The Georgian parliament is mulling a tax reform bill based on the Estonian model to apply corporate tax only to distributed profit, and to exempt undistributed, reinvested and retained profits from corporate tax. The law could be adopted as early as April, according to Finance Minister Nodar Khaduri, and would come into force in January 2017.
Georgia is using the model of another small economy, Estonia, to reform its corporate tax system in order to attract more foreign and domestic private investment. Corporate tax in Georgia currently stands at 15% if the profit is retained and 20% if it is distributed as dividends. Estonia introduced a similar tax reform in 2000, and further relaxed its tax system in 2011. The move resulted in an increase in corporate tax revenues as a percentage of GDP from 2.3% in 2001 to 5.2% in 2014 from an increase in private investment. Unlike Estonia, corporate tax is an important contributor to the Georgian government's budget, ranking third after value added tax (VAT) and individual income tax. Therefore, there are some concerns about the effect on the state budget of implementing the corporate tax reform too quickly, if anticipated private investment inflows do not compensate for the decline in tax revenues.
An initial draft of the tax reform excluded banks, insurance companies and microfinance institutions from the reform - which are included in the revised bill and for which the implementation would begin in 2019 - and aimed for an implementation in July 2016. However, complaints from the business community about the logistical difficulties they would face from having to change to a new taxation model in the middle of the year, as well as an expected GEL350mn to GEL400mn (€135.8mn to €155.2mn) decline in tax revenues in 2016 prompted the Finance Ministry to push back the suggested implementation date to January 2017.
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