On 21th January 2021, Georgian Revenue Service (GRS-Georgian Tax and Custom Administration) set new restrictions for some category of business in Georgia by introducing the term “non-qualified VAT payer”.
Companies/Entrepreneur individuals/organizations in Georgia, qualified under this status will not be entitled to issue or receive tax invoices (documents that are necessary for input VAT recovery) until the status of “a qualified VAT payer” is granted.
Companies/Entrepreneur individuals/organizations in Georgia, qualified under this status will not be entitled to issue or receive tax invoices (documents that are necessary for input VAT recovery) until the status of “a qualified VAT payer” is granted.
Which category of business can be qualified as “a non-qualified VAT Payer”?
Newly registered VAT payers in Georgia and/or other Georgian tax payers previously registered on VAT but with no taxable transaction in last 12 consecutive months, will be automatically given a status of “a non-qualified VAT payer” by the Revenue Service of Georgia.
Next, GRS will decide whether to unchangeably leave the “non-qualified VAT payer” status or grant the status of “a qualified VAT payer.” For such a decision, GRS will conduct an analysis in scope of which: tax authorities may interview business via call or in person, ask questions and for documentation, check business documents, tax declarations, accounting ledgers, visit the office of the companies/individual entrepreneurs, and others.
The main purpose of this analysis will be to understand whether the decision of VAT registration in Georgia without having such an obligation is due to the real business rationale or if a real purpose for the VAT registration is a fraud and/or avoidance of taxes.
In other words, for example, if you want to voluntarily register your Georgian company as a VAT payer you will not be rejected for VAT registration but will automatically be given a “non-qualified VAT payer” status by GRS. As a next step, the tax authorities will perform the thorough analyses for determining whether you really “deserve” such status or the restrictions should be removed.
Just to make it clear, company formation or registration of an individual entrepreneur in Georgia is different than VAT registration. Newly registered companies do not automatically become VAT payers. To become VAT payer, VAT registration is necessary (statutory or voluntary). Thus, not every tax-payer in Georgia is at the same time VAT payer unless they register or have obligation to register so.
Why do companies in Georgia usually voluntarily register as VAT payers?
VAT in Georgia (18% rate) is payable by tax-payers only if they are VAT-registered persons. VAT registration is statutory (e.g. if the sum of VAT taxable operations exceeds 100 000 GEL within consecutive 12 months) or voluntary (no such obligation exists, but a tax-payer still decides to register).
Why do firms voluntary register as VAT payers even if they never reach a 100 000 VAT registration threshold? The most common reason is that being a VAT-payer is a necessary precondition for the right to deduct input VAT (and reverse VAT).
For example, if a Georgian IT company carries out IT services abroad and this service is considered as delivered outside Georgia according to the Georgian tax code (GTC), the service is not taxable by VAT with the right of input VAT (as well as reverse VAT) recovery. However, for such recovery, VAT registration is a must. Thus, if this IT company voluntarily registers as a VAT payer, its services will remain exempted, and at the same time, the right of VAT (and revere VAT) deduction will work.
BTW, differently from ordinary VAT, the obligation of paying Reverse VAT in Georgia on services received from non-residents is due even without reaching the 100 000 GEL threshold and being a VAT-registered person. In other words, if you own a company and/or are registered as an individual entrepreneur in Georgia and receive services from non-resident entities, you will have to pay reverse VAT for such services in most cases, regardless being a VAT registered entity or not. (Note: a reverse VAT obligation depends on whether such service is qualified as delivered in Georgian territory or not, according to GTC).
What kind of restrictions apply for “non-qualified VAT payers”?
Non-qualified VAT payers will not be able to issue and receive tax invoices in the period when they are qualified under this status. It means that such tax-payers cannot recover the input VAT and their clients will not recover the input VAT on services/goods purchased form them. Notably, without a tax invoice, no deduction is possible of VAT paid for local services/goods.
Besides, you should be aware of the probability that when Georgia’s tax authority starts analyzing your “non-qualified VAT payer” status, it may find other tax risks in your company that might become a reason for initiating a desk or field tax inspection.
Conclusion
The newly-introduced term “non-qualified VAT payer” currently came in force and applies to a specific category of business in Georgia. In particular, the status applies to newly-VAT-registered entities and ones that have previously registered as VAT payers but do not have any taxable transactions in the last 12 months.
Tax-payers with this status are not entitled to recover the input VAT. Their clients will neither be able to deduct the input VAT on services/goods received from them. The Georgian tax authorities review the status of “a non-qualified VAT payer” shortly after giving it to a tax-payer. As part of such a revision, they will conduct a proper analysis (e.g. studying your documents, tax declarations, setting up the interview, visiting your office, and others.). If tax authorities conclude that there was a business rationale besides your decision to register as a VAT payer without such an obligation, GRS will grant you a new status of “a qualified VAT payer” and all restrictions will be removed. Otherwise, you will lose right to the input VAT on the future transactions, in that case you will have the right to appeal the decision of the GRS in the system of Ministry of Finance of Georgia and/or before the court.
This process can go smoothly and can take just 10 days, but it is important to make sure that you clearly demonstrate the business logic of your decision to register as a VAT payer and no other tax risks exist which might be examined by tax authorities while conducting an analysis regarding “a non-qualified VAT payer status”.
Author: Gela Barshovi is an international and Georgian tax consultant and a managing partner of Tbilisi-based accounting/consulting firm TPsolution.
