Tax lien amendment affects Georgian investment climate
19 January, 2012
Tax lien amendment affects Georgian investment climate

New regulation of tax liens that give priority of lien to the state on expense of banks is expected to have a negative impact on Georgian banking sector; it makes credits more expensive and undermines Georgian investment climate as a consequence.
By end of 2011 Georgian state got back the privileged creditor right over the tax lien that means that if property of tax-payers is under double-arrest on the part of the Revenue Service (RS) and banks, in insolvency case

banks can claim their credit collateral only after the state, even if they attached the questioned property as a collateral to the disbursed credits before the RS lien.
The state enjoyed the priority creditor’s right over the tax lien till 2010 at the expense of banks. The point is, the banks never disburse a mortgage loan if the property is under tax lien already while tax service always charges the property by lien even if it has previously been charged by the banks. Therefore banks chronologically are always first creditors and they have long been craving for equal creditor rights based on chronology but to no avail.
And only in 2010 when real estate prices slumped in consequence of financial crisis of 2008 and neither the state nor the banks could sell out the 150 million worth double-arrested property, the state agreed on concession and equalized the lien rights of banks and tax service.

However, even then government seemed reluctant to give up the tax lien priority right forever and some experts presumed that the measure could be temporary.
And now the state demands its priority right on tax lien back, thus leaving banking sector vulnerable to risks. However, the banking sector except Cartu Bank, owned by Georgian tycoon Bidzina Ivanishvili who emerged as a political opposition last fall, turned a blind eye. Nodar Javakhishvili, Director General of Cartu Bank, believes the tax lien change is an additional tool of political pressure on Cartu Bank, which was accused of alleged money laundering and put under the probe of the National Bank of Georgia (NBG) in mid-October.
The silence of other banks makes Javakhishvili to think so.

“If the change is bad to the entire banking sector why don’t they say a word?” he said.
As a matter of fact, no sooner the tax lien change was made by the end of December of 2011 that the National Bureau of Execution started arresting tax liens of Cartu Bank clientele; it put them as mortgage collaterals and put them for sale at an open auction. By today more than 46 arrested units were put at the auction and sold for half-price, thus depriving Cartu of several millions while the only bidder for the questioned collaterals was the Ministry of Economy of Georgia.

Transparency International Georgia (TI Georgia), having analyzed the tax lien change consequences, came to conclusion that the change undermines Georgian investment climate ultimately.
“This has become particularly obvious now when we are witnessing how the said amendments are being applied in practice to certain financial institutions. We believe that the new rules for determining the priority of liens will have a serious negative impact on financial institutions and borrowers in Georgia, and will create an unfavorable environment for them. Moreover, these rules will also have a negative impact on foreign investment, as well as Georgian financial and economic system as a whole,” TI Georgia experts say.
The loans granted to the Georgian banks or non-banking entities (industrial companies, etc.) by international financial institutions (IFIs), will bear serious risks and the credibility of Georgian financial institutions as business partners is undermined on the international level.

Levan Surguladze, Head of the investment bank Caucasus Financial Service, fears that Georgian banks and other financial institutions can no longer rely on the assets of borrowers as collateral because there is the possibility that this collateral will be superseded by a tax lien even if the borrower had no tax obligations at the time the financial institution’s collateral was registered. Georgian banks are supposed to face risks while borrowing at the international market as International Financial Institutions (IFIs); therefore the banks are likely to request additional collateral and fix higher interest rates.
“This change increases risk for the banks and the increased risk as a consequence, jacks interest rates up,” he said.
TI Georgia believes the amendments will also affect foreign investments. The largest foreign investments in Georgia are often financed by reputable IFIs (OPIC, EBRD, IFC, ADB). Such loans used for financing foreign investment in Georgia are almost always secured by Georgian assets, which the foreign investor has acquired as part of investment. Now the said amendments increase the risks associated with the country and IFIs will no longer rely on the security of such Georgian collateral.
“Therefore, they will unwillingly loan to foreign investors on the basis of property registered in Georgia. This will essentially reduce the amount of foreign investment, especially “western” and non-governmental investment,” TI Georgia elaborated.

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