07TBILISI2091, REVENUE SERVICE HEAD POSITIVE ABOUT TAX AND

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Reference ID Created Released Classification Origin
07TBILISI2091 2007-08-21 13:21 2011-08-30 01:44 UNCLASSIFIED Embassy Tbilisi

VZCZCXRO5850
PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHSI #2091/01 2331321
ZNR UUUUU ZZH
P 211321Z AUG 07
FM AMEMBASSY TBILISI
TO RUEHC/SECSTATE WASHDC PRIORITY 7378
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEAHLC/HOMELAND SECURITY CENTER WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION PRIORITY

UNCLAS SECTION 01 OF 02 TBILISI 002091 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/CARC AND EB/IFD/OMA 
COMMERCE FOR 4231 DANICA STARKS, MOSCOW FOR USDA 
 
E.O. 12958: N/A 
TAGS: ECON PGOV GG
SUBJECT: REVENUE SERVICE HEAD POSITIVE ABOUT TAX AND 
CUSTOMS REFORMS 
 
REF: A. 06 TBILISI 2698 
 
     B. TBILISI 01791 
     C. TBILISI 01456 
 
TBILISI 00002091  001.2 OF 002 
 
 
1. Summary.  On August 8, Mindia Gadaevi, head of Georgia's 
Revenue Service, discussed with Econoffs the progress made to 
date in the reorganized service, which includes customs and 
tax departments and elements of the former Financial Police. 
Tax revenues are up by one third year on year in the first 
quarter of 2007 as the gray economy becomes legalized.  The 
Revenue Service is targeting its tax auditing and customs 
resources and looking to the Internet as a medium for 
taxpayer obligations.  Gadaevi dismissed predictions that an 
increase in the personal income tax effective next year will 
have negative consequences on employees.  End Summary. 
 
2. On August 8, Econoffs met with Mindia Gadaevi, head of 
Georgia's Revenue Service to discuss progress made during his 
first five months in office.  He said he sees his role as a 
strategic manager instead of the head tax or customs 
investigator.  He and his staff have developed a strategy for 
the Revenue Service, which combines the tax administration 
and customs, as well as elements of the former Financial 
Police--following the Estonian model (ref A).  Although an 
IMF expert gave advice on development of the strategy, 
Gadaevi said, the Revenue Service decided to do almost 
everything the opposite way.  Nevertheless, the IMF reviewed 
the strategy, he said, and accepted it as a good effort.  The 
Service aims to increase revenues, reduce the shadow economy, 
prevent corruption, maintain a positive image, and increase 
customer satisfaction. 
 
Revenue Increases 
----------------- 
 
3. Gadaevi said that statistics for the first quarter of 2007 
show tax revenues increased by 30-35 percent from the same 
period last year.  Gadaevi attributes the continuing strong 
growth in tax revenue to a combination of economic growth, 
more efficient tax administration, tougher enforcement and 
the legalization of the gray economy as more businesses 
decide it is better to be on the legal side of the law.  The 
Revenue Service is in the process of closing various informal 
markets, or bazrobas.  The action will cost many people their 
jobs, but Gadaevi contends the cost to the economy of the 
illegal and unaccountable commercial activity is greater than 
than the social cost of the lost jobs.  Business owners are 
realizing there is a competitive advantage to being 
compliant, and the tax system is now more or less stabilized, 
he said.  One advantage to compliance, he said, comes in the 
form of Value-Added Tax (VAT) refunds.  Some businesses claim 
that the Revenue Service is exceedingly slow to refund VAT. 
Gadaevi said he has met personally with several 
businesspeople who raised such complaints and discovered that 
many had never even applied for their refunds in the first 
place.  The Revenue Service is launching an advertising 
campaign to urge businesses to apply for their VAT refunds 
and promising a one-month turnaround for straightforward 
cases. 
 
Targeted use of Resources 
------------------------- 
 
4.  Gadaevi said that the current pace of reform in both the 
tax and customs departments cannot continue because almost 
all necessary improvements are in place.  He joked that there 
will be no job for him next year.  Now the Service will focus 
on risk management to more effectively target its resources, 
he said.  In the Tax Department, 350 auditors will target 
companies where the risk of not paying is high.  According to 
Gadaevi, 640 large companies produce 70 percent of state tax 
receipts.  At the same time, the Customs Department is 
developing a Gold List of high-volume, thoroughly vetted 
businesses which can submit customs clearance documents 
electronically.  Gadaevi said the Revenue Service has not 
been involved at all with developing the Poti Free Trade Zone 
(ref B), but he expects the zone will create new jobs. 
Gadaevi expects taxpayers will be able to perform more and 
more of their obligations via the Internet in the future. 
 
Merger of Income and Social Security Taxes 
------------------------------------------ 
 
5. Gadaevi was confident that after the recently enacted 
elimination of the social tax and increase of the personal 
 
TBILISI 00002091  002.2 OF 002 
 
 
income tax from 12 to 25 percent takes effect in January 2008 
(ref C), employers will increase wages to compensate their 
employees, despite widespread concern to the contrary.  He 
predicted that when the state raises gross salaries by 20 
percent, as it intends to do after the social tax is 
abolished, all large businesses will raise salaries 
accordingly.  Busine
sses that fail to follow will lose their 
competitive advantage and have internal problems with their 
employees, he claimed.  Since the combined taxes will be 
withheld from employee's paychecks, employees would 
immediately feel the pinch if their net wages are not 
increased.  Thus, an employer's failure to increase wages 
would not escape his employees' notice.  Gadaevi said there 
will be no benefit gained for businesses who do not increase 
the net salaries. 
 
Comment 
------- 
 
6. Comment: AmCham officials confirmed that large employers, 
especially American ones, are planning to keep their bottom 
line the same, which actually will result in a net increase 
of 2.7 percent for the employee.  AmCham officials could not 
confirm, however, that all small and medium-sized 
enterprises, especially in the regions where unemployment is 
higher, will follow the larger companies' lead.  Elguja 
Meladze, President of the Georgian Employers' Association, 
told Econoff that the majority, 60-65 percent, of employers 
will increase employees' gross salaries.  We will continue to 
urge our contacts within the private sector to keep their 
bottom-line operating costs the same and not let the 
employees take the tax hit.  End Comment. 
PERRY

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