REVENUE SERVICE HEAD POSITIVE ABOUT TAX AND

UNCLAS SECTION 01 OF 02 TBILISI 002091

SIPDIS

SIPDIS

STATE FOR EUR/CARC AND EB/IFD/OMA
COMMERCE FOR 4231 DANICA STARKS, MOSCOW FOR USDA

E.O. 12958: N/A
TAGS: ECON PGOV GG
SUBJECT: REVENUE SERVICE HEAD POSITIVE ABOUT TAX AND
CUSTOMS REFORMS

REF: A. 06 TBILISI 2698


B. TBILISI 01791

C. TBILISI 01456

TBILISI 00002091 001.2 OF 002



1. Summary. On August 8, Mindia Gadaevi, head of Georgia's
Revenue Service, discussed with Econoffs the progress made to
date in the reorganized service, which includes customs and
tax departments and elements of the former Financial Police.
Tax revenues are up by one third year on year in the first
quarter of 2007 as the gray economy becomes legalized. The
Revenue Service is targeting its tax auditing and customs
resources and looking to the Internet as a medium for
taxpayer obligations. Gadaevi dismissed predictions that an
increase in the personal income tax effective next year will
have negative consequences on employees. End Summary.


2. On August 8, Econoffs met with Mindia Gadaevi, head of
Georgia's Revenue Service to discuss progress made during his
first five months in office. He said he sees his role as a
strategic manager instead of the head tax or customs
investigator. He and his staff have developed a strategy for
the Revenue Service, which combines the tax administration
and customs, as well as elements of the former Financial
Police--following the Estonian model (ref A). Although an
IMF expert gave advice on development of the strategy,
Gadaevi said, the Revenue Service decided to do almost
everything the opposite way. Nevertheless, the IMF reviewed
the strategy, he said, and accepted it as a good effort. The
Service aims to increase revenues, reduce the shadow economy,
prevent corruption, maintain a positive image, and increase
customer satisfaction.

Revenue Increases
--------------


3. Gadaevi said that statistics for the first quarter of 2007
show tax revenues increased by 30-35 percent from the same
period last year. Gadaevi attributes the continuing strong
growth in tax revenue to a combination of economic growth,
more efficient tax administration, tougher enforcement and
the legalization of the gray economy as more businesses
decide it is better to be on the legal side of the law. The
Revenue Service is in the process of closing various informal
markets, or bazrobas. The action will cost many people their
jobs, but Gadaevi contends the cost to the economy of the
illegal and unaccountable commercial activity is greater than
than the social cost of the lost jobs. Business owners are
realizing there is a competitive advantage to being
compliant, and the tax system is now more or less stabilized,
he said. One advantage to compliance, he said, comes in the
form of Value-Added Tax (VAT) refunds. Some businesses claim
that the Revenue Service is exceedingly slow to refund VAT.
Gadaevi said he has met personally with several
businesspeople who raised such complaints and discovered that
many had never even applied for their refunds in the first
place. The Revenue Service is launching an advertising
campaign to urge businesses to apply for their VAT refunds
and promising a one-month turnaround for straightforward
cases.

Targeted use of Resources
--------------


4. Gadaevi said that the current pace of reform in both the
tax and customs departments cannot continue because almost
all necessary improvements are in place. He joked that there
will be no job for him next year. Now the Service will focus
on risk management to more effectively target its resources,
he said. In the Tax Department, 350 auditors will target
companies where the risk of not paying is high. According to
Gadaevi, 640 large companies produce 70 percent of state tax
receipts. At the same time, the Customs Department is
developing a Gold List of high-volume, thoroughly vetted
businesses which can submit customs clearance documents
electronically. Gadaevi said the Revenue Service has not
been involved at all with developing the Poti Free Trade Zone
(ref B),but he expects the zone will create new jobs.
Gadaevi expects taxpayers will be able to perform more and
more of their obligations via the Internet in the future.

Merger of Income and Social Security Taxes
--------------


5. Gadaevi was confident that after the recently enacted
elimination of the social tax and increase of the personal

TBILISI 00002091 002.2 OF 002


income tax from 12 to 25 percent takes effect in January 2008
(ref C),employers will increase wages to compensate their
employees, despite widespread concern to the contrary. He
predicted that when the state raises gross salaries by 20
percent, as it intends to do after the social tax is
abolished, all large businesses will raise salaries
accordingly. Businesses that fail to follow will lose their
competitive advantage and have internal problems with their
employees, he claimed. Since the combined taxes will be
withheld from employee's paychecks, employees would
immediately feel the pinch if their net wages are not
increased. Thus, an employer's failure to increase wages
would not escape his employees' notice. Gadaevi said there
will be no benefit gained for businesses who do not increase
the net salaries.

Comment
--------------


6. Comment: AmCham officials confirmed that large employers,
especially American ones, are planning to keep their bottom
line the same, which actually will result in a net increase
of 2.7 percent for the employee. AmCham officials could not
confirm, however, that all small and medium-sized
enterprises, especially in the regions where unemployment is
higher, will follow the larger companies' lead. Elguja
Meladze, President of the Georgian Employers' Association,
told Econoff that the majority, 60-65 percent, of employers
will increase employees' gross salaries. We will continue to
urge our contacts within the private sector to keep their
bottom-line operating costs the same and not let the
employees take the tax hit. End Comment.
PERRY