Selective tax penalty write-offs raise protectionism concerns
05 December, 2013
Selective tax penalty write-offs raise protectionism concerns
The Georgian government has forgiven penalties on past-due taxes to over 100 companies, and many more have applied to the Ministry of Finances. Neither names of the forgiven companies nor amounts of the excused penalties have been made public, however. The government explains this as a confidentiality concern.
But sector pundits believe the absence of transparency actually raises protectionism issues, some even calling it “selective amnesty” - which sends negative signals to investors.
No sooner had the new government taken
office this past fall than the former government – whose head, Mikheil Saakashvili, was president until recently – itself proposed a financial amnesty initiative. They suggested legalizing the non-declared tax obligations and hidden property-based incomes accumulated against the state budget as of 1 January 2013.
Only economic amnesty could give impetus to declining economic activity, they argued. To justify the idea, ex-officials cited the example of the financial amnesty they implemented quickly after the 2004 Rose Revolution which accounted for the economic growth that followed.
But the new authorities declined the initiative indignantly. “We have no intention to legalize incomes taken through corruption,” Finance Minister Nodar Khaduri stated. As a matter of fact, it was an open secret that only the ex-power’s favorite businesses evaded taxes and hid property during the previous regime, while others paid diligently to avoid penalties. However, the former government still contrived to impose heavy penalties on alleged past-due taxes and obligations. Frequently this was a tactic to bankrupt a business, then seize it eventually.
Since no amnesty was declared, companies in difficult financial situations appealed to the MOF to study their taxation cases. They were ready to pay off accrued taxes if the penalties imposed on the past-due taxes were forgiven.
According to Khatuna Ivanishvili, a spokesperson for MoF, the applications are discussed by the MoF Dispute Council as individual cases. Cases which the Council finds legitimately worthy of being excused are sent to the Cabinet of Ministers, which makes the final decision. And in fact, around 130 companies have been forgiven tax penalties by today. However, names and amounts are kept confidential.
Ditrikh Muller, a co-founder of Georgian Investment Group+, calls the policy “half-amnesty.” He fears that it is discriminating and entails corruption risks; any kind of economic and financial amnesty is negative to the economy and business environment, but selective amnesty is the worst.
“I do not approve amnesty because it indicates management and institutional problems in the company and the country respectively, but this penalty forgiving here is nothing other than amnesty of financial arrears. And it is more dangerous because it forgives tax-payers individually, while every individual deal includes corruption risks,” Muller told Georgian Journal. “Besides to forgive only certain entrepreneurs is discriminating. If there are preferences, they must cover all players equally. If separate people have problems they have to solve disputes through courts – this is the fairest way out.”
Meanwhile, MoF swears that the ongoing penalty-forgiving is not an amnesty, and no tax amnesty is planned at all. Demur Giorkhelidze, an economic analyst, agrees but still worries about protectionism.
“It is no amnesty … amnesty covers everyone. But this is a discriminating tool for solving problems. We all know that problems have been accumulating within business during the ex-power, and that thousands of businesses have suffered unfair treatment and penalties. I understand that authorities want to alleviate the problem but the selective approach implies protectionism risks,” he said.
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