Issue 5, 2013. October-November



The tax dispute resolution system is crucial to business confidence and has gone through several waves of reforms. Throughout this period, businesses have never stopped discussing the independence of the system, the degree of trust it holds and the need for further reform. In this article, Rusudan Kemularia, General Counsel at Millennium Challenge - Georgia, former Deputy Minister of Finance (2010-12) and a member of Amcham's Commercial Law and Tax Committee project, discusses the changes currently under consideration and their possible impact on the reliability of the tax environment in Georgia.

Rusudan Kemularia

Continuing Challenges with the Tax System

There is little doubt that improvements in the tax code and the management of the tax system in Georgia have been considerable in recent years: electronic declaration of taxes was introduced in 2007 and the tax code has undergone several major reforms (most recently in 2010). In addition, an alternative tax audit mechanism is available for most taxpayers and an improved website exists to help clarify the interpretation of the code.

However, ambiguities over the interpretation of the tax code and concerns over its consistent application have been a persistent problem facing businesses in Georgia and have, at one time and another, been highlighted by the likes of the US Government and the EU as causes of concern.

Grant Thornton's Nelson Petrosyan noted that clearer tax rules and less ambiguity is needed.

"We need to continue efforts to minimize instances where tax legislation allows for multiple interpretations. To illustrate with the example of football - the rules of the game have to be clear for all - players (taxpayers), coaches (investors), referees (government), and not less importantly, the spectators (society)," he said in an email interview.

"When referees' judgment calls are based on rules of the game that are clear to all, then you would expect fewer objections from players and the coaching bench, and far less disapproving whistles from the spectators' crowd."

Ironically, some areas of tax reform may have made the situation worse, as changes to the tax code were often brought in quickly, and with little consideration for conflicts that they may generate. For example, a previous analysis conducted by the Commercial Law and Tax Committee, found that in 2011 there had been 285 separate amendments to the tax code, made on 15 separate dates.

Dispute Resolution

The dispute resolution process is one of the mechanisms intended to protect taxpayers against problematic interpretation of the code. This process allows two independent appeal mechanisms to review decisions taken by the Revenue Service and provide an opportunity for taxpayers to argue their position.

The tax appeal system within the Ministry of Finance has two stages. First, following an initial decision of the Revenue Service, an individual can submit an appeal with the Revenue Service. Second, if the individual still disagrees with the decision, he or she can make an appeal to the Tax Dispute Resolution Council under the Ministry of Finance.

An alternative to the dispute resolution process in the Revenue Service or the Ministry of Finance is to take the dispute into the courts for resolution. However, in Georgia this has rarely been the preferred option, as the courts were not considered to be technically competent to independently arbitrate disputes and so would tend to defer to the Revenue Service for their interpretation of the code.

Nonetheless, while the dispute resolution mechanism of the Revenue Service has been widely used, there continue to be concerns about its operation. Under an EU-funded project PwC is currently finalizing a report on how to reform changes to the dispute resolution process, and the Minister of Finance Nodar Khaduri has said that the Ministry will carefully consider the recommendations from this report and how to implement them.

However, before the report comes out, one can already highlight the issues under consideration, particularly the challenges of improving the predictability of interpretation, adjudicative independence and professional competence.

Improving the Predictability of Interpretation of the Tax Code

Lack of predictability of interpretation of the tax code has been a consistent problem of Georgia's tax system for years. It is not only a problem for business planning but has also left the concern that the tax code might be selectively applied.

One problem that makes predictability and consistency of interpretation difficult is the lack of published guidance on the tax code, and particularly the lack of published guidance that is binding on future interpretation. In an attempt to help this situation, the former government launched the website This website is gradually publishing guidance on the tax code, but is still in its early stages. An alternative mechanism for gaining confidence in interpretation is to apply to the Ministry of Finance for an Advance Tax Ruling. This is a useful instrument, but is expensive, and generally only suitable for larger companies.

One means of helping to improve the predictability of dispute resolution decisions, currently under consideration, is that the Dispute Resolution Council could publish its decisions and make its interpretations binding on future decisions. Over time, this would then provide a body of guidance on how to interpret the tax code and on predicting likely decisions of the Council.


The second major problem of the dispute resolution council is independence. At the current time, the individuals involved in the appeal process are also responsible for the initial decision. In the case of the first tier of dispute resolution, this conflict is most clear, as the disputes are decided by members of the Revenue Service, and there is a sense that they are likely to defer to the decisions of the original Revenue Service auditors.

Conflict is less clear in the case of the Dispute Resolution Council, as the members come from the Ministry of Finance and not the Revenue Service. However, indirect conflicts may exist as the members of the Council are still, for the most part, employees of the Ministry of Finance. This is problematic as the Ministry of Finance has revenue-raising as one of its key responsibilities and this may create a pro-government bias in its decision making.

The inherent issues of independence have led some to suggest that dispute resolution should not take place in the Ministry of Finance at all, but should take place in some kind of separate "tax courts." However, this option is not currently being considered by the new government and, anyway, may conflict with the Georgian constitution.

Improving Professionalism of Dispute Resolution

The final problem facing the dispute resolution process is how to deal with the work level and professional focus of those involved. The dispute resolution process, at both levels, involves individuals who also have other responsibilities. This is a problem because there is no clearly defined group of people to collectively train and develop dispute resolution and review skills. It is also a problem because the scale of the work makes it difficult for those involved in dispute resolution to give it their full attention. This is made worse by the increasing use of this system. In 2011, the Revenue Service received 7,900 tax appeal claims. In 2012, this figure almost doubled to 14 890.

One of the potential solutions to the problems of independence, professionalism and workload would be to separate those involved in dispute resolution from the day-to-day operation of the Revenue Service and Ministry of Finance.

At the same time, by making this group exclusively responsible for dispute resolution, this may make it easier for the group's members to develop their training and internal processes and make it easier for them to manage the increased workload.

Discussions over this issue are ongoing and the Ministry has expressed an eagerness to engage with stakeholders on the best possible reform.

To that end, AmCham will be facilitating discussions between the Revenue Service and any members who are interested in participating. Any individuals who would like to provide input or feedback should contact Rusudan at

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 the views of USAID, the United States Government, EWMI or EPF.