Giorgi Kakauridze, the Deputy Minister of Finance declares, that no changes have been made in the legislation regarding "Virtual Zone Persons" and that it is a crime if the businesses do not pay their taxes.
"As for improving tax administration, we will constantly focus on its improving. Amendments have not been made to the code “on Virtual Zone Persons” so far and if someone has not paid for something, it is already a crime," said the Deputy Minister of Finance.
According to Giorgi Kakauridze, he cannot talk about the details why the Revenue Service has changed the practice related to the taxation of virtual zone persons.
"I cannot go into details because I do not have full information, but nothing has changed at the legislative level. If someone has not paid taxes, it should be regulated in line with the law," said Giorgi Kakauridze.
Virtual Zone Person - this is the status by which information and technology service companies (IT companies) can exempt from VAT (18%) and corporate income tax (15%) if the company provides its services to foreign customers located outside Georgia. It means that the IT company tax is 0%.
These tax benefits are defined by the Law on Information Technology Zones adopted in December 2010 and the Tax Code. According to the law, zero tax fee is adopted to support the development of IT services in Georgia.
The status of a virtual zone person is granted to the companies by the Ministry of Finance. According to Article 6, activities in the virtual zone shall comprise the economic activities of legal persons related to the production of ITs in the territory of Georgia.
More than 1,000 legal entities have been registered with this status in Georgia over the past 10 years. According to the code, the companies are not required to have employees directly in Georgia and to provide services directly from the territory of Georgia.
However, it has been a few weeks since the Revenue Service radically changed its practice and required companies to pay taxes on income earned in previous years. The main argument of the agency is that according to the Law on Information Technology Zones, IT services should be produced directly from the territory of Georgia, and more than 90% of "Virtual Zone Persons" do not actually create their own products in Georgia, so they have to pay taxes.
According to the law firms and audit companies, a radical change in tax practices by the government in relation to "Virtual Zone Persons" is a significant problem that could cause many investors to leave the country. Audit firms point to the fact that no communication has been made by the state on this issue so far. According to the lawyers, the disputed issue that the service should be created directly from Georgia is written in the Law on Information Technologies and not in the Tax Code, so the state should use Tax Code instead of the Law “on Information Technology” for tax administration.
