On May 31 - June 2, 2004 head of the laboratory of problems of budgetary federalism of the IET I.V. Trunin in membership of the group of Russian experts visited the Republic of Georgia with a working visit.

The agreement on the visit of a group of leading Russian experts aimed to discuss issues of economic reform was achieved by Minister of Economic Development and Trade of the Russian Federation G.O. Gref and the Prime Minister of the Republic of Georgia Z. Zhvania during the first Georgian-Russian business conference in Tbilisi on may 27-28, 2004.

 The expert group also included First Deputy Minister of economic development and trade M.E. Dmitriev, Director of Department of strategy of socio-economic reforms of MEDT S.B. Batkibekov, head of the Expert Council of the State Duma Committee on budget and taxes M.Yu. Orlov, Director of the Fund "City Economy Institute" N.B. Kosareva.

Establishment of contacts with the Georgian government on a range of issues regarding first of all the strategy and tactics of the tax reform was the main purpose of the visit of Russian experts. The importance of the visit consisted in the fact that the Prime Minister of the Republic decided to postpone the surrender of the draft Tax Code in the IMF before the end of negotiations with the Russian delegation. During the visit members of the delegation held meetings with Georgian officials.

Confidence in further successful collaboration in experience exchange between Russia and Georgia in the area of economic reform was expressed by the results of the meetings with President of Georgia M. Saakashvili. During a working meeting headed by the Prime Minister of the Republic of Georgia Z. Zhvania possible approaches to reforming the tax system of the Republic of Georgia in the short and medium term were discussed. After the meeting the Prime Minister expressed interest in establishing long-term relations between the group of experts under the auspices of the IET, international donors and the Government of the Republic of Georgia on the issues of providing consulting support to the Georgian authorities in the field of economic reforms. Meetings were also held with the Minister of Finance of the Republic of Georgia Z. Nogaideli, Minister of economy I. Rekhviashvili, Deputy Minister of Finance Z. Antelidze , Deputy Minister of economy N. Turnava, representatives of the Parliament of the Republic of Georgia, State Chancellery, ministries and departments.

 On behalf of the Director of the IET Ye.Т. Gaidar official invitation to participate in the IET conference "Socio-economic transformation in the CIS countries: achievements and problems", which is held in Moscow on September 13-14 2004 was delivered to the Minister of Finance. It should be noted that the visit was brief and some positions in the field of preliminary analysis of the situation with tax reforms in Georgia require further clarification. But some conclusions can de drawn at this stage.

1. The current Tax Code was adopted in 1997. It includes all taxes except the target of turnover taxes that are sources of formation of Road funds and customs duties. Currently there are 21 income taxes in the Tax code.

 2. According to the plans of the Government at the beginning of June 2004, the New Tax Code will contain 7 taxes, including VAT, Excise taxes ( excises on alcohol, gasoline, tobacco and cars), corporate income Tax, individual income Tax, real estate Tax, land Tax, gambling Tax.

3. Inheritance tax and gift tax are expected to be incorporated into the income tax, as well as a number of smaller currently existing taxes (for example, a tax on the resale of cars, the tax for owners of vehicles and other).

4. From 1 January 2004, the value of payers of VAT registration threshold was increased to 100 thousand gel. At the time of the visit persons with annual revenue exceeding 75 thousand lari were not allowed to register as VAT payers, while for persons with proceeds from 75 thousand gel to 100 thousand lari such registration was voluntary. At the time of the visit, the Georgian government had no plans to further raise of registration threshold.

5. VAT is levied on accrual basis, however, the legislation establishes liability of third parties for the payment of VAT counterparties to the transaction (taxpayer may be denied for a tax deduction in case if the counterparty has not fulfilled its tax obligations), this rule however as a rule according to which the tax is calculated for 90 days from the day of transaction is planned to cancel the new tax code.

 6. Tax invoices exist in the form of strict reporting forms (similar to the Kyrgyz system of VAT), in the course of the tax reform it is not planned to renounce such a system, but it is planned to provide it for taxpayers free of charge.

7. There are problems with the tax invoices received from the enterprises located on the territory of Adjara (fake invoices of some companies, which are difficult to regulate).

8. In Georgia 4000 of the 200,000 taxpayers must pay VAT. Until 1 January 2004 was 16000. The 64 tax inspections arranged on 3 levels of control (A - control of taxpayers; B - control of tax collection; C - registration of taxpayers and the verification of declarations).
9. Taxation in capital construction: currently VAT is not charged with home sales, although it is planned to revise this provision. There are no tax deductions for purchases prior to the completion of capital construction.

10. Sales of services in the field of international transport is subject to VAT at 0%rate. A problem in this area is the correct allocation of the "incoming" VAT between international and domestic transportations carried out by taxpayers claiming the right to use the zero rate. Currently such distribution is made in proportion to the proceeds of international and internal freight; it is planned to distribute the "incoming" VAT in proportion to the time spent on the implementation of international and domestic transport with the recalculation for the year.

11. The problem of crediting of VAT in the budgets of different levels is: taxpayers may overpay the VAT and ask to consider overpayment in favor of other taxes, which are permitted by the legislation. However, such compensation does not implies a redistribution of incomes between the budgets.

12. In 2-3 years it is planned to liquidate plans of mobilization taxes in the budget for the regional tax inspectorates.

13. One of the important directions of tax reform - introduction of a 15% flat rate of income tax (currently the income tax is: at the largest annual income up to gel 200 - 12%, from 200 to 350 gel - 15%, from 350 to 600 gel - 17%, more than 600 gel - 20%). The average effective tax rate at the time of the visit was estimated at 17% - 18%.

14. The rate of social tax is 33% of which 31% paid by the employer and 2% - by the worker. During the visit the parties discussed the possibility of lowering the rate to 20% or 25%. 15. Issues relating to the tax administration, the powers and responsibilities of tax authorities are also relevant.