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Accounting policies

Posted on 12 April 2024 by admin

Accounting policies represent such rules and procedures that companies use for their accounting and financial reporting purposes.

Why do companies need accounting policies?

Those who are not familiar with the concept may not be aware of the need to implement accounting policies. They may think that those approaches and procedures, in accordance with which companies should keep their accounting records are publicly known, available and therefore companies don’t need to have their own separate policies, since they can use the existing ones. The fact is that the accounting standards which exist and are publicly available are not uniform and present companies with a choice between multiple approaches. It is mandatory that companies make their own decision and pick policies that suit their companies the most and capture the essence of transactions.

For example, one of the basic accounting policy choices relates to fixed assets (property, plant and equipment). In particular, companies can choose between the fair value model and the historical cost model of accounting. Both approaches are allowed by International Financial Reporting Standards (“IFRS”). Let’s discuss a specific example:

A company paid 2 million GEL to acquire a building. The useful life of the property was estimated to be 50 years (i.e. the company would use the building for 50 years). Exactly 1 year has passed since the transaction. The question is – what should be the net book value of the building in the company’s accounting records? The answer is – it depends. If the company has elected historical cost model, then the building’s net book value in 1 year from the date of property acquisition will be 1,960,000 (one million nine hundred and sixty thousand) GEL, which can be calculated by deducting the annual depreciation from the initial value (2,000,000 – 2,000,000/50). However, if the company has elected fair value model of accounting, then it needs to determine the fair value of building in 1 year from its acquisition. If the building’s value has increased to say 2.5 (two and a half) million GEL, then the company needs to revalue the building to 2.5 million GEL in the accounting records.

As evident from the above example, accounting policies’ choice has important implications on companies’ accounting records and financial statements.

How are accounting policies implemented?

A company which wants to select and implement accounting policies should hire a qualified expert, who has experience in the field. The expert can be either an individual or a company which studies the company’s existing accounts and presents a choice between various accounting policies to the company’s management. Based on the analysis, management chooses between various accounting policies, after which, based on the decisions made, the expert prescribes the accounting policies in a document, which the company must adhere to in its accounting and financial bookkeeping process. If you decide to implement accounting policies in your company, “Ants” will provide you with all relevant services.

Theoretically, companies can change their selected accounting policies and transfer to alternative methods, however, such amendments need to be substantiated and if decided, the changes must be applied retrospectively, as if the amended accounting policies have always been applied. As a result, prior period accounts should be amended as well.

Profit tax in banking sector

Posted on 7 March 202411 March 2024 by admin

In Georgia, vast majority of companies are on so called “Estonian Model” of profit tax. This means that companies do not pay any profit tax until they distribute profits to owners. The latter model is one of the unique models in the world and encourages companies to reinvest their profits in business development and therefore save profit tax, rather than distribute dividends. Banks, on the other hand, pay profit taxes regardless of dividend distribution. In this article, we will be discussing practical aspects of profit taxation in the banking sector.

For the purposes of comparison, first we will discuss how profit taxation works in other sectors.

How is profit tax calculated in non-banking industries?

Upon profit distribution, for example payment of dividends, companies must pay profit and dividend taxes. It should be noted that dividend distribution from one Georgian resident entity, which is on so called Estonian Model, to another such entity can be done tax-free (in most cases). Profit and dividend taxes are usually paid when distributing profits to individuals or foreign entities. For non-banking sector companies profit tax comprises 15%, while dividend tax comprises 5%.

For example, during the year a company generated profit of 1,000 GEL and decided to fully distribute the amount as dividends to a shareholder. In this case, from 1,000 GEL only 807.5 GEL (1,000 x 85% x 95%) is paid by the company to the shareholder and the remaining 192.5 GEL is paid as dividend and profit taxes. If a company decides not to distribute profits but to reinvest and use them for business development, then the company will not pay any profit or dividend taxes.

How is profit tax calculated in banking industries?

Profit tax for banks (as well as credit unions, microfinance organizations and loan providers) represents 20%, unlike profit tax for other industry entities, for which profit tax is usually 15%. However, it should be noted that banks don’t pay dividend taxes (from the profit earned during 2023 and subsequent periods), which is 5% for entities in other industries.

To calculate profit tax, banks calculate “taxable profit”, which is derived by deducting various expenses from revenues. It should be noted that some revenues do not participate in calculation of profit tax. For example, Interest earned from debt securities issued by a Georgian enterprise and listed on a recognized stock exchange of a foreign country are not subject to profit taxes. Usually, such activities that the state intends to foster are sometimes exempt from profit tax.

Also, some expenses are not taken into account for profit tax calculation purposes, e.g. expenses not related to the entity’s economic activity as well as representative expenses above a certain limit (above 1% of the previous calendar year’s revenues) are not deducted from revenues for deriving taxable profits.

For example, during the year a bank generated profit of 1,000 GEL. This profit includes 200 GEL interest income derived from debt securities issued by a Georgian enterprise and listed on a recognized stock exchange of a foreign country. Besides, the profit also includes 300 GEL expenses which lack supporting documents, which means that in accordance with Georgian tax code, they are assumed to be unrelated to the bank’s economic activities. The bank decided not to distribute dividends to shareholders. However, regardless of whether the bank distributes dividends or not is irrelevant. Banks pay profit tax of 20% on taxable profits. In our example, taxable profit equals 1,100 GEL and is derived as follows: 1,000 – 200 + 300 = 1,100 GEL. Consequently, the bank must pay profit tax of 220 GEL (1,100 x 20%).

Our company offers comprehensive accounting, tax advisory, and other financial services tailored to the needs of banking and microfinance organizations

How to calculate salary-related taxes

Posted on 22 November 2023 by admin

Company owners and directors, who don’t have financial background, often ask questions on how to calculate so called “gross” salary i.e., salary including applicable taxes. They understand a company must pay taxes on employee salaries; however, they don’t have information on the exact formula for calculation of such taxes. In this article, we will be discussing all combinations of such taxes.

What are the applicable taxes on employee salaries if the employee is involved in the pension scheme?

For example, let’s assume that a company pays 1,000 GEL salary to an employee. On salaries and other employee benefits, companies must pay 20% PIT (Personal Income Tax) and 4% pension contribution (of which 2% is the company’s share and 2% is the employee’s share). As a result, the company’s aggregate salary expense including taxes is derived using the following formula:

1,000/98%/80%*102% = 1,301.02

Therefore, in case an employee is involved in a pension scheme and assuming company pays 1,000 GEL salary, the company must additionally pay 301.2 GEL in the form of PIT and pension contributions. Out of this amount, 250 GEL represents PIT and 51.02 GEL represents pension contribution.

What are the applicable taxes on employee salaries if the employee is not involved in the pension scheme?

When an employee is not involved in the pension scheme a company must pay only PIT.

First, let’s discuss in which cases an employee is not involved in the pension scheme. An employee may not be involved in the pension scheme if he/she is relatively older. When the pension scheme was introduced in Georgia in 2019, involvement in the scheme became mandatory for individuals below the age of 40; Individuals above 40 were automatically involved in the scheme, however they could opt to come out from the scheme; As for women above 55 and men above 60, they were not involved in the scheme, however they could opt to get involved voluntarily. Apart from the age, there are other criteria – foreigners (non-residents of Georgia) are not involved in the pension scheme.

The aggregate salary expense for those persons who are not involved in the pension scheme, is derived using the following formula:

1,000/80% = 1,250

Therefore, in case an employee is involved in a pension scheme and assuming company pays 1,000 GEL salary to the employee, the company must additionally pay 250 GEL PIT.

How can a company learn before hiring an employee whether he/she is involved in the pension scheme? If a company has the employee’s identification number (ID), whether the employee is involved in the pension scheme can be ckecked on the following webpage: www. pensions.ge

What are the applicable taxes in case of hiring a freelancer?

First, it should be noted that, if a freelancer is also registered as an “Individual Entrepreneur” and the work that he/she performs represents a service rather than work of an employee, then the payment to such person represents payment for service rather than a payment of salary. In such cases, the company does not have to pay any taxes and the tax declaration burden rests on the freelancer. Besides, Individual Entrepreneur’s involvement in a pension scheme is voluntary. However, in a number of cases, when a company hires a freelancer, contract with the freelancer may have a substance of an employment agreement rather than a freelance work. In such cases, “substance over form principle“ applies, which means that the tax authority is authorized to reclassify the contract in accordance with its substance and request from company to declare employment-related taxes. To help companies determine whether it has hired a freelancer and pays service fee or hired and an employee and pays salary, the tax authority has published a questionnaire, which helps companies distinguish between the two contracts. Link to the questionnaire is as follows: Employment agreement or service contract

In cases where company pays service fee to Individual Entrepreneur (freelancer), it does not have to withheld and pay any taxes. If a company pays 1,000 GEL, the applicable taxes are declared and paid by the freelancer. If a freelancer has “Small Business” tax status, then the freelancer himself/herself (and not the company) will pay 1% of the generated income. If a freelancer does not have such status, then he/she pays 20%. For more information regarding the “Small Business” status, please refer to the article in our blog (Small Business Status). In any case, whether the freelancer has the tax status or not, a company is not liable to withheld and pay taxes. Instead, the Individual Entrepreneur is obliged to declare and pay the applicable taxes.

Our company provides all relevant accounting services in Tbilisi, Batumi, and other cities of Georgia.