Taxation in Georgia

Many transitional and developing countries are currently facing a problem of mobilising their resources for investment purposes. In these countries labour productivity is very low and therefore compensation is very low too. Scanty income of population is the primary reason for low saving rate and causes insufficient investments. Inadequate amount of investments in an economy permanently maintains productivity on a low level. The only way to tear from this vicious circle is to receive resources from foreign channels. Through foreign investments domestic firms are able to acquire new capital, modern technologies, know-how in management and marketing. Foreign investments stimulate rise in productivity and support future growth.

The main target of forthcoming report is to demonstrate and estimate investment climate and taxation in Georgia, to reveal their negative and positive sides, to compare current situation in Georgia with the neighbours.

The following factors play pivotal role in establishing Investment environment in a country:

  1. Macroeconomic situation (GDP, GDP per capita, GDP growth rate, inflation, currency exchange rate);
  2. Export orientation (the amount of manufacturing industry in export);
  3. Socio-political factors (corruption in particular will be discussed in a separate report);
  4. Business operating conditions.

The creation of a legal framework is necessary for developing business in a country. One of the significant components of business operating conditions is tax system. On the basis of the IMFÆs recommendation Parliament of Georgia enacted a new tax code on June 13, 1997. Till then tax relations were adjusted by the various acts on each tax type and imposed many inconveniences on both taxpayers and taxcollectors. Here comes the brief description of Georgian tax system (emphasis is put on main tax types):

Value added tax (VAT) or European tax as it is sometimes called, because of its European origin, is the first-rate tax for Georgia in terms of revenues received from it. Though real revenues are far less, than potential ones suggest. It comes clear from the following calculations: In 1997 GDP of Georgia equalled to 6,4 million laris. This is the overall value added product of the country that should be taxed at Georgian tax rate (20 %). More precisely, in order to receive the taxable sum, the value of corn import, export and supply of primary agricultural products that is the preferential items must be deducted from the 6,4 million laris and added the amount of import of all the remaining items. According to preliminary data in 1997 revenues received through VAT channels composed only 4 % of GDP and it is only one-fifth of potential incomes.

Tax rate of 20 % is presented in Georgia and its neighbours, except for Russia (where rate is 22 %) and Turkey (the basic rate is 15 %).

The rate of 20 % is effective in Georgia and its neighbours, except Russia (where rate is 22 %) and Turkey (the basic rate is 15 %). Turkish tax rates are classified according to types of goods. As compared with developed countries, Georgian VAT rate is somewhat higher (rates in developed countries on average vary from 15 to 19 %), although the rates of the other taxes are relatively low. Unlike the other neighbours the list of the tax-exempt goods and services in Georgia is quite long. The reasons for high VAT rate in Georgia are its easy administration and also countryÆs low stage of development (see table 1).

 

Unlike the other neighbours the list of the tax-exempt goods and services in Georgia is quite long. The reasons for high VAT rate in Georgia are its easy administration and also countryÆs low stage of development.

Pursuant to the tax code (item 273) until December 31, 2000 importation of motor-cars in Georgia is subject to following taxation: excise tax of 0,1 Lari per each cubic centimetre of the car motor power plus 5% VAT. This law does not apply to cars bought for self-consumption. Such kind of approach is wrong, because it prevents developing car business in Georgia and makes Georgian consumers dependent on other countries markets.

 

Taxes imposed on imports at passenger cars hinder the development of car business in Georgia.

Enterprise profit tax is paid by Georgian enterprises and joint ventures. Profit tax rate is 20 % in Georgia. As it can be seen from the table 2, profit tax rate is quite low in Georgia, it is low as compared with developed countries too (e.g. profit tax rate for Germany is 36-50 %, for France - 39-57 %). The fact that profit tax rate is so low, encourages investments to some extent, though it would be better if somewhat reduced rates were established for priority-given enterprises. For example, Turkish tourist and construction firms enjoy diminished tax rates and that pushed these two industries to unprecedented levels (see table 2).

Judging from international standards profit tax rate is fairly low in Georgia.

Although profit tax rate is quite low in Georgia, capital consumption allowances are quite low too and that causes increase in taxable base. For instance, depreciation norm for industrial and agricultural equipment in Georgia is 15 %, while in Russia - 28 %, Finland and Denmark - 30 %, in France only for agricultural machinery - 50 %. We can deduce from here, that real profit tax is higher in Georgia.

Relatively low depreciation norms cause real profit tax to be higher.

Personal income tax is one of the most significant taxes. Rates vary from12 to 20 % in Georgia.

In order to support social justice, provide increasing budget revenues, legalise populationÆs incomes and arrange properly accounting system, it is necessary to conduct serious reorganisation of personal income tax and its rates.

As a rule, income equal to subsistence level must be taxed at the lowest rate. According to State Department of Statistics (SDS) subsistence level for a single person in Georgia is 108 laris or one person needs 1284 laris in a year. Social justice requires this sum not be taxed at all. But we should take into account socio-political situation in Georgia and also the fact, that accounting system does not work properly. According to SDS average monthly wage in Georgia is 52 laris, or 624 laris must be taxed at the rate equal to 12 %. Individuals with income from 1,500 to 3,000 laris should pay 20 % and income of more than 3,000 laris should be taxed at 25 % rate.

The new tax scheme proposed by us is not ideal at all, but it is much closer to reality, than the current scheme.

In order to legalise populationÆs incomes and arrange system properly, it is necessary to conduct serious reorganisation of personal income tax and its rates.

Total family income can also be taken as a taxable base for personal income tax and not a single person income. If one person in a family works and the others are jobless, it seems unfair to tax that person with maximum rate, notwithstanding his income.

Tax code does not provide any holidays for families with many children, while demographic situation is pretty alarming in Georgia. In Italy, for instance, a family can reduce its taxable base by 96,000 liras ($ 60) per each child (see table 3).

Excise is another kind of nondirect taxes. Excise goods and rates are defined by the tax code.

As it can be seen from the table 4, excise tax rates are not very high in Georgia and particularly low rates apply to beer and petrol. Armenia and Ukraine have different rates for imported and domestically produced goods, but it can not be regarded as a positive side of their tax systems. First of all, such kind of differentiation of excise rates is not in agreement with World Trade Organisation requirements. Secondly, excise tax is not the appropriate tool to support national production and prevent importation. The right instrument is import tariff (see table 4).

Georgia has optimal excise tax rates, particularly low are rates for beer and petrol.

It is also vitally important to set up the practice of excise stamps, that will help to increase revenues received from excises.

It is necessary to set up the practice of excise stamp in Georgia.

Payroll tax is levied from enterprises and is deposited into state social security and employment funds. By the rate of payroll taxes we can judge the orientation of a country.

Judging from international standards payroll tax rates are quite high in Georgia, as well as in neighbour countries.

As it can be seen from the table 5, payroll tax rates are quite high in Georgia, as well as in neighbour countries. Particularly high rates are characteristic for Armenia, Azerbaijan and Ukraine. Russia is an exception and it has quite low rates (see table 5).

Taxes on International trade. Customs taxes affect international trade greatly. Import tariffs in Georgia are 5 % and 12 %, while export is zero rating. Customs tax is an instrument to carry out protectionist policy. Compared to neighbour countries import tariff is lower in Georgia. Exceptions are Armenia and Ukraine, where import tariffs are 0 % and 10 %. Though, these two republics possess differentiated excise rates for domestically produced and imported goods and it is a manifestation of implicit protectionism policy (see table 6).

Import tariff is low in Georgia, but a bit higher than in Armenia and Ukraine ( where rates are 0 and 10 %).

As a necessary measure Georgia should resort to differentiation of customs tax rates. High rates should be established for goods, production of which is considered as a priority of Georgian economy. It is also necessary to reveal those types of goods that are imported in Georgia with damping prices.

As we see, Georgian tax system is one of the most liberal among neighbour countries, although Armenia provides tax holidays for foreign investors. But as experience proves such kind of measures are less efficient in attracting foreign investments.

VAT rates in Georgia and its neighbour countries

Table 1.

Georgia

Armenia

Azerbaijan

Russia

Ukraine

Turkey

20 %

Exports of goods and services, also corn import - 0%.

A person with an annual income of less then 3000 laris is not taxed.

Exemptions:

Supply of primary agricultural products; Import of capital goods;

Import of raw materials which will be used for producing export goods;

Medical service; Supply of pharmaceuticals; Supply of magazines, newspapers, note- books;

Financial service

20%

Exports of goods and services - 0%.

Exemptions:

Supply of primary agricultural products;

Supply of precious metal inputs;

Medical service;

Supply of pharmaceuticals.

20%.

Exports of goods and services - 0%.

22%.

Exports of goods and services - 0%.

Enterprises with less than 15 employees and with a yearly turnover of less than 2500 min wage are tax-exempt.

Imports of goods and services in Russia are taxed at the rate which equals to the spread between Russian VAT

and that of the exporter (if the export is VAT taxable ). If the exporters VAT is higher than Russian it is taxed at the exporter æs rate.

20%.

Exports of goods and services - 0%.

Supply of electricity - 0%.

Exemptions:

Enterprises with turnovers

of less than 100min. wage;

Supply of certain newspapers and magazines;

Insurance and banking services ;

Supply of medical products;

medical services.

Firms with foreign investment registered before May 20, 1993 have a 5 year tax holiday.

15%.

Exports of goods and services - 0%.

1%- Supply of certain agricultural products ;

Supply of books, newspapers and magazines ;

Supply of second-hand passenger cars;

8%-supply of basic staples;

Supply of services by private schools and colleges;

23%-Supply of luxury items ;

40%-Supply of cars with motor power over 2000cc.

Exemptions:

Banking and insurance services;

Supply of sea, air and railway vehicles including maintenance and repair services rendered in sea- and airports;

International transportation services;

Transportation of foreign petroleum products through domestic pipelines.

Profit tax in Georgia and neighbouring countries

Table 2.

Georgia

Armenia

Azerbaijan

Russia

Ukraine

Turkey

20%

For Georgian enterprises on dividends paid - 10%;

On interests paid - 10%;

Taxation of non-residents:

On insurance deposits by Georgian enterprises - 4%;

On payments made by Georgian enterprises for foreign telecommunication and transportation services - 4%;

Royalties to be taken away from Georgia - 10%.

Exemptions:

Profit received by budgetary and charity organisations;

Grants and membership fees received by an organisation ;

Profit derived from selling private agricultural products;

Profit of National Bank.

 Annual profit in thousands of drams:

up to 360($900)-12%;

from 360 to 720-18%;

from 720 to 1080-25%;

over 1080 - 30%.

Banks and insurance companies - 30%;

Casinos-70%.

Exemptions:

Agricultural enterprises except industrial type ones;

New enterprises for their first two years after being officially registered;

Joint ventures and enterprises with foreign capital participation receive tax credits (up to 3-10 years after being registered enterprises pay 50% of taxes if the proportion of foreign capital is above 50% and the minimum investment is a sum equal to $100,000).

 Joint ventures with more than 30% of foreign capital :

up to $200,000 - 25%;

$200,000 to 400,000 - 30%;

400,000 to 500,000 - 35%.

Commercial banks - 45%;

Joint ventures with foreign capital less than 30% - 25%;

Rate is reduced to 10% in mountainous areas.

35%

Casinos - 90%;

Profit derived from show business - 70%.

For small enterprises are applicable the following exemptions:

  1. up to 100 million rubbles - 23%;
  2. above 100 million rubbles - 35%.

30%

Profit from intermediary transactions, auction sales of material values - 45%;

Profit of conducting lotteries, gambling houses and gambling activity - 60%.

Exemptions:

Construction, cultural and health-care facilities and fishing collective farms;

Interest by non-residents for credit provided to the Government of Ukraine and National Bank.

25%.

Exemptions:

  • Dividends from stock investments;
  • 20% of the revenues from tourist activities
  • Profits derived in foreign countries from civil engineering (until December 31, 1998)
  • Income from disposition of corporate shares and immovable property (until December 31, 1998)

Personal income tax in Georgia and neighbouring countries

Table 3.

Georgia

Armenia

Azerbaijan

Russia

Ukraine

Turkey
up to 9 laris - 0%;

9 to 200 laris - 12%;

201 to 350 laris -15%;

351 to 600 laris - 20%.

Exemptions:

Following types of income are not taxed:

Grants, state pensions, state stipends and social security benefits;

Alimony;

Income received from selling privately produced agricultural products.

income up to 10 times min. wage(mw)- 12%;

20 times MW- 18%;

40 times MW- 25%;

above 50MW- 30%.

 income up to 0.5 MW- 2%;

0.5MW to 1MW- 6%;

1 to 3 MW - 10%;

3 to 6 MW - 12%;

6 to 12 MW - 15%;

12 to 20 MW - 20%;

20 to 35 MW - 30%;

35 to 50 MW - 40%;

above 50 MW - 55%.

 Up to 60 million rubbles - 12%;

Above 60 million rubbles - 30%.

From taxable base can be deducted:

  • One MW each month;
  • One MW per each child ;
  • Money spent on charitable purposes (within established norms).

Exemptions:

State aid; pensions; stipends; alimony; income of farm members during five years after registration.

 From 1MW to 5MW - 10%;

5 to 10 MW - 20%;

10 to 15 MW - 30%;

15 to 25 MW - 40%;

above 25 MW - 50%.

Income in foreign currency is taxed at half the above rates.

Wages and salaries of miners are taxed at a flat rate of 10%.

Exemptions:

Pensions; alimony; income from sale of property.

 Progressive rates from 25% to 55%.

Exemptions:

Income of small farmers;

Income of small tradesman and artisans;

Interest income from government securities.

Excise tax in Georgia and neighbouring countries

Table 4.

Georgia

Armenia

Azerbaijan

Russia

Ukraine

Turkey
  • Grape wines - 15%;
  • Strong wines - 50%;
  • Champagne - 100%;
  • Vermouth , fruit wines - 50%;
  • Spirits (brandy, vodka, etc.) - 50% and 100%.
  • Beer - 15%;
  • Ethylated alcohol - 100%;
  • Tobacco of 1st and 2nd quality - 100%;

3rd, 4th and 5th quality - 5%.

  • Jewellery - 35%;
  • Passenger cars - 15%;
  • Tires - 15%;
  • Ordinary petrol - 15%;
  • Ethylized petrol - 50%;
  • Caviar - 20%.
  • Spirits - 50%(Domestic) and 75%(imported);
  • Beer - 50%(dom.) and 75%(imp.);
  • Wines - 25%(Dom.) and 50%(Imp.);
  • Caviar - 50%;
  • Tobacco - 50%;
  • Jewellery - 25%;
  • Furs - 25%;
  • Passenger cars - 0%(Dom.) and 15%(Imp.);
  • Carpets - 50%;
  • Petrol - 25%;
  • Tires - 25%(Dom.) and 15%(Imp.).

Exemptions:

Raw materials used as inputs into excisable goods;

Goods exported outside the states of the former USSR.
  • Wines - 40-90%;
  • Beer - 75%;
  • Alcohol - 90%;
  • Fish - 50%;
  • Furs - 50%;
  • Carpets - 40%;
  • Tobacco - 50%(Dom.) and 30%

(Exp. to CIS);

  • Petrol - 52.6%;
  • Chocolate - 40%.
  • Wines, except champagne - 3,000 rubbles per 1 litre.
  • Champagne - 6,000 rubbles per 1 litre;
  • Beer - 700 rubbles per 1 litre;
  • Ethylated alcohol - 15,000 rubbles per 1 litre;
  • Cigarettes - from 6,000 to 23,000 rubbles per 1,000 unit;
  • Jewellery - 45%;
  • Passenger cars - 10%;
  • Petrol - 70%;
  • Natural gas - 30%;
  • Diesel fuel - 30%.
 Rates range from 10% to 300%;

Different rates are used for domestic and imported goods.

 Excise is called supplementary VAT(SVAT).
  • Tobacco - 100%;
  • All kinds of spirits - 100%;
  • Wines and beer - 15%;
  • Non-alcoholic beverages - 10%;
  • Methylated alcohol - 50%;
  • Playing cards - 60%.

Exemptions :

All kinds of wines, except sparkling wines, plain and fruit sodas, fruit juices.

Payroll taxes in Georgia and neighbouring countries

Table 5.

Georgia

Armenia

Azerbaijan

Russia

Ukraine

Turkey
  1. For the state social security fund - 27%;
  2. For the state employment fund - 1%;
  3. For the state social security fund from an individualÆs wage - 1%.
 Up to 8MW - 32%;

From 8 to 16MW - 27%;

Above 16MW - 22%.
  1. Into employment fund - 2%;
  2. Into pension fund :

35% from wage fund ;

1% from an employee;

3. Invalids fund - 1%.
  1. When taxable base is up to 60 million rubbles:
  • 3.5% - into the social security fund;
  • 1% - into state employment fund;
  • 3.9% - into compulsory federal medical security fund.
  1. Taxable base more than 60 million rubbles:
  • 1.5% - into the social security fund;
  • 2.5% - into compulsory federal medical security fund.
  1. Chernobyl fund - 12% from wage fund ;
  2. Employment fund - 2%;
  3. Social security fund 37% from enterprise wage fund.

Wages of public organisations - 5%;

Income of persons who handle their own business which is based on their own work - 9%.

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Customs tax in Georgia and neighbouring countries

Table 6.

Georgia

Armenia

Azerbaijan

Russia

Ukraine

Turkey
Customs collection - 0.2%;

Import tariffs - 5% and 12%;

Export - 0%.

 Import tariffs range from 0 to 10%;

Export - 0%.

 Import tariff from 0 to 70%.

Export tariff-70%.

Import tariffs range from 2 to 30%.

Export tariff - from 1 to 500%.

 Import tariffs range from 0 to 10%;

Preferential rates (normally zero) apply to goods from the least developed countries and privileged tariffs (2% and 5%) apply to countries covered by "free trade" agreement.

 Import tariffs vary from 5 to 100%.

CIF price of importing goods.