Category: კატეგორიის გარეშე

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.

Micro Business status is associated with significant tax benefits in Georgia. Therefore, investors are often interested in the subject. In this article, we will be discussing exactly what are the tax benefits, who can obtain the status, in which cases does an investor lose the status and what are the pros and cons of the status compared to an LLC.

 

What are the exact tax benefits of the Micro Business status?

Micro Business status holders are exempt from personal income tax (PIT), which usually comprises 20%. Besides, participation in state pension scheme is voluntary. The pension scheme is only applicable to Georgian residents. Therefore, we will continue our discussion excluding the pension scheme effect.

Let’s compare taxation of Micro Business status holder to taxation of an ordinary employee. For example, if a company pays net 1,000 GEL to an employee, this means that its total salary expense, including the PIT, equals 1,250 GEL (1,000/0.8). Now let’s see what happens if the company pays the budget allotted for the employee compensation to a Micro Business status owner instead. In this case, the individual (the status owner) does not pay PIT and will receive the full payment of 1,250 GEL. Simply put, the status owner receives 250 GEL more (1,250 – 1,000) due to PIT tax saving compared to an ordinary employee.

Who can obtain the Micro Business status?

Often investors assume that registering as an Individual Entrepreneur is enough to receive the tax benefits in Georgia, however Individual Entrepreneur should also obtain Micro Business status from the Revenue Service of Georgia.

Our company offers all necessary accounting services associated obtaining the status.

Individual Entrepreneur can obtain the status in case his/her business activities are not one of the, so called, “prohibited activities”, meaning activities in case of which Micro Business status is not available. Such activities include medical, architecture, legal, notary, consulting, audit etc. The full list is available on the webpage of Legislative Herald of Georgia.

It should be noted that, despite being exempt from PIT, Micro businesses are required to submit income tax returns no later than 1^st April of every subsequent year.

 

In which cases does an individual lose Micro Business status?

The status is lost if an individual’s revenue for a calendar year exceeds 30,000 GEL. Status is also lost if Revenue Services conducts stock-take and finds that individual’s inventory balance exceeds GEL 45,000. Besides, the status is lost if an individual registers as a VAT payer.

What are the pros and cons of Micro Business status?

Apart from significant advantages associated with the tax reliefs discussed above, Micro Business status has some disadvantages compared to an LLC (Limited Liability Company). Micro Business status owner is personally responsible for business liabilities. For example, if a business owes 100,000 GEL to suppliers (or banks) and is unable to pay, the creditors are entitled to request payment directly from the individual’s private property. In case of LLC, on the other hand, creditors can only request repayment from the company’s assets and not from the private property of the business owner.

Small Business status is associated with significant tax benefits in Georgia. Therefore, investors are often interested in the subject. In this article, we will be discussing exactly what are the tax benefits, who can obtain the status, in which cases does an investor lose the status and what are the pros and cons of the status compared to an LLC.

 

What are the exact tax benefits of the Small Business status?

Small Business status entitles an individual to only 1% personal income tax (PIT) instead of standard 20%. Besides, participation in state pension scheme is voluntary. The pension scheme is only applicable to Georgian residents. Therefore, we will continue our discussion excluding the pension scheme effect.

Let’s compare taxation of Small Business status holder to taxation of an ordinary employee. For example, if a company pays net 1,000 GEL to an employee, this means that its total salary expense, including the PIT, equals 1,250 GEL (1,000/0.8). Now let’s see what happens if the company pays the budget allotted for the employee compensation to a Small Business status owner instead. In this case, the individual (the status owner) will pay only 12.5 GEL (1,250*1%) in taxes and will receive net payment of 1,237.5 GEL (1,250*99%). Simply put, the status owner receives 237.5 GEL more (1,237.5 – 1,000) due to PIT tax saving compared to an ordinary employee.

 

Who can obtain the Small Business status?

Often investors assume that registering as an Individual Entrepreneur is enough to receive the tax benefits in Georgia, however Individual Entrepreneur should also obtain Small Business status from the Revenue Service of Georgia.

Our company offers all necessary accounting services associated obtaining the status.

Individual Entrepreneur can obtain the status in case his/her business activities are not one of the, so called, “prohibited activities”, meaning activities in case of which Small Business status is not available. Such activities include medical, architecture, legal, notary, consulting, audit etc. The full list is available on the webpage of Legislative Herald of Georgia.

As an additional requirement, to obtain Small Business status, an individual’s revenue should not exceed 500,000 GEL. If such revenue exceeds 500,000 GEL for two consecutive years, individual will lose the status. If in some years, but not in consecutive years, individual’s revenue exceeds 500,000 GEL, then he/she must pay 3% income tax instead of 1%. Individual will be taxed by 3% starting from the month of exceeding the limit, up to the end of the calendar year.

 

In which cases does an individual lose Small Business status?

As discussed above, the status is lost if an individual’s revenue exceeds 500,000 GEL for each of two consecutive years.

Besides, the status is lost if an individual was penalized for violation of rules of use of cash terminal or if he/she conducted the called “prohibited activities” discussed above.

 

What are the pros and cons of Small Business status?

Apart from significant advantages associated with tax reliefs discussed above, Small Business status has some disadvantages compared to an LLC (Limited Liability Company). Small Business status owner is personally responsible for business liabilities. For example, if a business owes 200,000 GEL to suppliers (or banks) and is unable to pay, the creditors are entitled to request payment directly from the individual’s private property. In case of LLC, on the other hand, creditors can only request payment from the company’s assets and not from the private property of the business owner.