Annotation.  The present article reviews changes in tax legislation and of Georgian legislation “Financial Accounting, Reporting, and Audit”, impact on business environment. Examines substance of profit tax reform and its replacement with tax of distributed profit .It is noted that replacement reform is quite compatible with international financial reporting standards. Although, introduction of this model does not ensure simplification of tax administration and tax legislation. It is mentioned that there is close connection between the amendments put into Georgian tax legislation and the Law of Georgia on “Financial Accounting, Reporting, and Audit”.

Keywords: Financial accounting, tax accounting, tax legislation, profit tax, Estonian model.

Creation of a stable business environment is inevitable precondition of country’s sustainable economic development, as well as solid guarantees of investment safety, inviolability of private property, and state’s consistent and forethought economic policy.

Simplification of tax legislation and tax declaring provides effective increase of company’s activity and significantly reduces cost of tax administration. In this regard many issues of tax administration in Georgia’s tax legislation, still needs to be refined.

Tax code of Georgia occupies a leading place in tax legislative system of the state. Tax Code of Georgia represents complex normative act, which includes not only material, but procedural norms. It is adopted by the high representative organ of the state (parliament of Georgia) and operates on the whole territory of Georgia.

In the aim of practical use of a wide range of legal provisions, the Constitution of Georgia takes into consideration possibility of adoption subordinate normative acts connected with taxation. In addition, Tax Code of Georgia has the preliminary legal force in respect to subordinate normative acts in Georgia. 

Despite of current legislative system, there is not established consistent tax legislation system in Georgia. Due to which constantly lasts changes and amendments. In some concrete cases, groundless punishment of taxpayers takes place, which is frequently followed by tax disputes. 

Countries with transition economy, including Georgia is characterizing with tax liberalization, which with its essence, is really attractive, and has many supporters. Reduction of tax rates theoretically and practically   should ensure economic growth, and the development of real sector, but the main problem in this case is providing budget with tax revenues. The problem of budget deficit causes increasing of internal and external debts. In addition, increase of deficit causes provocation of inflationary processes. It is essential to determine qualitative characteristic of elasticity between these indicators. Tax burden(Tax Burden)–is a generalized index, which is characterizes the role of taxes and is defined as the  the ratio of the total amount of tax revenues to a joint national product.

Government of Georgia in the light of global crises focused on development of liberal tax policy. Current tax code, which entered into force in 1 January 2011, included a wide range of provisions stimulating business. A simplified tax regulation for small business (micro and small enterprises) was introduced. Institute of Tax Ombudsman was established. Institute of Private tax agent was also established.  Institute of warning has been activated as an alternative method of fine; legislation was consolidated, tax and customs codes were unified. Positive aspect was the introduction of “tax agreement” into tax legislation of Georgia. The principle of tax agreement was also acceptable and justifiable to the state, which was maintained in all subsequent amendments. However, in the existing provision of legislation it is not defined in which form of legislative framework should be agreed tax agreement (in basic payment, fine, or surcharge). Consequently, this does not exclude subjectivism.  On the basis of current discussion we consider that it should be regulated within the legislation and subordinated to particular legislative frame. 

In spite of the measures taken in the last years, that  simplified  tax legislation and reduced tax interests, fulfillment of legislative base still continues.

From January 1, 2017, an amendment introduced into tax legislation entered into force, according to which, existing profit  tax changed by tax   of distributed profit, that is similar to Estonian model. The significant change of legislation is that distributed earnings and incurred costs shall be taxed by profit tax, which is not connected to economic activity. company has the right to carry out reinvestment  without restriction and taxation at the expense of income -  expand, dispose production and deposit money on bank deposit. For the purpose of profit taxes calculating period is considered calendar month. Taxation base is defined according to financial accounting data produced under international standards.

The cost, which is basically connected to company’s economic activity, is free of taxes. An incurred cost or other payment, which is not connected to economic activity, is taxed by profit tax. Deliver of goods/service and cash transfer; or representative expense incurred above marginal amount;

Small and middle sized entreprises have the right of reinvestment without taxation of received income, the same rule is set for large business; when the business has much financial resource in the form of untaxed income, it can carry out reinvestment, and expand production. This must be reflected on reducing of unemployment level, growth of economy and finally, on the increase of budgetary income. This is considered one of the main advantages of Estonian model.

Declaring of tax payments is fully conducted electronically and compatible with international standards of financial accounting.All type of tax privileges set for profit tax is abolished. There is no need to calculate amortization of movable/immovable property. It should be considered, that income is determined according to financial reporting prepared in compliance with international financial reporting standards.

In June 2016, The law of Georgia on “Financial Accounting, Reporting and Audit” was signed. The shall have a significant impact on business environment in Georgia because it is related to  financial reporting prepared in compliance with international financial reporting standards, to its usage, publishing and society’s accessibility. The law divides companies/enterprises into 5 categories. The law obliges public interest person (PPI) enterprises and the first category enterprises to implement financial accounting and reporting in compliance with international financial reporting standards (IFRS); Enterprises, from second and third category, should implement financial accounting and reporting according to international financial reporting standards of small and middle sized enterprises (IFRS  forSMEs); and enterprises and non-profit  legal entitiesfrom the forth category, should implement financial accounting and reporting according to standards defined by accounting, reporting and auditing Board of Review.

Thus, enterprises from the first, second, and PPI categories, whose accounting period coincides, must to implement financial reporting according to IFRS by the finished year of 31 December , 2017. Also, they are required to ensure financial reporting audit by the same period.

Conclusion

There is a close connection between the amendments put into Georgian tax legislation and the Law of Georgia on “Financial Accounting, Reporting, and Audit”. Tax base is entirely based on financial reporting data produced according to IFRS. Consequently, substantially increases responsibility and the importance of implementation for readiness of mentioned changes.

Although, it cannot be said that the abolition of tax privileges over tax administration and simplification of tax legislation is conditioned by the introduction of Estonian model. Indeed, in our opinion, these type of changes require perfect ensuring of financial accounting, keeping the standards of international financial reporting standards and hard work from the side of accountants while presenting monthly income declarations. 

The work should be continued towards improvement of tax legislation system of Georgia. The urgent issues we consider: ensure the stability of tax system; maximal simplification of tax system and reduction of tax privileges; optimal coordination of direct and indirect taxes. To weaken tax burden by reasonable reduction of tax rates; Improvement of income tax of individuals by taking into consideration the inflationary conditions and Implementation of a minimum of unpaid amounts due to the minimum wage; and establishment  of tax-exempted minimum by considering minimum of subsistence.

References

1. Constitution of Georgia, Tbilisi, 2010;

2. Tax Code of Georgia, Tbilisi, 2017;

3. Commentary of Tax Code of Georgia, Book I-II, Tbilisi 2012;

4. International Financial Reporting Standards (in Three books)- Edition 2014;