IT law disappoints local companies
30 December, 2010
IT law disappoints local companies

A law on IT Zones that was supposed to make a breakthrough in sluggish Georgian IT sector development, fell behind expectations.  Instead of proposed completely zero taxes for IT Zone entities, the preferences covered Value Added Tax and profit tax as well. The income tax exemption, which was supposed to be the key to IT Zone success, remains unchanged.
Last summer the government initiated a bill for creation of Free Virtual Zones for export oriented IT companies to revive the underdeveloped

IT sector by foreign investments. As 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, informed Georgian Journal in summer the quintessence of the tax-free IT Zones was to zero the income tax [the highest tax charging by 20%] that makes 70-80% of companies’ expenses. Abolishment of the most burdensome tax was supposed to be the key lure to attract foreign IT giants to enter Georgia.
Other taxes were supposed either to be revoked completely or one of the taxes profit tax for example could remain but its rate was to be cut down from 12% to insignificant 3-5%. Funds raised through this 3-5% taxation were supposed to be spent on education and infrastructure development that is indispensable to insure IT sector’s success.
On the other hand authors of the IT Zone bill were proposing to build in the law an obligation for international companies to employ 70% of local people that might have a spill-over effect and cause transfer of international know-how and experience to local companies.
According to Goginashvili, income tax preference coupled with the local cheaper labor force might cut down international IT giants’ expenses by 70% that could make them be interested to invest in Georgia rather than in any other country.
“If we offer Microsoft a IT specialist for USD 15 per hour instead of USD 100 it pays to American IT specialist and plus  income tax exemption, the expenses the company spend on personnel  reduces from USD 160 per person to USD 15 per employee. Moreover, it will be the single expense [as other taxes will be also zeroed]. Generally 70-80% is spent on human resource, the company can sell the product in similar price and have a big profit margin, and ultimately the company will be interested to move production to Georgia,” Goginashvili elaborated.
Georgian IT companies have been impatiently waiting for break-through taxation changes giving them a chance to divert the tax-exempted financial resources on company development and become more competitive at the international level.  According to Georgian IT companies only complete-tax-free zones might pose Georgia competitive to other IT Zones globe over [including India, China and Singapore proposing the cheapest labor force] as other zones are not completely free of all taxes. But the approved law gave a cold shower to optimistic expectations. The law on IT Zones approved on December 15, 2010 includes only Value Added Tax (VAT) and profit tax exemptions on export that is no novelty in fact: according to Georgian tax legislation, all export is tax-free except the income tax. Only non-resident companies i.e foreign investors can be exempted from income tax in some cases that poses local companies in an uncompetitive position. 
“Government touted that it was adopting the Irish model of IT Zone that offers tax-preferences to all IT companies whether or not they are export-oriented, that actually is very successful and gives a drive-force to this sector. But actually they duplicate the Singapore model that boosts foreign investors alone on expense of local companies,” Levan Kalandadze, an economic analyst, explained to GJ.
He does not rule out that the Singapore method can bring economic profit but fears that local companies can scarcely promote themselves at international arena. Kalandadze finds the export-oriented law discriminating and believes that “If we really want to develop our IT sector we have to adopt the Irish model and give equal chance to foreign and local companies alike”.
Georgian IT companies look disappointed and say no breakthrough seems in prospect.  
“Export has always been exempted from all taxes except income tax, so what difference this IT law is supposed to make to me if it still taxes me by income tax?” Giorgi Gordeladze, a spokesperson of Saatec, a Tbilisi-based software development company, told Georgian Journal. “It would be better to retain the profit tax for example and exempt us from income tax, income tax preference is the most substantial to IT sector, no special development is supposed to happen if it is not revoked.”
Top officials of UGT, the biggest Georgian IT company that was involved in the IT Zone law working process appear optimistic. They assure the IT legislation is not finally shaped out as yet and upcoming changes will make it more consummate.
“Yes the law is already approved but the secondary legislation is still under vision and nobody can enjoy any preferences proposed by the law till the secondary legislation is not worked out, it is difficult to say something at the moment,” Ermile Suladze, Financial Director of UGT, told GJ.
The questioned law enters into effect January 1st, 2011, however  neither the status of IT Zone entities nor the status granting terms are defined as of yet. They must be defined by February of 2011. 
Some sector pundits think no IT giant is supposed to rush into Georgia even if income tax is zeroed as far as Georgia cannot provide with skilful personnel as far as it lacks IT-oriented high school system. The cultivation of computer geeks is a very expensive pleasure and no serious IT company is supposed to be that philanthropic to invest in education of Georgian greenies having no IT high-school backup.
Davit Nadaraia, Head of iTex International, acknowledges that Georgian universities do not provide with the internationally accepted IT education level, and Georgian IT sector stands on self-educated computer geeks in fact. And even tax-free legislation can have positive results in 10-15 years without development of high school system.

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