PresentationSME Conference

Tbilisi, Georgia May 4-6, 2011

Patricija Pergar

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Agenda

classification of companies, taxation system for sole entrepreneurs,

lawyers, notaries, journalists, etc., taxation system for companies, simplifications, reporting net income – challenges and

problems, grey economy and supervision.

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Classification of companies

Companies are classified as micro, small, medium and large companies with the application of the stated criteria:

average number of employees in the business year,

net revenue from sale and value of assets.

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Classification of companies

99 percent of all companies are classified as small.

2007 2008 2009Total number of taxpayers registered for income tax purposes

161.261 166.074 170.000

Total number of small enterprises registered for income tax purposes

159.586 164.409 168.355

Proportion of small enterprises on total number of taxpayers (%)

98,96% 99,00% 99,03%

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Taxation system for sole entrepreneurs, lawyers, notaries,

journalists, etc.

Persons liable for income on performing business activities belong to this group. These are sole entrepreneurs as well as other individuals, for

example lawyers, notaries, journalists, sportsmen, persons performing business activities in the field of culture, etc., who register performing of activities on

the basis of other regulations.

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Taxation system for sole entrepreneurs, lawyers, notaries,

journalists, etc.

The tax base from income from business activities is established in two ways:

with taking actual income and expenditures into consideration,

with taking norm expenditures into consideration.

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Taxation system for sole entrepreneurs, lawyers, notaries,

journalists, etc.The tax base from income from business activities is established by taxpayers themselves in tax returns.The annual tax base is a sum of tax bases from income from employment, income from performing business activities, income from basic agricultural and basic forestry activities, income from renting property, from transfer of property right and other types of income.The tax authority establishes the liability for payment of tax for the previous tax period with the assessment decision.

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Taxation system for companies

The tax base of companies is established only by taking actual income and expenditures into consideration.

Taxation is performed according to the system of self-taxation.

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Simplifications

Establishing of the tax base by taking norm expenditures into consideration,

books of account,

accounting reports,

annual reports.

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Establishing of the tax base by taking norm expenditures into consideration

Expenditures are defined in a lump-sum amount and they represent 25% or 70% of income realised, which depends on activities, performed by taxpayers.

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Books of account

Taxpayers, who establish the tax base by taking norm expenditures into consideration, don’t have to manage books of account. These taxpayers manage only the record of issued invoices and record of fixed assets.

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Books of account

Sole entrepreneurs may manage books of account according to the system of single entry bookkeeping in cases when they fulfil certain conditions.

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Books of account

Other entities manage books of account according to the principle of double entry bookkeeping.

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Books of account

The tax authority may establish the subject of taxation with assessment and on this base it assesses tax also in cases when persons liable for tax fail to file tax returns or file them without data or fail to submit books of account and records, which they shall keep, or if the subject matter of books of account and records is not correct or if they show such essential formal insufficiencies, which provide justified doubts about their substantive relayability and correctness.

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Accounting reports

Companies prepare breakdown of accounting reports in relation to the size. Smaller companies require breakdown with fewer details.

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Annual reportsTaxpayers, who establish the tax base by taking norm expenditures into consideration, don’t have to prepare annual reports.

Annual reports of sole entrepreneurs include balance sheets and profit and loss accounts, where a detailed breakdown of balance sheets and profit and loss accounts is not required. Explanations for accounts with disclosures and business reports are also not necessary.

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Annual reports

The annual report of small companies with share capital, with the securities not listed on the organised stock markets, consists of at least:

balance sheet, profit-and-loss account and annexes with explanations for statements.

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Annual reports

Small companies with share capital don’t prepare cash-flow tables, capital-flow statements and business reports. Breakdown of balance sheets and profit and loss accounts doesn’t include so many details as at large companies.

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Annual reports

Annual reports of other entities include accounting reports, consisting of balance sheets, profit and loss accounts, cash-flow tables, capital-flow statements and annexes with explanations for accounts and business reports. Companies, which are subject to audit, shall also prepare statements of comprehensive income.

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Reporting net income – challenges and problems

assistance to taxpayers in tax compliance, submission of reports for several purposes at the

same time, performing electronic services with the public

administration,  input control of returns received.

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Grey economy and supervisionGrey economy is one of important reasons for non-compliance with tax regulations, so special attention will be focused on it in next periods. In 2010 there were 3,586 audits performed within the grey economy project, 1,616 violations established, 900,000 EUR of fines imposed and 1.4 million EUR of estimated additional tax liabilities.

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Grey economy and supervision

Last year 2,256 audits in total were performed at small taxpayers. Out of this number there were 1,658 audits at micro companies and companies categorised as smaller than micro and 598 sole entrepreneurs. The most frequent examples of violations are:

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Grey economy and supervision failure to issue invoices (hotels, restaurants,

catering, transporters, construction field), deficiency in management of subsidiary records

(cash register operations, records of travel expenses, construction journal),

fictitious invoices for expenditures (non-performed services in construction, transport, consultant services),

irregularities in connection with depreciation (recalculation for assets already depreciated or for assets already alienated).

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Grey economy and supervision

expenditures for personal use – private purpose (as a rule there is no separation between business and private use),

“fictitious” travel expenses and daily allowances,

for which it is established in supervision procedures that taxpayers don’t have relevant papers and documents for proving reality.

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Grey economy and supervision

Modern auditing methods are already applied:

application of the computer programme for electronic data processing (ACL tool),

supervision over electronically managed cash registers with methods of computer forensics,

supervision over electronic distance selling (selling on the Internet).

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Conclusion

Activities of tax auditing are directed into supervision over tax compliance as well as into preventive activities and prevention of further tax evasion.

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THANK YOU FOR YOUR ATTENTION!