Not-so risky business in Georgia

By bne IntelliNews March 14, 2011

Molly Corso in Tbilisi -

Eager to banish the memory of armed, masked police officers storming company offices during tax disputes, the Georgian government is trying to win back the trust and confidence of the business community. But rebuilding trust won't be easy, say businessmen in the Caucasian republic.

In addition to tweaking the tax code so businesses won't be penalized for making honest mistakes, a newly created "business ombudsman" - tasked with tackling tax issues and soothing business concerns - has topped the government's latest efforts to reach out to CEOs and entrepreneurs. Other measures include a new business council chaired by Parliament Speaker Davit Bakradze and plans for a new tax review council. Prime Minister Nika Gilauri appointed one of his advisors, Giorgi Pertaia, to the ombudsman position in January after consultations with the business community.

Pertaia, who is still lodged in the prime minister's office pending the assignment of new office space, tells bne that the government is now more ready to listen to business. He says his office will act as "a bridge" between business and the government - a conduit to make communication faster and more effective. "This is actually the sign that the government really wants to solve the problems of the business," he says. "[The government] understands very well that the main generator of the economy is business - there is no disagreement that business is very important for Georgia."

Fine words, but business advocate Kakha Kokhreidze, vice president of the Georgian Small Medium Enterprises Assocation, tells bne that restoring confidence in the business community will require a complete break from the government's controversial strong-arm tactics that so tarnished the country's reputation.

Soured

Relations between businesses and President Mikheil Saakashvili's ostensibly pro-business government cooled in 2009 when the Ministry of Finance decided to restore powers to the Financial Police.

Created after the "Rose Revolution" in 2003 to curb Georgia's mammoth black market and culture of tax evasion - as well as to fill the country's empty coffers - the Financial Police became synonymous with the black-clothed, gun-toting officers that closed companies for weeks and arrested executives in front of television cameras.

The force was "decriminalised" by Saakashvili in 2006 and folded into the newly created Revenue Service, which included the tax and customs bodies as well. But the Ministry of Finance decoupled the Financial Police from the Revenue Services in 2009 again to make both agencies more efficient and separate administrative duties from policing.

Once again an independent agency, the Financial Police was rechristened the Investigation Service, but old fears remain. A change to the tax code that made it easier for the government to freeze assets and bank accounts during tax disputes, introduced around the same time as the new Investigation Service came into being, did nothing to allay these concerns.

Businesses were further alarmed by the growing push to tighten tax administration and bolster tax revenues after the economy was hit by the global economic crisis, which GDP contract by 3.9% in 2009. The level of concern was muted, at times, by businesses' support for the ongoing reforms in the tax code and other aspects of the business climate. Over the past five years, Georgia has repeatedly scored as a top reformer in the World Bank's "Doing Business" report and other international surveys focused on simplifying burdens for business. Anxiety about tax administration was so high, however, it even registered as a potential obstacle for development in a 2009 International Finance Corporation report on Georgia's industrial competitiveness.

But with tax revenues now on the rise, the government appears eager to repair relations. According to the 2011 budget, tax revenues increased by GEL3.9m (€1.63m), or 9.1%, in 2010. And they are projected to grow by another GEL7m this year, bringing the total to over GEL5.3bn. Tax revenue in 2010 was GEL4.55bn.

In a December speech to business executives, President Saakashvili reassured them that the government is ready to reform and become a real "partner" for business. "Many entrepreneurs still have a feeling that the state does not listen to them appropriately and treats them unfairly; still often are cases when punishment is bigger than violation," he said. "The state mustn't choke the taxpayers, but must hold their hand and as true partners must go all the way to the finish."

According to Kokhreidze, the president's message and Pertaia's office are both "good steps" - but businesses need to see results. "When we listen to the government, we always hear good messages. When we look at media, we also hear good messages, but the most important is the practice," he says. "It will depend on the practice, how everything will be followed and how all these messages and promises will be met."

Kokhreidze reckons it will take "at least several years" for real trust between the business community and the government to be restored. "Trust cannot be changed in one month or even one year - it is an ongoing process, it will take time," he says.

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