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Corporate Income Tax Reform Reduces tax Revenues

The Georgian Finance Ministry said that it will have to cut about GEL 400 million from 2016 state budget as planned corporate income tax reform will reduce tax revenues this year.

According to the proposal, which the government says is based on the Estonian model, corporate income tax (a regular rate is 15%) will only apply to distributed profit; undistributed profits, reinvested or retained, will not be subject to income taxation.

The bill was endorsed by cabinet members at a meeting on February 12 and it will now be sent to the Parliament for consideration. The government hopes the reform will help to speed up economic growth.

Proposed amendments to the tax code, if approved by the Parliament, will go into force from July 1, 2016, Finance Minister Nodar Khaduri said.

The proposal, however, will not apply to banks, insurance companies and microfinance institutions, he said.

A calendar year, which is now the tax period for corporate income tax, will be replaced by a month, according to the proposal.

In another proposal, the Finance Ministry said, a company, using fixed assets in VAT taxable operations, will be exempted from VAT on importation of fixed assets.

“These reforms – both income tax and VAT – will reduce this year’s targeted revenues by about 400 million lari,” the Finance Minister said, adding that the planned budget cut will come “mostly at expense of reducing administrative expenditures.”

The 2016 state budget targets revenues from corporate income tax at GEL 980 million, accounting for over 11% of budget expenditures and 12.3% of total tax revenues of GEL 7.98 billion planned this year.

Speaking at a meeting with business community in Tbilisi in late January, PM Giorgi Kvirikashvili said that the government was ready for the budget cut associated with the planned corporate income tax reform even though 2016 is election year in Georgia.

“Hopefully in couple of months from now we will have a new tax code, where only distributed earnings will be taxed. Of course it will require respective budget adjustments and we are ready to make these adjustments despite the fact that we are in an election year,” the PM said on January 28.

Kvirikashvili first voiced proposal to introduce so called Estonian model – zero corporate income tax on undistributed profits – in March, 2015 when he was the Economy Minister. Although the government launched examining its possible effects, the proposal did not appear to gain traction at the time; deputy finance minister sounded skeptical over the proposal, when commenting on the issue in October, 2015. Kvirikashvili refloated idea in January, two weeks after becoming the Prime Minister.