Project Brief Investment Climate | World Bank Group 90710 Tax Reforms Benefit Georgia Businesses Project At A Glance Results and Impacts Country/Region GEORGIA/EUROPE AND CENTRAL ASIA • Simplified regimes introduced with Product BUSINESS TAXATION World Bank Group support helped Georgian micro and small businesses THEME SMALL AND MEDIUM ENTERPRISES achieve cost savings of around $15.8 The Georgia Tax Simplification Project aimed to lower tax compliance million. costs and expand the tax base of micro and small enterprises. The • New mediation procedures at Revenue project worked to reduce the administrative burden of paying Service resulted in businesses winning taxes, streamline the tax appeal system, improve public awareness 47 percent of cases, compared to 10 on tax reform, expand outreach to the tax-paying community, percent before mediation. Firms partially and help develop detailed transfer pricing rules and procedures to won 28 percent of cases, compared to increase transparency in George’s business environment. Project 20 percent before mediation. recommendations are reflected in the new tax code and legislation • These results mean more companies enacted since January 2011. will be willing to address concerns to Revenue Service. • Implementation of taxpayer education system included 12 training events. Context While intensive tax reforms implemented in Georgia since 2003 • Tax code amended in June 2012 to have improved the business environment, there was a discrepancy include a transfer pricing-related in the impact of reform on small versus large businesses. According clause expected to improve to the 2008 Business Environment and Enterprise Performance tax revenues. Survey conducted by the World Bank Group and the European Bank In Partnership with AUSTRIA, LUXEMBoURG, THE NETHERLANDS World Bank Group for Reconstruction and Development, the percentage Tax code reforms include a transfer-pricing clause and of medium and large firms that consider the tax implementation of a good-practice tax audit system. administration a major obstacle decreased from 26 to 4 Transfer pricing occurs when two related companies percent between 2005 and 2008. Over the same time trade with each other. When they establish a price for the period, this number increased among small businesses transaction, it is called transfer pricing. Abusive transfer from 11 to 20 percent. pricing is illegal. An “arm’s length” price is the market price that would naturally result if two unrelated companies traded—this is usually considered acceptable for tax Our Role purposes. Investment climate teams of the Bank Group advised the Georgian government on a new tax code that was adopted in September 2010 and enacted the following year. The new tax code introduced special tax regimes for micro and small businesses. New regulations crafted with the help of the IFC-implemented project reduced the administrative burden and compliance costs, thus improving company operations. Simplified regimes can eliminate many of the labor and monetary costs associated with tax accounting and penalties for micro and small businesses, as well as other related costs. This new legislation has allowed for a more transparent and equitable system in line with international good practice. An independent tax ombudsman’s office has even been created to support businesses. The new transfer pricing clause in the Georgian tax code The new tax code includes a good-practice appeals process gives the Ministry of Finance the authority to determine that alleviates a previous bias in the process in favor of the how the arm’s length price is established so that the government. The project helped support the introduction concept can be incorporated into the regime according of new tax mediation procedures. to international good practice. This reduces the potential These new procedures have resulted in firms winning 47 for economic double taxation or foregone revenues for percent of cases, as compared to just 10 percent prior to the country. The project supported the government in mediation. They have also improved the credibility of the development of secondary legislation, as well as production Revenue Service. of detailed guidelines on the application of transfer pricing law and capacity-building of the Revenue Service staff. The tax program in Georgia also benefitted from a taxpayer “The new taxation system is comfortable education campaign. The project helped organize 12 training events for 671 micro and small businesses to help for small businesses like mine” them comply with the new tax code. Additionally, 3,746 Nana Kurashvili copies of tax brochures were distributed through local Entrepreneur Revenue Services offices nationwide. Contact Ekaterine Avaliani | Operations Officer | Investment Climate Email: TBarbakadze@ifc.org | TEL: 995-32-223-4300/01 | www.wbginvestmentclimate.org