Dinner with the Taxman
The restaurant business, more than any other, has its ups and downs. One day can see the place packed with paying punters and another brings empty tables and idle staff that still need paying. Over the financial year, though, one would hope that one could turn a profit, and based on it, pay what taxes are owed to the state. As one foreign business man operating in Georgia told Transparency International Georgia, in other countries, this is how it works. "We have this strange idea of taxing you on what you actually earn," he said. In Georgia, however, the Revenue Service, instead of calculating taxes on the basis of actual earnings, has a novel approach. Basically, tax officials sit in a premise, sometimes for a week, monitoring cash flow, and on this basis, extrapolate what a given business is making over the year. So, if like what happened to the Didi Sakhli restaurant [the name has been changed as the owner wishes to remain anonymous] on the East-West highway, they decide to come in mid August – at the busiest time of the year – there will be an assumption that your annual earnings are considerably more than they actually are. And of course, your tax liability will be similarly disproportionately large. The Didi Sakhli restaurant, on this basis, has been presented with a GEL 400,000 tax bill, including fines, as it was deemed not to have paid its fair share of taxes over the previous two years. The fact that the restaurant all but closed in August 2008 because of the war doesn’t seem to have dawned on the tax authorities. The episode is not isolated. All across Georgia, businesses – ranging from small dukanis to Elit Electronics – have been feeling the heat from the tax authorities. With the tax-take down following the war and the international financial crisis, the state – desperate to bring in revenue – has been "merciless", according to Jeffrey Kent of Tbilisi-based Wel3 drilling company. Small infractions are pounced on, with massive fines that no small business could possibly pay. Late tax returns – in many cases because the business hasn’t been paid by a client – are met with bank accounts being frozen and assets seized. Refunds – often required because the tax authorities often seize more than the liability – are rarely given in cash, but are instead set off against next year’s tax liabilities. In effect, the state is getting interest-free loans, but when businesses owe the state, they are charged a whopping .006% a day in interest. Research conducted by TI Georgia for an upcoming report on the taxation system in Georgia reveals that the problem is more than just excessive zeal and unfair grey areas in the tax code. While other countries use risk analysis to target potential defaulters and evaders – and thus properly utilise tax auditing resources – in Georgia unknown criteria are increasingly used to decide on which businesses are to be audited. The result is what one observer calls a "capriciousness" in the application of the law, with "the tax mechanism used as a club." There have, for instance, been cases where business rivalries have been decided with one side bringing in the Financial Police to destroy the other; where personal slights have been met with a tax audit; where political opponents have had their bank accounts frozen and assets seized. As long as such practices continue, what one prominent business man called "the bad karma" will continue to pervade the Georgian business environment, undermining the many positive legislative and regulatory changes introduced by the government over the past five years. Indeed, the on-the-whole excellent tax code introduced in 2006 will also fail to meet its full potential. For the Didi Sakhli restaurant it will also mean an uncertain future as it faces the prospect of paying an unpayable tax bill or challenging it in the appeals court. For the rest of us, travelling the long road to Batumi, it may mean either a packed lunch or an empty stomach as the Didi Sakhli may be forced to close.