Home / Economy / Georgian Business People Assessing Removing Tax on Reinvested Profits

Georgian Business People Assessing Removing Tax on Reinvested Profits

Opinion of Influential Businessmen

Last period discussions on the reinvested profits tax abolition have intensified. The initiative was first raised by Economy Minister Giorgi Kvirikashvili. The decision was positively appraised by the Taxpayers Association. The organization put forward its own scheme for the tax removal, under which the tax amount should be reduced stage by stage in line with the following scheme:

The current tax: 15%;  I stage – 10%; II Stage – 5%; III stage – 0%;

Current Tax on Dividends: 5%;  I stage – 10%; II stage – 15%; III Stage – 20%.

The Authorities should realize the change will intensify the economic activity, the private sector will increase capitalization. A s result, the state budget revenues will grow from other taxes, the Taxpayers’ Association says.

Finance Minister Nodar Khaduri has also commented on the gradual removal of the profits tax. The Authorities are working on the tax removal. It will not be abolished immediately, because the budget revenues from the profits tax is 900 million GEL, Khaduri said.

“We are discussing the Estonian model, but we should not accelerate the process, because at this stage the state budget receives 900 million GEL. If we immediately remove the tax, the state budget will be cut by 900 million GEL. We are working on the issue and the final model will be expectedly submitted in September, as well as a roadmap for moving to the Estonian model”, Khaduri said.

The Finance Ministry is developing a new initiative to exempt the business sector from the profits tax and only dividends will be taxed. The business sector representatives have positively appraised the initiative. The freed funds will be directed to the business promotion and development, they noted.

The finance ministry is also developing another model. Deputy Finance Minister Lasha Khutsishvili talked about the tax removal details last week.

Today, the issue of removing the profits tax and increasing the dividends tax is being widely considered, but the Authorities have no similar plans, he said.

“The Estonian model implies not a growth in dividends tax, but replacing the profits tax and dividends tax by a new tax, that is, a distributed profits tax. It is important that this new tax must not be associated with the dividends tax”, Lasha Khutsishvili said.

The Estonian Model

Estonia introduced the distributed profits tax 15 years ago and it is regulated by the Income Tax Act, under which the distributed profits tax refers to:

  1. the distributed tax;
  2. Employees’ Salary Profits;
  3. Donations, Contributions and representative expenditures;
  4. Some expenditures or/and costs that are not related to a company business performance.

According to the Income Tax Act, the profits distribution includes: issuing cash and noncash dividends, reduction of capital, buying off a stake/share or capital liquidation distribution if it exceeds the deposits.

Estonia taxes the profits in the distribution component, but the country does not tax dividends in addition. Moreover, the rate of the distributed profits and the income taxes are the same to prevent registration of profits distribution as wages.

The Estonian model’s peculiarity consists in the fact some types of expenditures are taxed by a profits tax to prevent profits distribution through the expenditures component. In the Georgian taxation law, this norm is analogical to the expenditures that are not deducted from the taxable revenues and implies the following categories:

– Expenditures (including for real estate purchase) or issued funds that are not related to the company business activities;

– expenditures or issued funds without due documentation;

-issued loans or advanced payment in countries with preferential taxation for registered legal entities and so on.

The calculation of the distributed profits tax does not require a detailed analysis of separate incomes and expenditures and an accent is made on controlling issued money. The model based on this experience significantly simplifies the tax administration. Indeed, the control is necessary to prevent masking profits as expenditures, but contrary to a classic model of profits tax, there is no necessity of controlling the expenditures that are not related to the outflow of money from the company. Similar expenditures are as follows: amortization, charged interest rates, recalculation losses and so on.

It is also important the tax profits of the company equals to the financial profits in the distributed tax model (contrary to the Georgian model). This signifies the tax audit may be fully based on the audited financial accountability of the company and this will cut the time and expenditures that are required for the audit.

 

– Do you expect these changes to bring real support to the business sector and what do the businessmen think about this initiative?

“In this case Georgia will Become more Investment-friendly Country”

mikheil Chkuaseli

 

GeoPlant Director Mikheil Chkuaseli: “The Authorities have taken a good decision, but they should not focus on dividends.

It is more expedient to revise the budget expenditures than to tax dividends proportionally to reduction in profits tax or growth in dividends tax, Chkuaseli said.

In this case Georgia will become more investment-friendly country, he added.  “Georgia may develop the stock exchange and the stock market on the regional level and many physical bodies may be related to this process”, Chkuaseli noted.

This is an encouraging decision for the business sector, especially, for new investments, he said. “This will be huge stimulus. The existing business has already taken these decisions amid the current taxation regime”, Chkuaseli noted.

 

‘This Decision will Encourage Businessmen to Make Reinvestments” 

Tsezar Chocheli

Businessman Tsezar Chocheli says these changes will make positive affect on the business development and the economy, in whole. Under the current legislation and system, the government takes 20% and fewer investments are made.

This decision will encourage the business sector, Chocheli added. “So far the business sector has avoided making reinvestments and they used to make focus in dividends. I believe this decision will encourage businessmen to make reinvestments”, Chocheli said.

Similar models work in many countries, he added. Moreover, many countries have exempted the business sector from all taxes in order to promote the production, he added. “For example, China and Korea have set quite good preferences for the production development. China has developed regions for many years without taxes”, Chocheli noted.

Today’s decision will make positive influence on the Georgian economy, he said. 

“Foreign Investors should be Encouraged to  Put Investments in Georgia instead of other Countries”

tornike abuladze

Arci Group development company executive director Tornike Abuladze welcomes any decision for removing taxes, but he considers administration to be very important. This is the business sector promotion, but, it mainly promotes foreign investors, he said.

Georgian businessmen put money in Georgia, enlarge their business activities in Georgia, while Foreign Investors should be Encouraged to  Put Investments in Georgia instead of other Countries, Abuladze noted.

“State Expenditures will considerably Decline, Doing Business will Go Easier”

Businessman Lasha Papashvili backs all preferences to encourage the economy and asserts these preferences will bring only positive affects.

“This is a complex issue. Profits tax removal will make tax audit useless and state expenditures will considerably decline. As a result, doing business will go easier. In general, the business sector will be encouraged”, Papashvili noted.

“Administration Burden Removal will Leave Money in Business Sector”

Nikoloz Khundzakishvili

Natakhtari company corporate director Nikoloz Khundzakishvili says the initiative is acceptable. Two models are being discussed. In the first case, reinvested profits will be exempted from taxation. In the second case, the entirely profits will be freed from taxation.

Khundzakishvili backs the second case because of less administration. “Reinvestments need further administration to prove whether this or that expenditure is directed for reinvestments. We may create a bad system, by occasion. A full removal will be more convenient for the business. The Administration burden will be removed and the money will remain in the business”, Khundzakishvili noted.

“No businessman Trusts Empty Initiatives, Uncalculated Initiatives”

iva

Businessman Temur Chkonia positively appraises the mentioned initiative, but he thinks the Authorities should develop a joint program with full calculations. The less taxes, the better for the business. At the same time, everything should be calculated to know whether these decisions will serve the state interests.

“Every government is trying to do something, but we remain poor anyway. This signifies these attempts and initiatives are not programmed and they are useless. No businessman trusts empty initiatives, uncalculated initiatives. The fact is the Government is trying to do something, but only substantiated and skillfully developed program will bring real results and the business promotion will develop the whole country”, Chkonia noted.