Unwarranted GEL 2 billion write-off planned as part of tax amnesty
Two important changes are being made to the the tax code:
1. On January 1, 2017, a new profit tax system will enter into force. Retained earnings will not be taxed, while distributed earnings will. The reform aims to stimulate the economy and speed up economic growth, which is clearly a positive step.
2. Apart from this, a system-wide tax debt write-off will take place. As a result, the budget will shed GEL 2 billion from:
- GEL 1.41 billion in debts from 69,700 tax payers incurred before 2011,
- GEL 623.6 million in fines and penalties from 27,380 tax payers, provided they pay the GEL 339.5 million in taxes they accrued before 2013.
- The Government of Georgia has never written off tax debts on such a large scale. In total, more than GEL 2 billion from approximately 100,000 tax payers will be written off. The timing of the write-off – just several months before parliamentary elections – suggests that it may be politically motivated.
- Following a write-off, many tax payers may begin to expect that they can accumulate large tax debts, believing that they will be written off at some point in the future. Clearly this creates a dangerous precedent, which could change how tax payers behave. At the same time, it is clearly unfair to other tax payers.
Transparency International Georgia welcomes any action which aims to stimulate the economy. However, the government should carefully analyze its actions, so that it does not encourage inappropriate behavior by businesses. The government should assess how much any given tax break will stimulate the economy. The Ministry of Finance rarely performs this kind of analysis. When it does, the analysis is not published. Consequently, the public does not know what effects this tax amnesty will have. This raises suspicions about whether the initiative is politically motivated.
Transparency International Georgia believes that:
- The government should explains why it is necessary to write off over GEL 2 billion in tax liabilities from approximately 100,000 tax payers in 2016, an election year.
- Before the Ministry of Finance grants a tax break, it should assess its effects, and the tax break should be introduced if the probability that it will stimulate the economy is high. If the Ministry carries out such an analysis, it should publish it, as was the case with the analysis of the effects the profit tax reform will have on the economy. Notably, the Ministry of Finance and the Parliamentary Budget Office set a good example by publishing an interesting analysis of the effects of the profit tax reform.
The US Internal Revenue Service has significant experience with this type of analysis. Taking this experience into account would significantly ease the process of measuring the effects of tax breaks and their potential economic impact for the Ministry of Finance.
Debts incurred before January 1st, 2011 will be written off. Debts incurred between 2011 and the present will be written off, if the tax payer has not been engaged in business activities since the debt was incurred.