Companies Eligible for Tax Benefits are Retrospectively Fined
Companies Eligible for Tax Benefits are Retrospectively Fined
In 2011, Liberal amendments were made to the tax code in order to develop IT technologies in Georgia, and tax privileges were imposed on companies with the status of “virtual zone person”. 10 years after the legislative amendments, the Audit Office imposed profit tax and fines on companies with similar status retrospectively, starting from 2018 and the motive was that the companies could not confirm the fact of production in Georgia.
In order to protect the interests of the IT companies, in 2022 the “Association of Georgian Virtual Zone Persons” was created. The association studies the facts of fines and together with their cancellation requests specify some records in the law to avoid further interpretations.
To determine how many companies have benefited from the grace status, how many companies have been fined, what products they create in Georgia and what are their future plans, “Commersant” contacted Shorena kopaleishvili, the chairman of the Association of the Virtual Zone Persons.
– How many companies with the status of Georgian Virtual Zone Person have been registered since 2011?
– According to the official response received by the Association of Georgian Virtual Zone Persons from the Ministry of Finance, as of February 8, 2022, a total of 1115 companies with similar status were registered in Georgia.
– What amount of products have been created during the last 11 years by the efforts of the companies having the status of Georgian Virtual Zone Persons?
– The average annual turnover of an active and powerful company is about $ 1,000,000. As you can see, this is an approximate annual turnover of one company, respectively, the volume of funds is hundreds of millions of dollars.
— How much money has been allocated to the budget by the companies enjoying benefits since the liberalization of the law and how much money has been allocated to them?
– The association works on submitting the request to the relevant services in order to receive this information and describe it in numbers. However, we can judge based on the turnover of one of the companies known to us. For example, the distribution of profits in the company took place once every few months, ranging from 200,000 to 400,000 US dollars. At least 5% of this amount is a tax on the distribution of dividends to the state budget. Accordingly, only one time per year, when distributing dividends by one company only 5% of USD 400,000 is approximately USD 20,000.
Until 2021, Virtual Zone Persons enjoyed the following types of benefits:
* Profit received from deliveries outside Georgia;
* Delivery outside Georgia with Value Added Tax;
* Customs fees for export.
10 years after the adoption of the law, at the beginning of 2021, a mass audit of companies with this status was launched to determine whether their activities correspond to the privileged status. As a result, the companies ‘ benefits were retrospectively cancelled and profit tax payments were imposed from the past period – from 2018 onwards. Fines were also charged – in the amount of 50% of the amount payable. The amounts range up to millions of gel. All this on the grounds that the companies could not prove their activities on the territory of Georgia. In particular, they did not sit in Georgia and did not establish the fact of creation of information technology products on the territory of Georgia. However, until now, the business has not received answers to the main questions: 1) after so many years, what was the reason for the change of tax policy in such a rigid form; 2) why have companies been taxed for the past period, when at that moment there was no guide or reference on Taxation and why the Revenue Service interprets the law to the detriment.
– How many companies were fined and how much money?
– On our official website there are already cases of 4 companies whose fines exceed million gel. Considering the fact that hundreds of companies have been fined, we estimate that the imposed fines range within several million GEL. The association officially requested information from the Revenue Service about the presentation of the acts reflecting the fines of the companies, which unfortunately we were refused, while the Supreme Court of Georgia clearly explained that the information is public.
It should also be noted that before the creation of the association, companies, especially foreign investors, were reluctant to speak publicly about these problems. Now the representatives of the affected companies contact us daily and share information about how difficult it is to protect their rights in relation to the state. I encourage all companies to contact and join us.
— How many people are employed in the companies having the status of Georgian Virtual Zone Person as of March 2022, how many percent of them are citizens of Georgia?
– The number of employees depends on the needs of this or that company. However, it should be noted that companies with this status and their foreign founders had difficulty finding qualified and relevant staff in Georgia.
In addition, IT infrastructure costs for the company can reach 90% of total costs. For example hosting, and acquisition of server capacity (Amazon, Cloudfire, Hetzner). You will agree that creating IT products is impossible without a quality IT infrastructure. Unfortunately, there is no such service provider in Georgia yet.
— How much is the average salary in international IT companies registered in Georgia and how much abroad? (USA, Germany, Estonia…)
– It depends primarily on the qualification of a specialist. In the Georgian sector, it can be said that IT specialists receive practically the same remuneration as in European companies. The salary starts from 1000 USD and reaches tens of thousands of US dollars if the staff is a senior specialist and has unique competencies.
— In terms of technological development and strengthening of cyber security, after the liberalization of the law, what contribution have international IT companies made to Georgia?
— In this case, we are talking about companies having the status of the Georgian Virtual Zone Person, and not international companies that have opened their representative offices here. But it should be noted that any IT company that creates a product on behalf of the jurisdiction of Georgia thus strengthens the reputation of the country, develops the banking system, and most importantly, raises the qualification level of its staff.
— What part of the law gives the possibility of interpretation and how should it be changed?
-Article 6 of the law on Information Technology zones reads: “activity in the Virtual Zone includes economic activity carried out by a legal entity, which will be directed to the creation of Information Technologies on the territory of Georgia.” This provision does not clearly reflect the fact that employees of these companies must be in Georgia and sell Information Technologies from Georgia. Moreover, Article 99, Part 1, subparagraph “p” of the Tax Code of Georgia does not put any preconditions for a legal person to enjoy a 15% profit benefit.
As we can see, the law still allows interpretation, which attempts by the tax authorities grossly violate the rights of investors and damages the international reputation of the country.
The main requirements of the affected companies are the following:
1-abolish the decisions made as a result of the Tax Audit and the penalties imposed.
2-make legislative changes to all relevant laws, so that there is no attempt to interpret the law by either party.
3 – establish precise criteria as a necessary precondition for exemption from taxation, so that companies have sufficient information, make correct business decisions, and know in advance what the tax consequences of their activities will be if they do not meet the above criteria.