General Part
New concept of the taxation system implies for a fundamental reform of the current system mainly aimed at:
1. Legalization of the taxation base through simplification of the current system (reducing quantity of payments and bringing maximum transparency into the rules of calculation and payment of taxes);
2. Attainment of the adequacy of the new taxation system with the environment so as to render the code an actually practicable legal act and the payments - really computable and payable to the budget;
3. Sharp reduction of tax evasion and weakening of the motives for corruptive transactions;
4. Orientation of the system towards economic growth promotion by way of stimulating investment;
The draft Tax Code is based on the following principles:
1. Tax bearers and public administration shall regulate taxation-related issues on parity terms;
2. Each payment should be based on a clearly fixed concept. It should have a clearly expressed purpose and intention;
3. Payment and rules of tax administration shall not abuse principle human rights, such as economic and social rights. The weight of an averaged tax burden should be reasonable and bearable to the tax-payer and should not exceed 30 per cent against the GDP;
4. Introduction of taxes should be economically reasonable with predictable and justifiable long-term outcomes. Introduction of taxes with the aim of attaining some short-term fiscal or other local effects is inadmissible if in the medium and long-run this may turn into the factor impeding economic growth;
5. It is unjustified to introduce taxes unless this entails a reasonable fiscal effect;
6. Taxes should not breach liabilities undertaken under the international agreements;
7. Maximum harmonization of the tax code with the current Georgian legislation and in the first turn with the Constitution, Civil and General Administration Code. Norms and terminology of the Fiscal Law should to the highest possible extent be brought into conformity with the norms and concepts established by the active legislation;
8. Special terms of the Tax Code should be based on concepts specified by the accounting and auditing standards;
9. Introduction of taxes is unjustified if the possibility of their administration is doubtful and the anticipated effect is not subject to prognosis. The tax administration regime should be transparent and should to the highest possible extent exclude any possibilities for corruptive actions.
10. Authorities of tax administration should be balanced by corresponding responsibility. Delegation of powers to the administration unless they are balanced by responsibility and subject to control is inapplicable as otherwise such powers are as a rule abused;
11. The competence of tax administration as a body responsible for the fulfillment of the plan should be extended to that of the body supervising law observance. Establishment of efficient control mechanisms for the execution of the Fiscal Law and their sustainable functioning should be made a principal criterion for the assessment of the work of tax administration officers. Motivation of the work of tax administration officers instead of the fulfillment of the plan should be related to the law enforcement and establishment of an atmosphere of supremacy of law and effective management in the system.
12. Payment must be stable allowing for long-term planning on the part of a tax-bearer. Procedure of introducing changes into Fiscal Law should be subject to strict regulation. The changes adopted may be put into force only since the beginning of a new fiscal year.
Chapter 1
Georgian taxation system
The principle innovations offered by this part of the draft Code are as follows:
New definition of taxes. The draft defines taxes not as an inequivalent and uncompensated transfer of sums to the State but as a liability of certain persons before the State so as this last can provide its citizens and all legal residents on the territory of Georgia with safe life and work environment. Thus, this new definition defines the taxes as a reciprocal liability of the State and a tax-bearer before each other. Such definition makes it clear to the tax-bearer that the taxes are not some tribute but a sum payable by a tax-payer to the state administration on legal grounds, which by force of law must be used for his own interests.
Repeal of sub-laws (instructions) in taxation. Draft Code itself contains detailed directives concerning calculation of tax rates and samples of the accounting forms (declarations). Therefore, it does not envisage working out and publication of guidelines relating to taxation. Such approach is accounted both by international practice (forbidding specification of taxation procedures by standard acts ranking lower than Law) and own experience which proves that very often instructions instead of clarifying the rule of law make it even more incomprehensible). Moreover, there are frequent cases when definition given by an instruction is absolutely contradicting the same rule of law it defines. Another significant ground in favor of rebuffing instructions is that they are not universal. As a rule, instructions are not easily available for most of tax-payers whereas, provided they are available an administrative officer is fully guided by these instructive norms even when these instructive norms are in contrast with the corresponding norms of the Code. Apart from the fact that this places a tax-payer and an administrative officer in unequal positions, it is also distorting legal understanding of administrative officers and hampers their professional growth.
Sharp reduction of the number of existing payments. Currently, there are 12 national and 6 local taxes imposed by the valid Tax Code. According to the draft Code the number of national taxes shall be limited to 3 and that of the local taxes - to just one type. The rest of the taxes shall all be withdrawn except for those listed below:
National taxes:
1. Income-tax (for physical, entrepreneurial and non-entrepreneurial legal entities);
2. Value Added Tax;
3. Excise duty.
Local Taxes:
1. Property tax (including taxes imposed on land, property of physical and legal entities, owners of vehicles)
As to the withdrawal of taxes from the Code, part of them may be transformed into license or local taxes (e.g. on gambling and resorts). Whereas, the other part of taxes has been regarded as completely unjustified at this stage.
Withdrawal of the social tax and its transformation into personified social insurance contribution is noteworthy. As we know, the social insurance reform, which is also covering this problem, is underway. Although certain steps have already been made in this direction there is still a long way to go. The anticipated positive outcomes of the reform in taxation may not be attained at all or their effect may be dramatically undermined unless the transformation of the social tax into personified social insurance contribution is made in due time and unless this tax in its present distorted form is invalidated. As concerns the current liabilities of the United State Social Safety Fund, they have been covered from the accumulated proceeds on other national taxes.
Another subject for discussion is environment taxes. Their purpose, justification and regime of administration sharply differ from classical revenue taxes. Therefore, it has been proposed that these taxes should be made subject to regulation by a special law on environmental financial instruments instead of a Tax Code. Even if environment taxes (financial instruments) are retained in the Code, due to their distinct specificity, they should be regarded independently from revenue taxes and placed separately.
Change of the system of local payments. Under the present Code property and land taxes were attributed to national taxes. Considering our experience and international practice as well, these payments have been shifted to the group of local taxes. Under the new draft the property tax also comprises another currently existing national payment - tax on vehicle ownership.
Resulting from critical analysis of the current system of local taxes, 5 of the 6 types of local taxes have been completely rejected as far as their essence and effects fail to comply with the main principles of this new draft. The only remaining type of local taxes - on gambling business - is referred to rather as a license payment than an instrument to be regulated by the Tax Code.
According to the proposed project, property tax becomes a major source for the fulfillment of local budgets, which are better controlled and administered by municipalities than by central authorities. However, under this draft, a property tax combines real estate and also, according to the legislation, property subject to mandatory registration and some categories of moveable property groups, as well as agricultural and non-agricultural industrial land.
Specification of property tax as the only local tax does not exclude the possibility of financing local budgets from the proceeds on national taxes. This issue, though, goes beyond the frame of regulation by Tax Code into the competence of the Budget Law.
Chapter II
Tax administration
Norms addressed in this chapter are based on the parity principal between tax-payers and state administration in the sphere of tax relations. Tax-payer has civil rights as provided by Georgian Constitution (Articles 20, 21,40, 42 and 45), including presumption of innocence, which is an important novelty.
According to the referred principles and norms a tax-payer's rights and their protection are secured. Representatives of tax administration are granted only the right to claim fulfillment of tax liability from tax-payers. If a tax-payer considers it a relevant claim and accedes to it, than its fulfillment becomes compulsory whereas, non-compliance is regulated under a simplified order without legal action.
In case a taxpayer does not accede to the claim of tax administration he is conferred a right to produce in a written form, a well-grounded reason for the rejection of such claim within 12 days since it was presented. In such case the administration shall immediately bring up a suit against the taxpayer. Proceeding from the presumption of honesty, administration has to bear the burden to vindicate the claim in court.
If the claim of the tax administration is acknowledged lawful and allowed by court, the court shall impose on the taxpayer a sum twice as much as that of the unfulfilled liability in favor of State Budget. Besides, the taxpayer shall have to bear all legal costs himself.
If the claim of the tax administration is not allowed than the court shall impose it to pay the sum to the taxpayer under the same order.
In that case, the Head of the Tax Administration shall forthwith put in a claim for the amendment of the damage caused to the State against the tax administration officer, who has been found immediately responsible for presenting a wrongful claim to the taxpayer and shall also release him from duties till the end of the proceedings.
Advancing the role of Court in public relations renders more openness to the process and reinforces guarantees protecting legacy.
The new system provides for the creation of a special fund for incentives to the tax administration employees and notably, the proceeds from the execution of such court decisions shall serve as the major source for the fulfillment of this fund.
Chapter III
Income tax for physical entities
Under the concept, the former profit and income taxes have been combined into a single income tax.
The Chapter on income tax for physical entities contains the following principal novelty.
1. Two modes of payment will be concurrently valid and the taxpayer himself will have to make a choice at his convenience:
A. 20 per cent taxation rate with a right to enjoy deductions;
B. 10 per cent taxation rate without the right to enjoy deductions
Those taxpayers, which choose the first option, will have to maintain records on current incomes and expenses as well as monthly statements so as to reduce their joint income by expenses deductible from a documentary verified taxable income. The second option implies denial of tax concessions for those who have chosen it in this item of payment.
All taxpayers who choose the first option shall have to notify the Tax Administration of this choice in advance.
Another novelty is reduction of taxation rates for bank profits and dividends.
Chapter IV
Income tax for legal entities
There are following principal novelties in the income tax for legal entities:
1. Detailed specification of the norms and AA list of expenses to be included in the prime cost of production (works, services) by the Code;
2. To entitle A supervisory counsels (partners) to define AA norms of amortization costs within the frames specified by the Code for an AA long-term (more than a year);
3. Taxation of A re-investment profit on preferential terms.
Chapter V
Value Added Tax
The concept regards this tax as a leading national tax. Out of four models in the international practice the choice fell on the third model of the value added tax, which given to the present situation in Georgia was considered the most acceptable and effective. According to the proposed method this tax is practically universal.
VAT is imposed on operations and not on taxpayers as provided by current legislation. Proceeding from this, registration separately as the VAT payer becomes invalid, as well as the necessity to define a lower margin of the VAT.
It is the newly produced value that is the object for levying VAT calculated as the difference between a jointly taxable income and expenses carried out to gain this income. Therefore, it is no longer necessary to offset an already paid VAT, thus relieving responsibility from one taxpayer for the actions of another taxpayer and on the other hand eliminating an important source of corruption. The only operation on which a zero VAT rate is preserved (right for VAT refund on expenses) is the export of goods. However, this right shall become valid only when the taxpayer acknowledges the receipt of income from exports. Besides, the right for tax refund shall be originated whether or no the sums paid to the supplier have already been levied at the supplier's.
The new concept negates a tax invoice introducing instead an internationally accepted commercial invoice (i.e. cash demand). The invoice shall have requisite indications for ascertainment so that it is regarded a document demonstrating the right to deduction of expenses.
A period of VAT calculation is a calendar month. The date on which a declaration is to be presented is the 15th day of the month following that of the calculation and the period of tax payment - next 10 days. This payment period permits a taxpayer to qualify his liability before the State. The norm is based on the priority of the fact of tax payment against declaration of the tax.
VAT rate is based on the 15 per cent of a taxable turnover. Also this rate is provisional and may vary from case to case.
According to the new concept, the changes shall apply to the list of tax-exempt operations in course of optimization.
Chapter VI
Excise
Proceeding from its specific nature, no principle changes have been made with regard to this payment as compared to the currently active Code, except for voiding of an invoice.
Chapter VII
Property Tax
While this tax is the only local tax it is regarded as a major financial instrument of self-government and local control. This tax is imposed on the following objects:
1. Land and facilities;
2. Fixed assets used for economic activities;
3. Transport means;
4. Other property subject to mandatory registration
Principal novelty regarding this tax is introduction of progressive scales. Enabling of corrective territorial coefficients is also essential as far as it allows autonomous bodies to obtain additional effective instruments of urban policy management.
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