Category: კატეგორიის გარეშე

Our client companies often ask questions regarding the non-qualified VAT payer status in accordance with Georgian tax code. In this article we will discuss the details of this status and will explain the reasons for which it is important for companies operating in Georgia to know the basic aspects of this topic.

Our company provides all necessary accounting services related to VAT and other taxes in Georgia.

 

Why is it important to know the basics of this topic?

If your company purchases products or services from non-qualified VAT payers, then you will not be able to recover input VAT from such transactions. This could lead to significant financial losses.

For example, if your company purchased 118,000 GEL inventory and in accordance with contract with the supplier, the price includes VAT, in this case if your company itself is registered as a VAT payer, it will be able to recover the input VAT of 18,000 GEL. Therefore, net cash outflow for purchase of inventory equals 100,000 GEL, since company pays 118,000 GEL to the supplier and then recovers 18,000 GEL from the state. However, starting from 2021, Revenue Service of Georgia introduced the term “non-qualified VAT payer”. If company is classified as a non-qualified VAT payer, you will not be able to recover VAT on products and services purchased from such company. In our example, instead of net cash outflow of 100,000 GEL, you would have an outflow of 118,000 GEL and you would have lost 18,000 GEL in non-refundable taxes.

 

Which companies are classified as non-qualified VAT payers?

Non-qualified VAT payer status is automatically assigned to companies newly registered as VAT payers. Besides, a company is assigned non-qualified VAT payer status if it did not have any operations on its tax card for the last consecutive 12 months period.

Abovementioned change was introduced by the state to prevent fictitious companies from registering solely for the purpose of obtaining tax benefits for their related parties. Often such companies did not have any business substance and were established to issue tax invoices to their related companies to entitle them to fraudulent VAT input refunds.

 

How can we learn whether our supplier has non-qualified VAT payer status?

Considering the above discussed, it is only natural that many companies are interested in checking their potential supplier’s VAT payer status prior to signing a contract with them. It is especially important to check the status before committing to any large transactions due to proportionally higher associated risk of financial loss.

You can easily check qualified/non-qualified VAT payer status on Revenue Services’ webpage. For this, you just need to know or obtain tax identification code of your supplier and check this code on Revenue Service’s online portal. The status can be checked on the following online address: https://rs.ge/CheckUnqualifiedStatus

When purchasing services from non-residents, or in plain language – from foreigners, purchased service is taxed with 10% income tax. In this article we will be answering frequently asked questions regarding this topic.

 

In which cases does a company pay non-residents income tax?

Non-residents income tax is paid if a company purchases services from foreigners. It does not matter whether services are purchased from an individual or a company. Tax rate is 10% (except for services purchased from an entity registered in preferential taxation countries, in which case tax rate becomes 15%). Non-residents income tax is calculated based on “gross” amount. For example, if an entity acquires services for 90 EURO, respective tax amount will equal 10 EURO (90 / 90% * 10%) rather than 9 EURO.

Our company provides all relevant accounting services related to non-residents withholding income tax.

 

In which cases can a company avoid paying non-residents income tax?

Georgia has signed “double taxation avoidance treaty” with number of counties. Services acquired from those countries, with which Georgia has signed the mentioned agreements, are not subject to non-resident income tax. Full list of such countries is available on the following webpage https://www.mof.ge/en/5128

Company does not have to pay non-resident income tax, if both of the following criteria are satisfied:

• Company buys services from countries, with which Georgia has signed double taxation avoidance agreements; and
• Entity, from which company acquires services, provides its tax residency certificate, which confirms that it represents resident of a particular country. Such certificate is usually requested from the service provider.

Our clients often ask questions regarding reverse charge VAT (“RC VAT”). In this article, we will be discussing, in plain language, what it is exactly and in which cases do you have to pay RC VAT. We will also analyze what needs to be done for tax optimization.

 

What is reverse charge VAT?

RC VAT is local tax, which must be paid by a company that purchases services from outside Georgia. VAT rate is 18%. RC VAT is applicable to only imported services, but not to imported goods.

Usually, VAT is declared and paid by service provider and not the service receiver. However, in case of RC VAT, service receiver is obliged to file tax declarations and pay RC VAT. This is because service providers provide the service from abroad and therefore the local tax authorities do not have the ability to recover taxes from them. Therefore, RC VAT is declared and paid by service receiver.

 

Does a company have to pay RC VAT if it is not itself registered as a VAT payer?

Despite whether a company is registered or not as a VAT payer, it must file RC VAT declarations. To better understand the reason for this, let’s have a look at a company, which is not registered as VAT payer. If this company were to purchase a service from a local company, which is registered as a VAT payer, then the service provider would charge VAT in scope of its service price, because service provider is obliged to add VAT to its fees. Therefore, when service receiver purchases service from abroad, on which it did not pay VAT, it must file RC VAT declaration instead of the service provider.

 

What should you do to optimize your taxes?

To optimize taxes from RC VAT perspective, company must decide whether to register as a VAT payer itself. Let’s discuss two cases:

When a company is not registered as a VAT payer – if it purchases service from abroad, it will have to declare and pay RC VAT.

When a company is registered as a VAT payer – if it purchases service from abroad, it will have to declare, but it would not have to pay RC VAT as it would be able to take VAT credit for the paid VAT and offset the VAT asset (this is called “input VAT”) with the VAT liability. In this case the company simply files RC VAT tax declaration, but never has to pay it. However odd this may seem, in practice, this means that registering as a VAT payer actually makes company to pay less VAT. This information often causes confusion with company managers. They expect that registering as a VAT payer automatically means paying more VAT, however this is sometimes not the case. The thing is that, usually, only VAT registered entities can take VAT credit, while a company, that is not registered as a VAT payer, is not able to get such credit. Besides, as discussed above, a company must declare RC VAT notwithstanding the fact whether it is registered as a VAT payer or not. Due to this, an entity must declare RC VAT in any case, but only has to pay if it is not registered as a VAT payer, simply because it cannot take VAT credit.

After hearing the above information, a lot of companies ask whether it is lucrative to register as a VAT payer in all cases, even when the registration is not mandatory? (As a reminder, companies must register as a VAT payer if their taxable revenues, for the last 12 months, are greater than 100 thousand Georgian Laris). The answer to this question is – it depends. To analyze this question, we need to compare entity’s RC VAT and its ordinary VAT. If a company has significant service purchases from abroad, and therefore must pay large amounts of RC VAT, which exceeds the ordinary VAT that the entity would have to pay on local revenues, then it is recommended to register as a VAT payer. And vice versa, when VAT on local sales exceeds RC VAT, then it is not recommended to register as a VAT payer.

Our company provides all necessary accounting services in Tbilisi and other large cities of Georgia, with regard to RC VAT and other tax issues. Based on our experience, VAT registration is lucrative for a company, when its revenues are primarily from exports, and it has some service purchases from abroad. The reason for this is that revenues from exports are not taxable by VAT, even when a company is registered as a VAT payer. Therefore, when company’s revenues are generated from exports, it does not pay VAT even after registering as a VAT payer. It’s the opposite, it can take RC VAT credit for services purchased from abroad.