A new wave of coverage of Virtual Zone issues on Business Formula
A new wave of coverage of Virtual Zone issues on Business Formula
In the 21st century, especially after the Covid-19 Pandemic period, Virtual reality and the new possibilities which were opened, are the most actual issues all over the world. Today we have a new wave of changes toward taxation practices, which has been covered by the media, and on Formula TV, there was a show related to this topic, where David Papiashvili, the managing partner of Kreston Georgia, opened the topic super professionally, analyzed it, and talked about the stages of the problem and possible solutions. The Association of Georgian Virtual Zone Persons is actively raising this issue, both in the media and in Governmental bodies.
The respondent has mentioned that the Association is actively involved in this process and already has managed a new meeting with Revenue Service to analyze the problem and talk about possible solutions. Mr. David has already mentioned that the media has repeatedly covered the news related to the taxation of Virtual Zones, which means that this topic does not lose its relevance, and all this is thanks to the Association.
In general, the main idea of the Virtual Zone companies is that this is a tax status that gives us a profit tax benefit in case of cross-border supply of IT technologies abroad. The main requirement is the cross-border operation of products and services. And today, these companies are facing two problems. The first problem was related to the creation of a 100% Georgian product, which was imposed by the Revenue Service. Some companies managed to substantiate the Georgian origin of the products, but, before that, most of them were penalized with a very rigid approach, which cannot be considered a fair and correct approach.
After that, we faced a new reality, where the second problem appeared, related to the determination of the market wage limit. If the company meets the criteria for creating a product on the territory of Georgia and supplying it outside the country, companies in the Virtual Zone are taxed at 5% on profit tax and not on income tax, but now the government argues that companies pay insufficient wages due to market policies or not paid at all. Unfortunately, this problem is still open and could not be solved. In this case, we are dealing with a legislative defect, which is related to the non-existence of the concept of the market amount of salary. In Georgia, we have a market policy for goods and services, but there is no legal basis for wages, which is why the market amount of wages cannot be determined. That is why solving the problem should start from here.
There is a dispute regarding the amount of money that can be paid out as a dividend, and the amount that is not considered a dividend.
Another part of this problem lies in the fact that the Revenue Service approaches the payers with a non-uniform approach. Depending on the diversity of the IT field, there are different salary ranges. There are professional, mid-level, and low-level specialists, and they cannot have the same salary. In this process, it is also important to take into account the regional factor, GEL 5,000 an orally set limit is completely illogical because not all countries and regions can have the same salary policy, especially in such a diverse sector as the IT sector.
According to Papiashvili, the main reason for all this is that the law sometimes creates a loophole, and the government does not try to fix the loophole. This attitude is especially noticeable towards companies in the Virtual Zone. They cannot understand that first of all this is their responsibility.
Due to the problem in the law, the companies of the Virtual Zone applied to the parliament with a legislative proposal, and hope that there will be feedback from them and involvement in solving the problem. Even in private conversations, high-ranking officials recognize the legal gap. However, whether they will take concrete steps in this direction is not yet known.
After the pandemic, companies are trying to virtually hire employees from different countries, and Georgia is also actively trying to position itself in this process, and right now, these companies are struggling in the country with taxation and non-taxation. On the one hand, this approach of the government can be considered legitimate, it wants the budget to receive more income, but the wrong form worsens the investment environment.
The problem should be resolved through mutual involvement – to eliminate legislative gaps with a logical approach. This gap must be eliminated first, and then stricter methods should be implemented. Everything should be solved systematically and on a large scale, because this problem can spread to other sects as well and an unpredictable environment is a big problem for business operations.