A breakthrough in Georgian IT sector?
23 September, 2010
A breakthrough in Georgian IT sector?

 

The law on Virtual Zones’ exemption from taxes and special regulations supposed to be introduced in Georgia this fall seems suspended. Meantime the promised taxation preferences and definition of virtual zones are already built in the new code. But IT sector claims that without the promised law on virtual zones the tax code preferences cannot work.


Vera Kobalia, Minister of Economy of Georgia, having met with the leading American IT market players including Intel, HP, and Sisco during her recent

tour to US past week assures that the American IT giant companies are interested to enter Georgian market and seek for business partners in Georgia.
As Kobalia is reported saying by GHN news agency in September 18, 2010,  Ministry of Economic and Sustainable Development of Georgia must conduct intensive works in this direction [to attract IT investors to Georgia], and the Ministry is actually making its first steps,  but it is up to Georgian business  to undertake following steps. According to Kobalia, Intel has already decided to visit Georgian in October so as to get closer with Georgian IT market. Sisco’s general manager for Baltic, Central Asia and Eastern European  countries, plans to establish a Sisco center in Georgia so as to work on education, as well as on Small and Medium Enterprises (SME) development. 
However Georgian IT sector players appear skeptical to this end. They believe that no big western IT giant company will enter Georgia without serious taxation preferences and it is up to government to attract investors via the promised law on virtual zones [that is suspended as of yet] rather than to private companies to act.


A bill for IT Zones aimed at creation several tax—and-regulations free virtual zones across Georgia was initiated by Georgian government in June and supposed to be approved and put into effect in September of 2010. However works over the bill are halted for uncertain reasons.
“No IT giant is supposed to enter Georgia without taxation preferences,” Irakli Tushishvili, Executive Director of Alta Software, Tbilisi-based software company focused on  software service/product provision to  local banks, told Georgian Journal. “There are many other countries with serious taxation preferences that attract investors more than Georgia.”
“I do not think that anybody [IT giants] will enter Georgia without taxation preferences. They already have their representations in Russia, Ukraine and Turkey and Georgia is within either Ukrainian or to Turkish zones to them. I do not think that they will spend extra money to open office here without tax preferences,” Giorgi Gordeladze, a spokesperson of Saatec, a Tbilisi-based software development companies with focus on an offshore software development and handling with small and medium size software projects to foreign companies, told Georgian Journal.


“Georgia is enticing in the region by its low corruption level but investors cannot export their product to Russia that lures western investors in fact as Russia is a big market,” Vazha Goginashvili, Head of Systems Administration Department at Financial Analytic Service of the Ministry of Finances of Georgia and one of the authors of the governmental -initiated bill on free virtual zones, explains. “Only taxation preferences can entice big IT companies to Georgia.”
A bill for IT Zones aimed at creation several tax—and-regulations free virtual zones across Georgia was initiated by Georgian government in June and is supposed to be approved and put into effect in September of 2010.
Any local or foreign investors that will be operating in these zones and producing IT product are supposed to be free from income, excise, Value Add Tax (VAT), gain and customs taxes. More business regulation preferences are planned to be introduced however details of the upcoming preferences are still under vision [at government] and scheduled to be worked out but it is not clear when.
What is known for sure is that the export of both resident and non-resident IT companies operating in Georgia and producing product locally will be exempted from taxes.
The governmental understanding is that IT technologies the basement of modern world and economy are underdeveloped in Georgia and to boost the sector taxation and regulatory preferences are essential.  Government expects that the tax-free virtual zones enable companies to cut down business expenses by about 70-80% and lure international IT fames to enter Georgian market and give an impetus to it by creating market demand.
According to Goginashvili, they plan to build in the law an obligation for international companies to employ 70% of local people that is expected to have a spill-over effect and cause transfer of international know-how and experience to local companies. The key lure is cheaper local personnel plus tax exemption.


Georgian IT companies believe the upcoming Bill may be a breakthrough in Georgian IT sector but without proper educational back-up and state support it can give results only in 10-15 years.
However, the much touted Bill for virtual sector is shelved as of yet. On the other hand the taxation preferences proposed by the Bill are already built in the amendments made to the old tax code in this past July that entered into effect on August 1st, 2010.  But IT sector players cannot enjoy the preferences as far as nobody at MOF could explain them which IT business can be exempted from taxation – the tax amendment lacks clear definition of virtual zone players.
“The preferences built in the amended tax legislation are useless without the law on virtual zones as far as the law has to clearly define which business is a virtual zones representative, otherwise we cannot enjoy the taxation advantages,” Tushishvili said adding that some of his eastern European partners appear ready to enter Georgia as soon as the law on virtual zones comes true.

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