One of the most important changes to the tax legislation is the reform of the Value Added Tax (VAT). The aim of the reform is to approximate the tax legislation to the legislation of the European Union and to fulfill the obligations assumed under the Association Agreement.
It is for this purpose that amendments were made to the Tax Code of Georgia and the VAT rate was established with a new wording.
It is worth noting that within the framework of this reform, all tax benefits provided for by the current legislation have been preserved, and new regulatory norms have also been introduced. From the results of the VAT reform, several important points can be distinguished that may have a certain positive effect on the activities of business entities, for example: free supply of goods/services, taxation of leasing operations, tax benefits, and others.
Free delivery of goods/services
In accordance with current legislation, transactions carried out free of charge are subject to VAT and taxation is carried out based on the market value of the goods supplied and services provided.
According to the reform:
- Free delivery of goods
- Free supply of goods for the personal use of the employee
- Supply/use of goods for a purpose other than the purpose of one's own business
It is taxable only if the person has fully or partially accounted for VAT on these goods or the expenses incurred on them. However, the transfer/use of goods as a sample or a gift of small value [1] is not taxable with VAT. It is also worth noting that free supplies will be taxed from the “cost price” of the goods supplied, and not from the market price .
The provision of services free of charge will be taxed if the service is provided:
- For the personal use of the hired person
- or for a purpose other than the purpose of one's own activity
As we can see, the changes will somewhat simplify the process of fulfilling tax obligations, reduce the VAT taxable base, as well as sanctions imposed for incorrect calculation of the market price during a tax audit. This will save business entities time and costs associated with determining the market price and conducting relevant tax disputes . As a result, the tax burden will be alleviated for businesses and they will have more free time and money.
Taxation of leasing operations [2],
According to current legislation, leasing is considered a supply of services. Accordingly, taxation is carried out based on the periods of provision of leasing services.
According to the changes:
- The actual transfer of goods under a lease/leasing or other similar agreement, with a condition of redemption, is considered a supply of goods;
- The supply of goods occurs (and therefore taxation is carried out) immediately upon transfer of the goods, i.e. at the beginning of the leasing period.
- The benefits provided by leasing agreements are not included in the amount subject to VAT.
As a result:
- Companies will benefit from the cessation of VAT taxation of the financial component
- In the event of a default by the lessee, leasing companies will be able to refund the VAT paid.
It is also worth noting that a number of benefits have been provided for value-added tax, which will have a positive impact on taxpayers.
For example:
- Along with medical and educational activities, the supply of directly related and auxiliary services/goods is exempt from taxation;
- Ancillary services provided by insurance brokers and/or insurance agents shall not be taxed together with insurance and/or reinsurance;
- Along with the exempt main supply, services directly related to it will also not be taxed.
- The VAT-exempt transactions related to the transportation of goods are being expanded and clarified;
- The provision of services by an intermediary acting on behalf of another person in the case of international transportation of goods or participation in operations carried out outside Georgia is exempt from the right of deduction.
We believe that these and other changes, which we will introduce to you in more detail during the training "Changes in Tax Legislation" , will have a positive impact on your business activities.
[1] A small gift is a good or service that is provided free of charge and whose value, excluding VAT, does not exceed 50 GEL per individual during a calendar year. Advertising and representation expenses are not considered small gifts.
[2] Note – The new provisions regulating the VAT taxation of leasing transactions will apply only to leasing agreements concluded after January 1, 2022.
