The FINANCIAL -- For any investor considering entering the market of a country, the state of the tax system is one of the deciders on whether they will invest or opt out. Shalva Kilasonia, Tax Manager of BDO Georgia, and Giorgi Tavartkiladze, Director of the Tax & Legal Department of Deloitte Georgia, spoke to The FINANCIAL about the biggest issues that plague the Georgian tax system as of today. “The current system raises questions about the degree of independence of the legal process,” the experts said.
“The problems vary in nature, as some come from flaws within the legislature itself, while others can be accounted to procedural problems, like inadequate allocation of resources by the Government or inefficiency of their use,” commented Kilasonia, BDO.
“One of the problems which come due to the latter reason is the return of extra payment of VAT. The legislature is there, defining all the steps and deadlines in which the pay back should happen. However, the deadlines are rarely met, mainly due to inadequate fund allocation in the budget. This harms businesses as, often, the only way they can get any benefit off of the extra payment they had to go through with is by setting off other tax liabilities.
At a glance everything is fine, however, anyone with experience managing their business knows how important it is to have the money on hand as soon as possible. Reduced taxes are far from equivalent to the flexibility and investment opportunity money offers. Two weeks ago, news was announced which will help exporting companies in this regard, however, the problem will have to be solved for every single sector if we are to have an improved business environment and stronger businesses.”
“Another long-standing issue is that natural and during-production loss rates, which are relevant to entrepreneurs who produce goods, are not standardized – a lot of sectors do not have a defined average loss rate. This is problematic, as companies might have to pay taxes for resources which did not directly result in a product.
The Government keeps the right to tax them with no regard to their losses, sometimes resulting in a harmed private entity. This, at the same time, is associated with extra procedural expenses for both the private and the public sector. What is good, though, is that the Government showed its desire to fix the problem. One of their proposed solutions is based on a mix of experiences of many different countries, with the Polish model dominating. The uniqueness of the Georgian Government’s approach comes from their desire to actively collaborate with the private sector in this process,” Kilasonia said.
Naturally, solving this problem will depend on many different factors, including the amount of resources the Government is willing to invest, the efficiency of the personnel working on the issue, and the willingness of the private companies to collaborate on the issue.
“Currently, a group of German economic specialists are working on the problem and the proposed solution is to let entities write-off full losses based on international accounting standards, if they provide a sound documentation of losses,” commented Tavartkiladze, Deloitte, on the issue.
“This would bring double benefit to the country – first of all, this will improve the finances of smaller businesses, as they will have accordingly-reduced profit tax and VAT payments. They will have a better financial prediction opportunity, as they will no longer be uncertain if or at what level their losses will be accounted for when paying taxes. The other side of the win-win coin is the usage of the Revenue Service’s resources – hiring personnel to verify loss rates of numerous small-scale enterprises will no longer be necessary and this will free up a lot of space to deal with issues that are currently even more pressing. The full write-off approach is internationally common and is used by most EU countries.”
Tavartkiladze, nevertheless, pointed out judicial procedures as one of the main problems in the taxing system. He went into the details of the issue, outlining both the current situation and the possible solutions.
“When there is a disagreement between a private enterprise and the Revenue Service, first, the case is discussed within the entity itself, then it moves to the Ministry of Finance and only later on is it given to the court. Georgia currently does not have specialized judges for financial issues, which could both be a good and a bad thing, so the shtick is not here.
The problem stems from the internal regulations of the tax authorities which oblige the Revenue Service to move the case to the Appeals Court in case they lose in the first instance court. This drags the process out to absurd amounts of time – the first stage takes around 1.5 years; the second around a year; and finally if it goes to the Supreme Court, then it is an extra half year. Problems this system presents are immense – dragged out cases cost a fortune, which, by the way, many smaller companies do not have. For investors who come to Georgia, one of the crucial questions is how tax lawsuits are settled and their objectivity.
The current system raises questions about the degree of independence of the legal process, as, in initial cases, entities have to prove their arguments to the same system that they had disagreements with, not to mention the longevity of the process.”
Secondly, this makes a company unsure about its finances, so planning becomes a tad bit harder, Tavartkiladze believes.
“Finally, in Georgia, there is no upper limit to the amount a penalty can grow to. In the region there are examples of countries which set the bar at, for example, 50%. The current Georgian system works in a way that a penalty can grow to such significant numbers that entities are deincentivized from filing a lawsuit at all and the process is doomed to continue for years due to the compulsory appeal law,” Tavartkiladze said.
“An obvious solution to this issue would be to turn the legislature around – so that the Revenue Service does not have the right to appeal if they lose the case in the first instance court. This would free up a lot of resources for both the private and public sector. Alternatively, an independent tribune could be assembled, which would decide cases of such character. There were talks about introducing this kind of reform in the past, however, for some reason, the talks amounted to nothing and later on subsided,” Tavartkiladze told The FINANCIAL.