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Amendments to the Tax Code of Georgia: In 2011 Strict Administration has been Completely Replaced by Prevention Policy

Published: November 27, 2011 | 10:14 pm
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Discussions around the amendments to the Tax Code are still ongoing at The Parliament of Georgia. Georgian government says the main goal of the proposed initiatives is to create further simplified environment for businesses. COMMERCIAL TIMES interviewed Rusudan Kemularia, Deputy Minister of Finance of Georgia, regarding the concrete results expected through the tax code amendments.

-  Not everybody in the local politics welcomes the initiative of Tax Monitoring Officers’ institution, saying it carries a threat of putting pressure on businesses. What are your arguments in this regards?

- Tax Monitoring Officers’ initiative is a new control-related institution in Georgia. However, different from other types of already known controlling mechanisms like inventarisation or chronometrage, this new institution is far simpler, setting no fine on businesses. The main goal of Tax Monitoring Officers’ initiative is to let the tax body get involved in the manufacturing process and identify problems if there are any. This is rather useful for manufacturers as they are given an opportunity to make corrections until the final decision is made by the tax body. The decision will be truly a qualified one as it won’t be a hasty verdict and will be based on a consistent monitoring. Again, no fine will be set on businesses after the monitoring is completed.

Tax Monitoring Officers will be sent to specific enterprises that are considered high risk carriers, for example, excise goods manufacturing and distribution. This is the type of monitoring that conveys observation and consultancy activities, the main function of which is prevention.

- What’s the number of Tax Monitoring Officers and are they selected from internal staff only?

- It’s difficult to name the concrete number.  We do not have that big human resources to conduct monitoring of all enterprises. Internal staff may be hired as Tax Monitoring Officers and we are also free to employee external workforce. The Revenue Service will act in accordance with the market demand; if there is a need we will hire external human resources.

Two pilot projects are already ongoing in two enterprises successfully. Both companies seem to be taking the new initiative with complete understanding.

- How successful is the international experience of the Tax Monitoring Officers’ institution?

- All countries have a number of different administrative mechanisms of monitoring. There is no universal tax system that would be operated by every nation. Each country has its own internal legislation and regulations in terms of tax administration. Roughly, we can say there are two types of administration methods: one based on strict and the other based on prevention. If we look at the reforms made by Georgian government it is clear that in 2011 strict administration has been completely replaced by prevention policy, which is more liberal.

For example, in 2001 in Holland the government announced a new tax policy. Dutch tax bodies also have monitoring institutions, the main function of which is a prevention principle. All that is focused on minimizing the volume of fines by conducting preventable monitoring of enterprises.. However, for making the right policy work right there should be a relevantly favorable economic and political environment in the country. Revenue Service and the Ministry of Finance is the major force driving the economy in any country and in Georgia we do our best to make doing business in the local market as liberal as possible.

- One of the new initiatives included in the amendments to the Tax Code says cash machines will not be necessary for certain types of businesses. How beneficial will the new initiative be for small business representatives and why did the government came up with this amendment now and not before when there was a clear dissatisfaction about the necessary usage of cash machines for all types of businesses?

As for the recent initiative, tax regime envisions fixed taxes from 1 Lari to 2 000 Laries on particular services. Government will define the types of services to which this new fixed tax regime will refer. Currently, this issue is being discussed as thorough analyses have to be conducted in order to reveal which services should be included. In general, it will refer to micro and small enterprises and their services and not to trade related activities.

The main benefit that micro and small business representatives will get through this initiative is that on one hand they will not be obliged to use cash machines and on the other hand it will make easier for them to deal with accountancy issues. No VAT tax will be set for such enterprises The new amendment, which can be called a second step, is a far flexible proposal for micro and small size businesses to operate more comfortably in terms of service activities.

- What about the installment of central Cash Machines at special status trade zones? How does this work?

- The initiative of launching a Central Cash Machine will refer to special trade zones and not to ordinary markets or super markets. This new regulation will become mandatory for the markets organized by the holders of special trade zones status. . Everyone engaged in trade activities within this type of special trade zone will have to deal with a central cash machine. If there are, for example, particular shops in such markets they may be conducting separate tax operations as an alternative option. In general, the administration of the special status trade zone is in charge of tax operations.

-  As for offering tax-exemption for employing the 45-60 age group people, how big are the expectations that this initiative will cause increased demand on middle-age workforce?

- It’s very important to create incentives for 45- 60 age group people. There are some people saying that the government has come up with this initiative only because elections are approaching. The truth is that the government is working on a daily basis to further decrease tax burden..

In this concrete case, it is a one year tax-exemption for employing 45- 60 age group people who will get employed from January 1, 2012 to July 1, 2012 after being unemployed for the previous three months.

This new initiative does not refer to newly hired staff instead of the fired person.  This is a kind of prevention in order to avoid wrong usage of the law.

In order not to get huge decrease in tax incomes Georgian government has been working on this amendment very cautiously so that we get the best reasonable solution, which on one hand will be beneficial for businesses and on the other hand will serve as a serious incentive for employing 45- 60 age group people.

- In general, the amendments to the Tax Code is focused on making business environment more simplified for SMEs. What are the main changes that work best in this respect? As for large businesses, which initiatives are considered most significant to be carried out?

- If we look at the new Tax Code we will see a number of amendments at simplifying tax regime for micro and small size businesses. We have adopted new regulations for them by defining their statuses and this has proved to be necessary as by freeing them from mandatory accountancy and cash machine issues the two biggest challenges have been solved. Disputes resolution Council clearly showed that not all the micro and small size enterprises could have sufficient knowledge in accounting and lots of violations were made because of the lack of qualification. This is why the government announced to excuse those manufacturers who showed wrong data not on purpose but only because of a technical blunder.

However, it’s not like that all the new initiatives are solely focused on this segment. For example, a number of complex corrections were made in terms of leasing. Actually a new legislation has been created in this sphere.  As a result of the new initiatives, a leasing company would be able to deduct a 100 percent depreciation from their taxes. The current code envisaged that leasing companies will be authorized to account penalties as revenues for overdue amount. Particularly in taxation point of view, we can mention 100% nullifying ability, ordinary renting to be named leasing, also taxation on property to be defined by 0.6% in accordance with the price set on the concrete date. It’s important that tax-exemption in healthcare and agriculture has been spread to leasing as well. It should also be mentioned that cash method can be used while estimating penalties due to agreement.

- When should we expect the new amendments to come into force?

-  Some of the amendments have already been approved including leasing regulations and Tax Monitoring Officers’ institution. As for the initiatives referring to the employment of 45-60 age group people and fixed taxation, both of them are being currently discussed by the Parliament of Georgia.





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