The FINANCIAL Despite the promises of Georgian Government to reduce taxes and to set VAT on companies from annual turnover 200 000 GEL, the Parliament of Georgia on the third session held last Friday did not really make any significant changes. Draft of Freedom Act presented by President Saakashvili to the parliament last year is not even discussed yet. Though, Richard Stern, Program Manager of IFC Global Tax Team, says “Its one of the best tax system in Georgia”.
The package which involves setting in the constitution the maximum ratio of budgetary expenditures to GDP at 30%; budget deficit – at maximum 3% of GDP; and maximum of 60% of debt-to-GDP ratio is more than a year forgotten issue.
On this background International Finance Corporation (IFC) has introduced advisory project on tax issues specially supporting SMEs in Georgia.
“The tax system in Georgia is moving rapidly into really great position. There have been waves of reforms Georgia keeps doing. I think once it is done it will be close to the worlds’ best practice system,” says Richard Stern, Program Manager of IFC Global Tax Team.
“I think the goal of Georgian government is to get off business as much as possible let them grow but responsibly, so they pay taxes and but not to bother them which is very difficult thing to do,” adds Stern.
“I think, its one of the best tax systems in Georgia. However, it still faces some of the hard issues that other countries in the region have not yet dealt with it, Georgia is moving very rapidly, real hard part is to help businesses become aware of all these things,” declares Stern.
“The main aim of creating SME regulations is to create law correspondence and facilitation of administrative burden, supporting business legalization and putting SMEs in equal conditions,” declares Rusudan Kemularia , Deputy Minister of Finance.
“As for SMEs, micro business is free from paying tax on revenues. Moreover, in the new tax code the required documentation was changed. The SMEs and big companies had to bring the same documentation, this attitude was inappropriate as its impossible to put micro, medium and big size companies into the same shoes, as their turnover and consequently the control mechanisms differ,” Kemularia adds.
In the Tax Code there will be implemented new tax instrument Transfer Pricing which is exact capitalization, and advance decision method which is approbated in majority countries supporting the payer with easing the relationship with tax payment organs and making cooperation easy. Last week, German Gref ,the CEO of largest Russian Bank Sberbank brought Georgian tax system reform as an example that entrepreneurs who have annual turnover of 200 000 are free from gain payment.
“I think the most important thing for business people is that they know what the tax law is and they have no surprises. The main requirement for business is to be clear, they know what the tax will be and there are no significant changes so that they can make business plans into the future and the government is generally trying to do that,” declares David Lee, General Director of MagtiCom and AmCham.
As Lee notes the main obstacle Georgian businesses might have in tax code is that companies need clarity and they do not want surprises, they must know what the tax code will be and do not want any sudden changes that will destroy their business plans.
According to the official information, small and medium enterprises occupy 17% of total turnover of Georgian businesses, while the rest goes to big companies. Although people employed in the private sector small business enterprises are five times bigger than the amount in larger ones.
“I believe that little by little normally small and medium size enterprises will develop more and more as it is not normal to have all economy into hand of one hundred companies, this is very unhealthy and government is pretty well aware of it and is pushing for it as well,” Fady Asly , Chairman of ICC Georgia.
“In Georgia 80-90% of all entrepreneurs are small businesses like in most countries of the world and that’s the hardest population to tax, because you do not want to tax them too much and you also want to get them into the formal sector. However, the most SME tax systems do not do that,” says Richard Stern, Program Manager of IFC Global Tax Team.
“In Georgia this big performance is happening and is an attempt to make system attractive enough so that SMEs will join. We try to help government to come up with the system that is glued to the capacity of the small businesses,” adds Stern.
Kemularia declares that they tried to optimally consider the opinions of business sector representatives however, it is quite difficult to consider all companies’ interests while creating legislation as there exists interests of government too, and there is tax income which is very important for country development.
Only about 15% of Georgian businesses rated Tax Administration as a major obstacle to their businesses, which is one of the lowest values for all European and Central Asia according to the Business Environment and Enterprise Performance Survey 2008, a joint initiative of the World Bank Group and EBRD.
While the share of large and medium businesses that rated tax administration as a major obstacle from 2005 to 2008 decreased respectively from 26% to 4% and 17% to 8%, the share of small businesses complaining about the same issue in the same period increased from 11% to 20%.
Recently IFC Georgia has launched an advisory project to support Georgia in reforming the tax system for micro and small enterprises.
The goal is to lower tax compliance costs for micro, small and medium enterprises and expand their tax base through the following objectives: reform the tax system for MSMEs to reduce the administrative burden of paying taxes and encourage legal formalization and tax compliance, including through introduction of a simplified taxes for MSMEs.
Optimize tax administration resources by ensuring that a risk-based audit system is operational thereby enhancing results while minimizing the burden for businesses. As well as reduce the administrative burden to MSMEs by introducing a more rational use of penalties and by streamlining the tax appeal system
Finally, improve public awareness on tax reform and expand outreach to the tax-paying community.
“The importance of this project is high as we are implementing new systems for SMEs regulations. The project was developed together with IFC. We have acknowledged internationally approbated practices and by the support of foreign experts we tried to bring in correspondence with Georgian legislation and national systems,” declares Kemularia.
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