Tbilisi (GBC) – The Association of Georgian Virtual Zone Persons (VZP), which was established exactly two years ago, can be said to have successfully fulfilled its mission. Since its foundation, the basic accents of the Association have been made on improving the business environment in this area, protecting, and advocating the interests of Association members and partners, improving the competitiveness of the industry, and representing and protecting the rights of beneficiaries in the private and public sectors.
Here we remind you that the status of VZP gives international and local IT-companies the opportunity to enjoy the tax benefits, which are regulated by the law adopted in 2011. However, the extent to which the activities of these companies were properly regulated was called into question after it was revealed that the Revenue Service imposed fines of millions of GEL on the companies that enjoyed the tax benefits. Obviously, this resulted in disputes between the companies, both in the tax office and in court.
Due to the complexity of the problem, it would be impossible for the companies with the mentioned status to fight individually to protect their interests, and against this background, a legitimate need for creating the Association of Georgian Virtual Zone Persons naturally arose.
Audit with interpreted conclusions
If we follow the recent history of the sector in more detail, in 2021, mass audits of companies with VZP status began to determine whether their activities corresponded to the received preferential status.
In the first stage - in the spring of 2021, the Tax Agency of Georgia started to contact the representatives of the companies with the status of Virtual Zone Persons and request various types of information.
The tax agency disputed the fact that these companies created information technology products in the territory of Georgia. The companies were retrospectively cancelled the benefit in the profit tax and were required to pay the taxes from the previous period, starting in 2018. Here we should emphasize the fact that, it is still unknown what criteria and legal norms the tax authority relied on when determining the fact of the creation or non-creation of information technologies on the territory of Georgia.
As a result of the tax audits, the fines imposed on the companies reached several million GEL.
It was this difficult situation that led to the need to create the Association of Georgian Virtual Zone Persons. It was necessary to create a common space, a platform that would ensure the protection of the interests of VZP companies and the establishment of private-public dialogue. The association was founded in February 2022.
It is a non-profit organization that unites foreign investors and representatives of Georgian IT companies, which have been granted the status of a Virtual Zone Person.
The primary goal of the Association is to protect the interests of its members and VZP companies and to ensure transparency in the regulation of their activities. By clarifying the legislation, the problem of unfair, retrospective taxation of companies with the status of a Virtual Zone by the tax authorities will be solved.
The Association, which unites more than 40 IT companies, was headed by Shorena Kopaleishvili, a lawyer with many years of professional experience. During these two years, a number of important steps were made by the Association's team to protect the interests of the sector and each company.
"We believe that the regulatory legislation of such a promising field for the development of our country, such as information technology, should be clearly formulated and spelled out in the relevant legislative acts and should not be allowed to be misinterpreted by the representative of any agency. All the details of taxation for companies with the status of VZP should be spelled out in the Tax Code of Georgia and in the regulatory legislation of the mentioned field, not in the methodological references of the Revenue Service or in the so-called situation manuals. As it became known, one of the priorities of the Georgian government is the development of information technologies. In the published document "The main data and directions of the country for 2023-2026" we read that the government's goal is "to increase the number of specialists and companies in the field of information technology and innovation and promote the improvement of qualifications." To achieve this, it is necessary to: 1. analyze the current situation in the sector, identify challenges, and solve them; 2. support existing companies and promote their activities; 3. create a legal framework that will clearly and transparently regulate the activities of companies operating in the information technology field; and 4. strengthen measures and programs aimed at the promotion of this industry, so that Georgia can position itself as one of the most attractive countries for this sector (including tax benefits). I think the business and the government should work in a coordinated way to overcome the existing challenges", - says Shorena Kopaleishvili, chairman of the VZP Association.
What was done
It is probably too early to talk about achieving the final goals, and it will be more of a process than some concrete landmark. However, the list of achievements that were made possible by Shorena Kopaleishvili's team through tireless work, intensive communication with various government agencies, cooperation, and involvement with tax experts, auditors, and partner associations is extensive, including:
• Giving special importance to the problems of VZP companies. Due to the activity of the Association, the discussions of the problem began in state agencies (Revenue Service, Ministry of Finance, Parliament), European associations, and business community. There was also media coverage of the problem.
• As a result of its qualified reasoning, the Association succeeded in canceling the first and second methodological references, and accordingly, it started reviewing the decisions made by the representatives of the revenue service against the members of the Association, recalculating the accrued taxes and fines, and removing or significantly reducing the fines imposed on the majority of companies.
• The Association works diligently to establish clear criteria for tax purposes for IT-companies with Virtual Zone status.
• The Association was able to enter the Parliament of Georgia with the request to initiate legislative changes.
• The Association received the support of the Business Ombudsman of Georgia.
• The Association was able to inform the European Business Association and other European representatives about the current challenges.
• The policy carried out by the Association ensured an increase in interest in VZP status and the applications of companies.
• The Association ensured the establishment of a successful public-private dialogue.
• The Association was able to successfully resolve the tax disputes and related issues of a number of its member companies.
Contribution of the VZP sector to the economy of Georgia
The introduction of the VZP status and the establishment of tax benefits for it were intended to bring both large and medium-sized international IT companies to the Georgian market, which should create new, high-paying jobs, bring more knowledge and education about this industry, contribute to stimulating the development of the country's economy, and more.
As for the revenues of the country's budget from this sector, in the first 8 months of 2023, only 29.5 million GEL was paid to the budget by VZPs in the form of VAT. During this period, VZPs paid a 6.5 million GEL profit tax. The income tax reached an impressive rate, which amounted to 25.4 million GEL during the analysis period. If we sum up all the taxes, in the first 8 months of 2023, VZPs contributed 61.6 million GEL to the state budget.
If we take into account that these payments are calculated taking into account tax benefits, it will be seen that the contribution of companies with this status to the real economy of Georgia is much greater, which means the creation of high-paying jobs, employment of qualified personnel in the IT field in Georgia, and therefore the outflow of specialists with such important qualifications from the country decreases, and they spend the high salaries received in the country.
As for the last 5 years' statistics of payments to the state budget by the companies with VZP status, the dynamics have increased dramatically. In particular, VZP companies paid a total of 46 million GEL as taxes in 2019. In the pandemic year 2020, this indicator decreased slightly and amounted to 43.8 million GEL; however, from 2021 on, a sharp increase was observed - 67.3 million GEL. In 2022, this indicator reached 74 million GEL, and in only 8 months of 2023, 61.6 million GEL has been paid, and a significant increase in the total indicator of the year is expected after its calculation.
What is the Association going to do?
The association does not change its goals, and they are:
• to unit more companies
• Complete abolition of taxes, fines, and penalties for the past period
• Achieving legislative changes
• Establishing clear IT criteria for companies with VZP status
• Close cooperation with government agencies and other partners
• Facilitating the development of the information technology sector in the country