Citing a request from business associations, the Finance Ministry said it was decided to postpone enforcement of corporate income tax reform by six month until the beginning of next year.
According to the proposal, which is based on the Estonian model, corporate income tax (a regular rate is 15%) will only apply to distributed profit; undistributed profits, reinvested or retained, will not be subject to income taxation.
The proposed changes in the tax code will still go through parliament for confirmation, but, if adopted, they will be brought into effect from January 2017, instead of originally planned July 2016, according to the Finance Ministry.
In case of mid-year enforcement of the reform, the government was expecting drop in tax revenues, which would have required about GEL 350-400 million budget cut this year, Finance Minister, Nodar Khaduri, said on March 22. He suggested that these changes will no longer be needed because of six-month delay in enacting the reform. He, however, did not rule out other budgetary changes for the purpose of diverting some administrative expenses to funding of infrastructure projects.
The government’s initial proposal was excluding banks, insurance companies and microfinance institutions from the planned corporate income tax reform. The Finance Minister, however, said on March 22 that changes will also apply to the financial sector, but, unlike other businesses, from 2019 and not from January, 2017.
“We have analyzed business associations’ proposal and agree that the changes should go into force from January 1, 2017,” Finance Minister Khaduri said on March 22. “I want to ask the Georgian Parliament to speed up discussion of the bill as much as possible in order to have it adopted in April if possible.”
While expressing their support to the proposed reform, the American Chamber of Commerce (AmCham) in Georgia and Business Association of Georgia (BAG) have called on the government not to hurry with its enforcement and to postpone it until next year.
In a letter to the PM in early March, AmCham Georgia said that that bringing the proposal into effect “in the middle of the tax year will be quite problematic for implementation.”
“Our concern is that this is simply too soon to allow companies to put in place the necessary changes in their accounting practices. There are also concerns that, in order for companies to be able to change to the new system half way through the year, they would have to ‘close’ their financial year in the summer and in the New Year. This would create large administrative burdens that may negate the benefits intended in the change for the current year,” Sarah Williamson, the president of AmCham in Georgia, wrote in the letter.
BAG also voiced similar concerns and said that “hasty implementation” of the proposed reform was fraught with risk. BAG’s executive director, Irakli Aslanishvili, also pointed that some potential shortcomings of the proposed bill may only surface when it is put into practice, which would require prompt legislative changes – something that might be problematic in the view of upcoming parliamentary elections in October, which could have delayed urgent amendments until after the new parliament is convened.
