Georgia32.Georgia

IntroductionCertain transfer pricing concepts have been included in the Georgian tax legislationsince 1993 (Law of Georgia on Corporate Income Tax). Although specific provisionsrelated to transfer pricing are very limited, some general transfer pricing rules were Gadded to the Georgian Tax Code on 13 June 1997.

Similar provisions were incorporated into the latest tax code, effective from 1 January2005. In particular, Article 22, Principles of Determining the Price of Goods (Services)for Taxation Purposes, and Article 23, Interrelated Parties, provide the basis for transfer pricing control by the tax authorities.

Specific transfer pricing regulations have become effective from 1 January 2011. Even though the Tax Code enlists applicable pricing methods, the law is not detailed, and the governments position on issues such as compensating adjustments, documentation, burden of proof and safe harbours will not be known until implementing rules are issued. Generally, however, the law follows recognised the Organisation for Economic Co-operation and Development (OECD) principles, so it is reasonable to expect that an analysis based on OECD Guidelines will prove acceptable in Georgia.

The Tax Code stipulates that, in accordance with the Ministry of Finance instructions(inexistent for the moment), the tax authority may recalculate the taxes if they can prove that the prices applied by related parties of transactions differ from market prices.

Statutory rulesScopeThe Georgian tax authorities may evaluate transfer pricing involving the following types of transactions:

Controlled transactions involving various jurisdictions between related parties. International controlled transactions. In the following cases, transfer pricing regulations may apply: Controlled transaction between Georgian companies. Independent parties transaction if one of the parties is a tax haven resident or registered in Free Industrial Zone (FIZ).

Basis for transfer pricing adjustmentsThe tax authorities may apply transfer pricing regulations in the following cases:

Transactions between related parties, unless their relationship does not affect results of the transaction.

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Transactions in which the tax authorities can prove that the price declared by the transacting parties differs from the actual price.

Related partiesThe definition of related parties is found in Article 19 of the new tax code effective from 1 January 2011. Parties are recognised as related if their relationship could affect the conditions or economic results of their activities. For example:

Persons are founders (participants) of the same enterprise if their total share amounts to no less than 20%. One person has direct or indirect participation in another persons enterprise, where such market share is not less than 20%. Individual controls enterprise. One natural person is under subordination of another natural person in terms of his/her business position. One person is under direct or indirect control of the other person. Persons are under direct or indirect control of a third person. Persons, directly or indirectly, jointly control a third person.

Pricing methodsThe following transfer pricing methods can be used for evaluating whether the prices are arms length:

Comparable uncontrolled price method. Resale price method. Cost plus method. Net profit margin method. Profit split method.

If the cost plus method is chosen, the law indicates that the mark-up should be benchmarked against similar transactions between non-related parties. However,the tax legislation does not provide any additional information with this regard, and it remains to be seen how the government will seek to implement the benchmarking requirement, particularly given the limited data that is likely to exist in Georgia.

Other regulationsNot applicable.

Legal casesNo applicable.

Burden of proofCurrently the burden of proof remains with the taxpayer to confirm acceptability of theprices in place.

Tax audit proceduresGeorgian tax authorities are allowed to conduct tax audit procedures only once a year,unless there is reliable information for a more frequent audit because of tax evasion.No specific regulations related to transfer pricing tax audits are provided in the

Georgiatax code.

Revised assessments and the appeals procedureCurrently, the appeals procedures for any tax-related matters involving significantamounts are slow and may result in a change in the initial assessment based on available evidence. At this time, the court system is not a viable alternative.

Additional tax and penaltiesThere are no specific penalty regulations for the violation of transfer pricing rules.However, transfer pricing adjustments made by the tax authorities during a tax audit that would increase the taxable revenue of the taxpayer may be subject to tax underpayment administrative measures.

Specific measures include but are not limited to the following:G Profit tax at 15% rate. VAT at 18% rate. Possible excise tax depending on the nature of the goods.

Please note that current tax legislation also imposes fines for the underreporting ofincome and the late payment of interest.

Resources available to the tax authoritiesInformation on market prices is to be obtained from official sources, which may includethe database of government bodies, information submitted by taxpayers or other reliable information. Under certain circumstances, the tax authorities have relied on information from other outside sources. In one case, the Council of Tax Appeals obtained needed information directly from the foreign customs authorities.

Use and availability of comparable informationBased on experience, the mostly common procedure used by the tax authorities isto rely on information collected themselves from other similar taxpayers and/or information published by the State Statistics Committee. Revenue Service started negotiating with private companies to obtain access to commercial transfer pricing databases. In isolated cases tax authorities are successful in obtaining information from their foreign counterparts.

Currently, Georgian tax authorities try to obtain extensive information from other similar markets worldwide.

Risk transactions or industriesManufacturing and export/import.

Limitation of double taxation and competent authority proceedingsNo well-developed procedures are in place.

Advance pricing agreementsAny taxpayer may apply for an advance ruling. The ruling must be issued within 60

days of application and is binding on the tax authorities, but only for the taxpayer for whom it is issued.

Anticipated developments in law and practiceRules and instructions for submitting transfer pricing documentation to the taxauthorities should be determined by the order of the Ministry of Finance. However, such instructions have not been published yet.

Liaison with customs authoritiesThe tax and customs authorities have recently been merged into one body that isoverseen by the Ministry of State Revenues. It is too early to determine how much coordination will take place between the departments; however, a new, unified database was introduced recently that makes import and export information easily available to the tax authorities.

OECD issuesThe Georgian transfer pricing law follows recognised OECD principles and there are noprovisions in the law to suggest that non-OECD positions will be taken. Consequently, it is reasonable to expect that an analysis based on OECD Guidelines will prove acceptable in Georgia.

Joint investigationsNo such procedures are known to be taking place.

Thin capitalisationThin capitalisation rules became effective from 1 January 2011. Interest expense isdisallowed on any debt in excess of three times the equity of a company. The law does not indicate how debt and equity are measured.

The rules do not apply to:

financial institutions entities that have gross income of less than GEL 200,000 entities with interest expense that is less than 20% of their taxable income before deducting that interest expense.

The maximum rate for which interest may be deducted is 24% in 2011, as defined bythe Minister of Finance of Georgia.

Management servicesAlthough the Georgian Tax Code does not specify transfer pricing regulations withregard to management services, such transactions may be scrutinised for elements of transfer pricing, given that they are provided or received in one or more of the following manners:

By related parties. On a free-of-charge basis. As part of a barter transaction.

The more significant issue with management services is that such services generally have a source in Georgia under the tax code, and therefore would be subject to 15% withholding tax unless exemption is available under a relevant tax treaty.

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