarian law eliminated the withholding tax on
dividends for European investors, but U.S. investors face a
withholding tax of 15 percent.

FOREIGN TRADE BARRIERS

New insolvency rules in Bulgaria's Commercial Code and its
Law on Public Offering of Securities have greatly improved
the legislative protection for minority shareholders.
However, enforcement of the law's provisions is inadequate
and corporate governance remains weak.

In 2003, Parliament approved a new Telecommunications Law
which increases institutional and regulatory liberalization
of the Bulgarian telecommunications sector but focuses more
on institutional issues and the protection of state
interests than on greater market liberalization. The new
Telecommunication Act extended until December 2005 the
Bulgarian Telecommunications Company's (BTC) control over
the sole telecommunication network.

A June 1999 law regulating gambling imposes additional
requirements on foreigners organizing games of chance.
Foreigners can receive a license to establish a casino in a
hotel only if they satisfy one of the following conditions:
(1) purchase or construction of a hotel rated four-star or
higher; or (2) investment of at least $10 million and
employment of at least 500 workers in economic activities
unrelated to gambling.

According to U.S. businesses, other steps needed to improve
the environment for foreign investment include improved
creditor rights through improvements to bankruptcy law and
procedures; reform of the judicial system; improved
accounting standards and risk assessment; reform of the
energy sector; and transparency and accountability in public
policy to reduce the perception of corruption.

ELECTRONIC COMMERCE

Bulgaria's Law on the Electronic Document and Electronic
Signature went into effect in 2001. Three implementation
ordinances for this law aimed at improved access to
information services and promotion of electronic commerce
were approved in 2002: Ordinance on Requirements for
Algorithms for Advanced Electronic Signature; Ordinance for
Activity of Certification-Service-Providers, Termination
Procedure, and Requirements for Provision of Certification
Services; and Ordinance for the Order of Registration of
Certification-Service-Providers.

OTHER BARRIERS

Selective enforcement
Foreign investors complain that tax evasion by private
domestic firms combined with the failure of the authorities
to enforce collection from large, often financially-
precarious, state-owned enterprises places the foreign
investor at a disadvantage. The multiplicity of Bulgarian
licensing and regulatory regimes, their arbitrary
interpretation and enforcement by the bureaucracy, and the
incentives this creates for corruption, have long been seen
as an impediment to investment, private business development
and market entry. The 2003 Restriction of Administrative
Regulation and Control of Economic Activity Act is expected
to considerably lighten the potential of regulatory abuse at
all levels of government, and when implemented, should
improve the overall business environment.

Execution of judgment

Bulgarian and foreign observers caution that the proceedings
for the execution of judgments under the Code of Civil
Procedure remain slow and unpredictable. Also, the civil
servants who are currently responsible for carrying out
execution are viewed as extremely inefficient. Thus,
problems are procedural, as well as systemic. Further reform
of the legal framework and its implementation will be
needed. In May 2005, Bulgaria addressed the systemic issues
by adopting the Private Execution Agents Act, which created
private execution agents to work in parallel with the state
officials. The private execution agents are expected to
become operational in 2006. However at this early stage of
reform it is unclear whether it will be able to effectively
address the current problems. Procedural impediments to
execution of judgments still remain to be addressed through
amendments to the Code of Civil Procedure.

The U.S. does not currently have reciprocity with Bulgaria,
so Bulgarian courts are not obliged to honor decisions of
U.S. courts. In practice, enforcement of foreign judgments,
as well as their execution, is subject to delays, sometimes
resulting from corruption and inefficiency in the judicial
system.

Access to international arbitration

There are opportunities for international arbitration in
Bulgaria. The Code of Civil Procedure mandates that foreign
court of arbitration is possible only if at least one of the
parties has its seat or residence abroad. As a result,
foreign-owned, Bulgarian-registered companies having a
dispute with a Bulgarian entity can only have arbitration in
Bulgaria. However, under the Law on the International
Commercial Arbitration, the arbitrator himself could be a
foreign person. Under the same act, the parties can agree on
the language to be used in the arbitration proceedings. The
major and most experienced arbitration institution is the
Arbitration Court of the Bulgarian Chamber of Commerce and
Industry (BCCI).

Not all disputes, however, may be resolved through
arbitration. Disputes regarding rights over real estate
properties in the country or labor disputes can only be
heard by the courts. Additionally, Bulgarian courts have
exclusive competence over industrial property disputes
regarding patents issued in Bulgaria.

Bulgaria is a party to the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards (the New York
Convention),which facilitates enforcement of foreign
arbitral awards. However, having gone through the
enforcement proceedings before the Bulgarian courts, the
creditor needs then to execute the award using the general
framework for execution of judgments in the country, which
is inefficient.

Mediation

Businesses wishing to use mediation to solve their disputes
in Bulgaria may find it hard to select experienced
mediators. This service has just started to develop in the
country following the adoption at the end of 2004 of the
Mediation Act. BCCI and the American Chamber of Commerce
(AmCham) responded promptly by opening commercial mediation
centers. The mediators at these centers have been trained
with US assistance but at this point lack sufficient
experience to be able to provide high quality mediation
services.

Textiles and apparel

As of January 1, 2002, Bulgaria eliminated all tariffs for
industrial imports from the EU under its association
agreement with the European Union, including textiles and
apparel. Under Protocol One on Textile and Clothing Products
of the European Agreement, the EU eliminated quotas on
textile and clothing products originating in Bulgaria on
January 1, 1998, and eliminated tariffs on textile and
clothing products on January 1, 1997. Bulgaria levies
tariffs on textile and apparel from the United States, but
does not impose any quantitative restrictions (quotas) on
imports from the United States.

BEYRLE