Issue 3, 2012. June-July



As part of its on-going efforts to promote transparency, consistency and predictability into the tax system, the Revenue Service has just launched a new website that aims to centralize tax-related legislation and expand on the materials that the revenue service provides to help in its interpretation. The Commercial Law and Tax Committee analysed the new system for

George Welton

This website, ('messenger') serves two main purposes. First, it provides a linked source for all of the supporting legislation for the Georgian tax-code. For example, if the tax code includes a reference to a Presidential Declaration or Ministerial decree the site will provide a link to that declaration/decree. Second, the Revenue Service is gradually producing and releasing commentaries on the tax code which will also be linked to the main document to clarify how the revenue service interprets that particular clause.

This initiative has been the result of a collaboration between the government and the private sector. The commentaries were developed by a coordinating council, established this year. This includes nine members from the government, including the tax Ombudsman, and seven from business.

Both of these are extremely welcome developments. Giga Kverkhelidze, a tax specialist at BDO said, "We pay attention to the development of the website and we use it quite effectively in our working process. This provides us with necessary legislation acts, which are now much more easily accessed then before."

Nino Bakakuri, the legal analyst for the Commercial Law and Tax Committee (CLT) at AmCham and a Partner at the Law Firm, Nodia Urumashvili and Partners explains that this is just what many tax experts have been waiting for.

"When the Commercial Law and Tax committee started in October 2011 we conducted interviews with all the committee members, who represent the largest law and audit firms in the country," she said. "We asked them what the biggest problems were in the areas of commercial law and tax...One of their most frequently cited concerns was that there was no central source for information on the tax code and very little public guidance to help in its interpretation."

The ‘messenger' service is an attempt to address this problem, Bakakuri noted.

"We on the CLT committee will be working with the Revenue Service to try and ensure its effective implementation," she said.

Ted Jonas, the legal co-chair of the CLT committee, called it a "fantastic" development that "should really make it a lot easier for tax-payers and tax-professionals to understand the tax code and gain confidence that they are interpreting correctly."

The connection of the tax code to supporting/connected ‘sub-legal' acts is widely considered the most straight-forward fix to an enduring problem. Not only does this connectedness make reviewing the tax code simpler. It also helps to overcome possible confusion, as the code itself is not always clear on what the exact ‘sub-legal' acts are being referred to.

The provision of ‘commentaries' (interpretations of the code) was also generally considered a positive innovation by all four of the big audit firms that were interviewed for this article. However, as the system evolves, they all offered suggested areas where it might be improved.

One way in which the system could expand its effectiveness, according to Bakakuri, is if it allowed for publication of the administrative acts of the Revenue Service. These acts, which are issued by the head of the Revenue Service to direct revenue service employees on how to interpret the tax code under certain circumstances, are not considered ‘normative acts' and so do not need to be made public at the current time.

But Bakakuri noted that publically releasing these administrative acts would be "a big step forward in helping to provide transparency and predictability to tax-payers."

Samson Uridia, head of the department for international relations at the Revenue Service, noted however that it is "a commonly accepted practice" to distinguish between administrative acts for public use and those only used inside the administration of government.

"This is, for example, the way similar acts work in the United Kingdom. The commentaries we are currently developing are explicitly for public consumption but it is not the case that this would be appropriate for all administrative acts," he explained. In addition, there is debate amongst experts about the legal status of the commentaries or the importance of making them legally binding. According to Giorgi Tavartkiladze, a tax expert at Deloitte, "at this point it is unclear how legally binding the commentaries will be and, if they are not binding, then that will severely limit their usefulness."

Uridia noted that the commentaries "‘reflect the position of Georgia Revenue Service on the execution of any provision and will act as mandatory instructions for GRS officers when conducting working procedures. These commentaries are therefore legal binding on the Revenue Service."

Ivan Khokhlov, the head of law practice at Ernst and Young, agrees, saying that what is needed is not interpretations from the Revenue Service, but a body of decisions from the courts to see how the court system will interpret the code.

"These commentaries may be interesting for telling us how the Revenue Service interprets the Tax Code, but only the courts can make legally binding and final interpretations of the code," he said.

"The biggest problem of the tax-code is the lack of legal practice upon which we can depend. We therefore need a legal database. Cases are important because, even if they do not provide strict legal precedent, they can offer persuasive authority."

But Kakha Rukhadze, a tax expert at KPMG, believes publishing the commentaries, is more important than court cases.

"Published commentaries, binding or not, help us develop a body of practice and this helps to provide predictability," he said. "The fact that the commentaries are not legally binding can actually be useful, as it gives you an opportunity to argue with the revenue service's interpretation."

Another question is how exactly to prioritise the issues to cover. With so many possible areas where commentaries may be useful, it will be a long time before the Revenue Service will cover everything. Therefore, it is essential that they try and provide interpretations on the issues that are of most confusion first.

Uridia said help from the business community can assist them in setting those priorities.

"We are actively encouraging businesses and audit companies to approach us to highlight the areas they find confusing in the code so that we can write commentaries to clarify them," he said, adding that the Revenue Service would "welcome" comments from the committee about members' "difficulties."

All tax specialists agree, however, that the messenger service is a welcome development and is yet another sign that the Revenue Service is taking strong and positive strides forward.

Rukhadze noted that the situation is evolving. "The commentaries are getting a lot better but, even if you disagree with them, it is good to have them there," he said.

"This report is made possible by the generous support of the American people through the United States Agency for International Development (USAID), EWMI, and EPF, within the Judicial Independence and Legal Empowerment Project. The contents are the responsibility of AmCham and do not necessarily reflect views of USAID, the United States Government, EWMI, or EPF."