The only beneficiary _ audit companies
09 June, 2011
The only beneficiary _ audit companies

The pilot project of the government initiated alternative tax audit; the presentation will last till the end-of-year. The alternative tax audit autorizes private audit companies by tax audit right and enables business to opt between private and state tax control. However economic analysts question the idea that does not fall in line with the best world practice. They fear audit companies are supposed to be the only beneficiary of alternative tax audit.

Pilot alterative tax audit project launched officially, 12 audit

companies and 12 companies were shortlistsed as project participants and number of audit companies is supposed to increase to 25 by the end of the year however the full normative legislative framework that must regulate the alternative tax audit concept is not worked out as yet. Due amendments made to the tax code were approved last week but the order of Minister of Finances that should outline  audit companies shortlisting criteria as well as other essential details of the venture is lagging behind. The official explanation is “emergency” or to allow business enjoy benefits of alternative audit as soon as possible.

The governmental understanding is that private business has better trust in private audit companies than in tax officers and prefers to be audited by private auditors. Therefore it introduces alternative tax audit and enables business to opt who will check their financial papers tax officers or private auditors. The protocol of private audits will be equalized with the tax service protocols, and the tax service will check the privately audited companies once in three years.  Moreover, companies can write off part of penalties if they appeal to private audit service.

“Our goal was not to delay the pilot project to see the practice that will show possible problems and approaches,” Jaba Ebanoidze, Head of Revenues Service Department of Ministry of Finances of Georgia, said during the pilot project presentation event on June 2, 2011.

According to him results of the pilot project will be as guideline to work out methodology of the alternative audit idea so as it would work smooth when will enter into effect starting next year. As yet the pilot project is based on agreements between the revenue service and shortlisted audit companies and audits implemented to the pilot project participant companies will be legalized. Audit/consulting companies were selected based on their experience and professional skills, Ebanoidze explained to Georgian Journal and most probably the selective criteria will not change. Two commissions are already created at the revenue service, one works on methodology of alternative audit, the other writes tax code case by case.

According to revenue service top officials, the alternative audit project has three key benefits: revenue service will spare resources, audit and consulting companies find a new market niche, and private companies will be exempted of penalties and tax inspections as the audit implemented by private auditors is equalized with the tax inspections.

Georgian economic analysts’ big question meantime is why on earth the well-paid audit department of revenue service financed from the state budget does exist? Why does it take money if private auditors will do their job? They think the private tax audit initiative is calculated on big business however even to them it is an extra burden.

Levan Kalandadze, an economic analyst, fears the initiative will be discriminating Small and Medium Entrepreneurs (SME) for small business can never afford such expensive luxury as private audit. Therefore, Davit Narmania, Executive Director of the Center for Economic Problems Research, thinks the “freed” tax officers’ crackdown is supposed to increase on SME.

Ebanoidze played down the fears. He assures tariffs for private tax audits will be differentiated and affordable to everyone. Besides their rates fall much behind the penalties business pays for infringements while alternative audit exempts from penalties.

“The companies that will audit big companies have higher criteria and their prices will be higher starting GEL 30 thousand. But there will be fewer criteria for auditing smaller companies and their price will be affordable. The price for medium companies most probably start from GEL 15 thousand and it will make just several thousand for smalls. It is more lucrative if compared to huge penalty business pays that accrues to several hundred thousand,” Ebanoidze told GJ.

Notwithstanding Narmania believes the only beneficiaries of the alternative audit will be audit companies and not business in fact as far as the expensive private audit is an extra outlay to any business irrespective of the size and even differentiated system is no relief to small business.

“The least price for auditing small business cannot stand lower than GEL 10 thousand, no audit company implementing audit for, say, GEL 4 thousand will be mandated to implement private tax audit because they have no proper skills. And I strongly believe no small business can afford GEL 10 thousand per year,” he said. “Thus audit companies will make money thanks to this here alternative audit, big business can enjoy slight preferences, and small business none at all. This is not the best world practice I have ever heard of any developed country exercising this practice.”

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