Reform of the Georgian Tax Code – New VAT Rules

Value added tax (VAT) is one of the most essential taxes in Georgia. In 2019, VAT corresponded to 44% of the tax revenues of the Georgian budget. It may be concluded that VAT is one of the strongest instruments of the Georgian fiscal policy and has a significant potential of impacting an economic activity. This could in turn be the reason why the VAT rate has remained unchanged since 2004 and accounts for 18% of taxable transactions.

In line with the requirements of the 2014 Association Agreement with the European Union, some notable amendments have been recently made in the VAT section of the Tax Code of Georgia. Pursuant to these changes, the VAT regulations have been harmonized with the EU legislation (more precisely with the Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax).

One of the fundamental changes to the VAT regulations concern its scope. Prior to the reform, VAT was applicable to any economic activity which intended to provide income or compensation. From 2021, as a result of these changes, VAT started to predominantly apply to those persons that carry out a repeated economic activity, independently and in an organised manner for profit.

In addition here are some of the primary changes that have been made to the Tax Code with respect to the VAT rules:

  • Irregular activities except for the supply of non-residential building are no longer considered to be taxable;
  • Temporary admission of goods is no longer a taxable transaction;
  • A taxable person who has a fixed institution in Georgia will be obliged to become a VAT payer upon starting a business;
  • Delivery of goods free of charge will be taxed only if the relevant person has deducted VAT on these goods and will be taxed on the “cost basis” of the delivered goods/services and not at the market price;
  • The transfer/use of the goods as a sample or a small gift will not be taxed;
  • In addition to medical and educational activities, the delivery of services/goods directly related to it and ancillary in relation to it will be exempt from taxation;
  • The principles determining the place of service is changed (reviewed in details below).

General Nature of VAT

VAT as a tax is “assessed incrementally”, meaning that it is added at each stage of the supply chain, starting from labor and raw materials to the sale of the final product. In this regard subsequent chains of production or the goods’ improvement stages entail taxing the added value of the goods, e.g. if the initial value of the purchased good that was EUR200 were to be increased by EUR400, the VAT will be paid on the added value of EUR400 rather than its total price EUR600.

VAT object of taxation are the activities that are carried out on the territory of Georgia e.g.:

  • Suppy of goods;
  • Supply of services;
  • Import (Since recently Tax Code allowed eliminating VAT tax on temporary import of goods).

Right of Deduction

Pursuant to the Tax Code, the tax subject is entitled to the right of VAT deduction. A right of deduction can be defined as the means for the tax subject to claim the VAT paid upon the purchased goods and services. Prerequisite for the VAT deduction is for the original seller to be a registered VAT payer. The right of deduction is the primary reason why business owners, entrepreneurs and others prefer to be registered as VAT taxpayers. This way they are becoming more desirable partners in the market and their contractors are able to receive the paid VAT from the Revenue Services of Georgia.

Place of Taxable Operation

Operation will not be taxed with VAT if it was not carried out on the territory of Georgia.

The following approach is generally used to determine the place of the operation:

  • The place of the operation in the cases of the supply of the goods is determined based on the transfer of ownership while during the transportation, it is deterimined based on the sender’s location.
  • During the provision of the service – two main principles apply:
    • When an operation entails B2B transaction, place of the operation is defined based on the place of buyer’s establishment;
    • When an operation entails B2C transaction, place of the operation is defined based on the place of the seller’s establishment;
  • In cases of immovable property, its location determines the place of the taxable

Taxable amount

The taxable amount is the payment received in exchange for the supply of goods/services excluding the VAT. This amount includes all taxes (except the VAT), associated costs, commissions, transportation costs, insurance etc. Additionally, taxable amount does not include the discount or the costs incurred by the supplier or the seller.

Time for the VAT Tax Operation

VAT taxpayers should pay the payable tax amount within the time limit fixed by the tax legislation. If a person fails to do so, tax penalty will be imposed on him/her. Therefore, in order to avoid the responsibility for a tax offence, it is necessary to determine the exact date for when the VAT tax responsibility originates.

VAT on delivery of goods/services is carried out at the moment of the delivery of goods/services. If the advance is paid in full or in part before the supply of goods/services, the VAT liability arises upon the payment of the amount, during the same reporting period.

VAT Rate, Tax Period and Reporting

The VAT rate is 18 percent. The subject of the VAT tax is obliged to submit a VAT declaration to the tax authority by the 15th of the month following the reporting period (the calendar month is defined as the VAT reporting period) and pay the tax within the same period.

Transactions exempt from the VAT

Number of transactions are exempt from the VAT. These include:

  • Supply of the land;
  • Financial operations/financial services;
  • Medical/dental services;
  • Provision of educational services by an educational institution;
  • Provision of the services through lotteries, gambling etc;
  • Import of cars, motorcycles, mopeds, bicycles;
  • Import of goods intended for medical purposes;

Additionally, Georgia is party to more than 56 bilateral treaties on the Avoidance of Double Taxation. The agreements allow international investors to avoid being taxed twice on the same operations and in certain circumstances preclude the VAT payments to the Georgian tax authorities.

 

Reform of the Georgian Tax Code – New VAT Rules

Value added tax (VAT) is one of the most essential taxes in Georgia. In 2019, VAT corresponded to 44% of the tax revenues of the Georgian budget. It may be concluded that VAT is one of the strongest instruments of the Georgian fiscal policy and has a significant potential of impacting an economic activity. This could in turn be the reason why the VAT rate has remained unchanged since 2004 and accounts for 18% of taxable transactions.

In line with the requirements of the 2014 Association Agreement with the European Union, some notable amendments have been recently made in the VAT section of the Tax Code of Georgia. Pursuant to these changes, the VAT regulations have been harmonized with the EU legislation (more precisely with the Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax).

One of the fundamental changes to the VAT regulations concern its scope. Prior to the reform, VAT was applicable to any economic activity which intended to provide income or compensation. From 2021, as a result of these changes, VAT started to predominantly apply to those persons that carry out a repeated economic activity, independently and in an organised manner for profit.

In addition here are some of the primary changes that have been made to the Tax Code with respect to the VAT rules:

  • Irregular activities except for the supply of non-residential building are no longer considered to be taxable;
  • Temporary admission of goods is no longer a taxable transaction;
  • A taxable person who has a fixed institution in Georgia will be obliged to become a VAT payer upon starting a business;
  • Delivery of goods free of charge will be taxed only if the relevant person has deducted VAT on these goods and will be taxed on the “cost basis” of the delivered goods/services and not at the market price;
  • The transfer/use of the goods as a sample or a small gift will not be taxed;
  • In addition to medical and educational activities, the delivery of services/goods directly related to it and ancillary in relation to it will be exempt from taxation;
  • The principles determining the place of service is changed (reviewed in details below).

General Nature of VAT

VAT as a tax is “assessed incrementally”, meaning that it is added at each stage of the supply chain, starting from labor and raw materials to the sale of the final product. In this regard subsequent chains of production or the goods’ improvement stages entail taxing the added value of the goods, e.g. if the initial value of the purchased good that was EUR200 were to be increased by EUR400, the VAT will be paid on the added value of EUR400 rather than its total price EUR600.

VAT object of taxation are the activities that are carried out on the territory of Georgia e.g.:

  • Suppy of goods;
  • Supply of services;
  • Import (Since recently Tax Code allowed eliminating VAT tax on temporary import of goods).

Right of Deduction

Pursuant to the Tax Code, the tax subject is entitled to the right of VAT deduction. A right of deduction can be defined as the means for the tax subject to claim the VAT paid upon the purchased goods and services. Prerequisite for the VAT deduction is for the original seller to be a registered VAT payer. The right of deduction is the primary reason why business owners, entrepreneurs and others prefer to be registered as VAT taxpayers. This way they are becoming more desirable partners in the market and their contractors are able to receive the paid VAT from the Revenue Services of Georgia.

Place of Taxable Operation

Operation will not be taxed with VAT if it was not carried out on the territory of Georgia.

The following approach is generally used to determine the place of the operation:

  • The place of the operation in the cases of the supply of the goods is determined based on the transfer of ownership while during the transportation, it is deterimined based on the sender’s location.
  • During the provision of the service – two main principles apply:
    • When an operation entails B2B transaction, place of the operation is defined based on the place of buyer’s establishment;
    • When an operation entails B2C transaction, place of the operation is defined based on the place of the seller’s establishment;
  • In cases of immovable property, its location determines the place of the taxable

Taxable amount

The taxable amount is the payment received in exchange for the supply of goods/services excluding the VAT. This amount includes all taxes (except the VAT), associated costs, commissions, transportation costs, insurance etc. Additionally, taxable amount does not include the discount or the costs incurred by the supplier or the seller.

Time for the VAT Tax Operation

VAT taxpayers should pay the payable tax amount within the time limit fixed by the tax legislation. If a person fails to do so, tax penalty will be imposed on him/her. Therefore, in order to avoid the responsibility for a tax offence, it is necessary to determine the exact date for when the VAT tax responsibility originates.

VAT on delivery of goods/services is carried out at the moment of the delivery of goods/services. If the advance is paid in full or in part before the supply of goods/services, the VAT liability arises upon the payment of the amount, during the same reporting period.

VAT Rate, Tax Period and Reporting

The VAT rate is 18 percent. The subject of the VAT tax is obliged to submit a VAT declaration to the tax authority by the 15th of the month following the reporting period (the calendar month is defined as the VAT reporting period) and pay the tax within the same period.

Transactions exempt from the VAT

Number of transactions are exempt from the VAT. These include:

  • Supply of the land;
  • Financial operations/financial services;
  • Medical/dental services;
  • Provision of educational services by an educational institution;
  • Provision of the services through lotteries, gambling etc;
  • Import of cars, motorcycles, mopeds, bicycles;
  • Import of goods intended for medical purposes;

Additionally, Georgia is party to more than 56 bilateral treaties on the Avoidance of Double Taxation. The agreements allow international investors to avoid being taxed twice on the same operations and in certain circumstances preclude the VAT payments to the Georgian tax authorities.

 

 

Interested in retaining our firm?

We would be delighted to partner and contribute to your success!

They have trusted us

en_US