Issue 4, 2012. August-September



Kakha Kokhreidze, the Vice President of the Georgian Small and Medium Enterprises Association (GSMEA), analyzes the tax dispute resolution in Georgia compared with international practices. While the tax authorities have made steps towards easing the process of contesting tax fines, creating a tax court could streamline the process of resolution and improve the quality of judgments.


As Benjamin Franklin said, nothing in life is certain except death and taxes. That means that when an investor is exploring business opportunities in a country, the local alternative tax dispute resolution (ATDR) format is of paramount importance.

The government's online services for paying taxes, and low tax rates, are significant improvements for the businesses, but there will always be ground for disagreements.

In Georgia, tax disputes are discussed at the Revenue Service (RS), in the Dispute Resolution Department (Mediation); at the Ministry of Finance (MoF), in the Dispute Resolution Council; and in the common Courts.

The current policy puts a preference on dispute prevention rather than resolution: companies can appeal to the RS before the fine comes into force. But the system has its shortcomings. The RS determines preventative measures on a case-by-case basis, which can add an unwelcome sense of insecurity to the process. While members of the business community agree that the dispute resolution at RS and MoF is taxpayer- friendly , they would prefer a method that is based solely on rule of law and institutions, rather than on a system that can be influenced by subjective factors.

Today, taxpayers who wish to appeal decisions made at the RS and the MoF are treated like those in any other administrative dispute: they have to go to court - first to the City (District) Court, followed by the Appeal court, and finally the Supreme Court. Because of the small number of tax disputes in the courts, the judges cannot deepen their experience and are ill-prepared to rule on complicated tax issues. Moreover, there are no financial professionals involved in the decision-making process, which also increases the possibility that the court does not have the level of understanding necessary to make qualified decisions.

Tax Courts: an international approach to resolving tax disputes

To resolve such problems, many countries have created special Tax Courts, staffed by judges well versed in complex financial issues. In the United States, tax courts were established in 1942, although today tax courts exist only on a federal level.

In Germany, tax disputes are resolved in two instances: tax disputes in Fiscal Courts are resolved by 11 Senates. Because of the complexity of tax issues, Senates specialize on narrowly defined issues within the Tax Code; there is an Income Tax Senate and a VAT Senate. Special Sub-Senates were created to rule on even more specific cases.

While the approach is different in Denmark, where tax disputes are resolved at a Tax Tribunal- an independent administrative agency the Supreme Tax and Customs Appeal body -the pattern of turning to highly trained specialists is the same. The Tax Tribunal resolves disputes according to the offices, which specialize in taxes, and three judges rule on every case.


Based on international practice, GSMEA recommends two possible solutions for tax dispute resolution in Georgia:

Short-term Reform - In the Tbilisi and Kutaisi Appeal courts, tax disputes should be separated from administrative cases and a Tax Case Chamber should be established. The Appeal Court and the Supreme Court should be on two levels for tax disputes, where cases will be directed following RS and MoF, a structure that should deepen the experience of judges dealing with tax dispute, as well as decrease the amount of time necessary for the resolution of cases.

Medium-term Reform - It is possible to create a Tax Dispute Resolution body, which will be separated from the executive government of the country, without changing the Georgian Constitution. GSMEA recommends the creation of a legal entity of public law, "Tax Disputes Resolution Bureau," with offices in Tbilisi and Kutaisi. Decisions made by the Bureau can be appealed at the Supreme Court. It is also recommended that special Tax Chambers are created within the Bureau, according to the tax competences, in particular a VAT chamber, income tax chamber, import tax chamber, and a corporate profit tax chamber. The Bureau's decision can be appealed in the Supreme Court according to the rules established by the Administrative and Civil Procedure Code. In addition, the decisions passed by the Bureau will be systematically published. Arbitrators serving in the Bureau will be nominated by the GoG, business community, ombudsman office (possibly tax ombudsman), and approved by the Parliament of Georgia.

This reform guarantees the detailed and qualified discussion of tax disputes and the establishment of a common approach for this vital area of the law. By resolving cases in courts ruled by qualified judges, tax disputes will be concluded more quickly and with more qualified judgments. This will eventually reduce the likelihood of a misinterpretation of the law by the tax authorities and of misperceptions by the taxpayers. Overall, this will be a significant step forward towards improving the business climate in Georgia.

Georgian Small & Medium Enterprises Association (GSMEA) is implementing a project "Supporting the Development of a Business-Friendly Legal Framework in Georgia", which is supported by USAID, through EWMI and EPF. The goal of the project is to increase the effectiveness, independence and transparency of the judicial system, which is of vital importance for the attraction of foreign direct investment. This report was prepared as part of that project.

GSMEA carried out several roundtables and the idea is most appreciated by the business community and even by public service representatives. The Association plans to submit legislative proposals, based on its research, to the Parliament of Georgia following additional discussions.