Issue 5, 2013. October-November



Alexander Melin

The current calculations for per diem business expenses are too low

Per diem allowances and the reimbursement of expenditures for business travel have suffered in Georgia from a lack of focused attention, affecting businesses and employees.Some eight years ago, the Order of the Georgian Finance Minister No. 220 established low rates for reimbursement of expenses for food, lodging, and incidentals on business trips (a separate order covered government employees' per diems). Since then there have been practically no adjustments of meal and incidental per diems—only adjustments to lodging costs, which are still lamentably low, and mostly changed in 2008—to bring them in line with international norms and the present realities of the Georgian business milieu.

"Per diem" refers to reimbursements company employees are entitled to for business travel-related expenditures on meals and incidentals; lodging is often considered a component as well. Why are per diems a standard business practice? First, as a matter of fairness, it is not right to force employees to pay for business expenses out of their own pockets. Second, without reimbursement there is less incentive for employees to undertake travel to seek out new business, create trade opportunities, receive training, go to trade fairs, and so forth; without reimbursement for business-travel expenses, business development would be stunted.

In the U.S. and in European Community (EC) external-aid-funded projects, per diem rates are updated regularly, typically yearly. In Georgia, this has not been the case, and per diems have not kept up with inflation and cost-of-living increases, and were often too low to being with. For example, any payment beyond 20 lari for an in-Georgia per diem is subject to taxation at 20 percent; it is simply unreasonable to think that a business traveler, who cannot cook at home, can eat normally on 20 lari per day. puts the price of an inexpensive meal in Tbilisi at a median price of 13.31 lari; just three cheap meals alone would be about 40 lari. Keep in mind that this 20 lari limit has not been updated with regard to inflation or cost of living increases since 2005. Also, all post-Soviet countries besides Russia have identical rates, indicating that these rates are chosen somewhat arbitrarily.To give some sense of typical rates, the following chart compares Georgia's combined per diems and lodging reimbursement with the U.S. and EC projects in USD, based on the Georgian Finance Minister's Order, and the 2013 U.S. and EC schedules. The month selected under the U.S. schedule was September, and the lodging rate for Tbilisi was set at $136 for purposes of this graph, reflecting the 2012 lodging average, according to STR Global (as within Georgia lodging is substantiated on basis of receipts).

It is immediately obvious that Georgia's rates are out of sync with the EC and U.S. This is simply not fair to those doing business internationally, as they are stuck between the two unpalatable choices of not compensating employees sufficiently, or overcompensating with their per diems beyond the threshold limit and paying tax for what is a legitimate business expense.

The latter case may also have the knock-on effect of incentivizing shadow accounts or misappropriation of funds to pay per diems, creating a corruption issue. Indeed, the best practice is to make sure per diems are a close approximation of actual costs, not higher or lower.

In today's business environment Georgia's regulation operates beyond the necessary scope of reasonable limitations to prevent per-diem fraud in a way that penalizes companiesand wastes time in accounting.

The whole framework is in need of reform. Making per diems correspond with actual prevailing cost conditions in respective locales, keeping them updated annually based on actual data, and extending them to NGOs' volunteers and interns would be a great start. If the Georgian government is concerned about the burden of data gathering, one possible solution is to create a revised list and index it to inflation in each respective country so that it may be updated more or less automatically each year, or, alternatively, adopt rates that are based on an average of U.S. and EC rates, or some other basket of other countries' rates, such as adopted by other countries within the EU.

By making per diems accurate and fair, business will thrive, tax enforcement headaches will be minimized, and accountants will be thankful.