A new term - “Non-Qualified VAT Payer” introduced by Georgian Tax Administration
On 21st January 2021, the Revenue Service of Georgia (GRS-Georgian Tax and Customs Administration) set new restrictions for VAT payers in the country; in particular, the term “non-qualified VAT payer” was introduced. A business in Georgia, qualified under this status will not be entitled to issue or receive tax invoices (documents that are necessary for input VAT recovery) until the status of “a qualified VAT payer” is granted.
Which category of business can be qualified as “a non-qualified VAT Payer”?
Newly registered VAT payers and companies/individual entrepreneurs previously registered on VAT but without taxable transaction in the last 12 consecutive months, will be automatically given a status of “a non-qualified VAT payer” by the Revenue Service of Georgia.
In other words, for example, if you plan to voluntarily (or statutorily) register your Georgian company as a VAT payer you will not be rejected for VAT registration but will automatically be given a “non-qualified VAT payer” status by GRS.
Next, GRS will decide whether to unchangeably leave the “non-qualified VAT payer” status to your company or grant the status of “a qualified VAT payer.” For such a decision, GRS will conduct an analysis in scope of which: tax authorities may interview you via call or in person, ask questions and for documentation, check your business documents, tax declarations, accounting ledgers, visit your office, and others.
The main purpose of this analysis will be to understand whether your decision of VAT registration without having such an obligation is due to the real business rationale or if a real purpose for the VAT registration is a fraud and/or avoidance of taxes.
Notably, If the Georgian tax authorities will make the decision not to grant you a status of “qualified VAT payer” after the analysis it is possible to appeal this decision in the system of the Ministry of Finance and/or before the court.
What kind of restrictions apply to “non-qualified VAT payers”?
Non-qualified VAT payers will not be able to issue and receive tax invoices in the period when they are qualified under this status. It means that such tax-payers cannot recover the input VAT and their clients will not recover the input VAT on services/goods purchased form them. Notably, without a tax invoice, no deduction is possible of VAT in Georgia paid for local services/goods.
Besides, you should be aware of and be prepared for the probability that when Georgia’s tax authority starts analyzing your “non-qualified VAT payer” status, it may find other tax risks in your company that might become a reason for initiating a desk or field tax inspection.
Why do companies in Georgia usually voluntarily register as VAT payers?
VAT in Georgia (18% rate) is payable by tax-payers only if they are VAT-registered persons. VAT registration is statutory (e.g. if sum of VAT taxable operations exceeds 100 000 GEL within consecutive 12 months) or voluntary (no such obligation exists, but a tax-payer still decides to register).
Why do firms voluntarily register as VAT payers in Georgia even if they never reach a 100 000 VAT registration threshold? The most common reason is that being a VAT-payer is a necessary precondition for the right to deduct input VAT (and reverse VAT).
For example, if a Georgian IT company carries out IT services abroad and this service is considered as delivered outside Georgia according to the Georgian tax code (GTC), the service is not taxable by VAT with the right of input VAT (as well as reverse VAT) recovery. However, for such recovery, VAT registration is a must. Thus, if this IT company voluntarily registers as a VAT payer, its services will remain exempted, and at the same time, the right of VAT (and revere VAT) deduction will work.
BTW, differently from ordinary VAT, the obligation of paying Reverse VAT in Georgia on services received from non-residents is due even without reaching the 100 000 GEL threshold and being a VAT-registered person. In other words, if you own a company and/or are registered as an individual entrepreneur in Georgia and receive services from non-resident entities, you will have to pay reverse VAT on such services in most cases, regardless of being a VAT registered entity or not. (Note: a reverse VAT obligation depends on whether such service is qualified as delivered in Georgian territory or not, according to GTC).
Starting on 21st January 2021, the newly-introduced term “non-qualified VAT payer” is in force and applies to a specific category of business in Georgia. In particular, the status applies to newly-VAT-registered entities and ones that have previously registered as VAT payers but do not have any taxable transactions in the last 12 months.
Tax-payers with this status are not entitled to recover the input VAT. Their clients will neither be able to deduct the input VAT on services/goods received from them. The Georgian tax authorities review the status of “a non-qualified VAT payer” shortly after giving it to a tax-payer. As part of such a revision, they will conduct a proper analysis (e.g. studying your documents, tax declarations, setting up the interview, visiting your office, and others.). If tax authorities conclude that there was a business rationale besides your decision to register as a VAT payer without such an obligation, GRS will grant you a new status of “a qualified VAT payer” and all restrictions will be removed. Otherwise, you will lose the right to the input VAT on future transactions, in that case, you will have the right to appeal the decision of the tax authorities.
This process can go smoothly and can take just up to 10 days, but it is important to make sure that you clearly demonstrate the business logic of your decision to register as a VAT payer and no other tax risks exist which might be examined by tax authorities while conducting analysis regarding “a non-qualified VAT payer status”.
About the author: Gela Barshovi is an international and Georgian tax consultant and a managing partner of Tbilisi-based accounting/consulting firm TPsolution. Regarding business registration in Georgia, tax consultation, and/or accounting services, support in the communication with Georgian tax authorities, you can directly reach out to him at firstname.lastname@example.org