Resume: In general, tax revenue to GDP ratio is the indicator used to measure tax burden in a country. Maia Tskitishvili is referring to total tax payable as share of gross profit, which is one of the components of the World Bank’s Ease of Doing Business ranking. Since Ms Tskitishvili was speaking of business conjecture, it is appropriate to use the aforementioned indicator. However, eventually, there is a lack of specificity and the statement does not fully reflect situation in the country in regard to debt burden.
As stated by the Minister of Regional Development and Infrastructure, business tax burden in 2018-2019 is 9.9%, making Georgia one of the top three countries in the world, after Vanuatu and Brunei. This reduction in tax burden is associated with the introduction of the so called “Estonian Model” of the profit tax in the beginning of 2017, which implies zero taxation of undistributed income. Usually, Ease of Doing Business report of a specific year is based on data of the previous two years and therefore, 2017 conjecture was reflected in 2018 report. In regard to tax revenue to GDP ratio, according to the World Bank’s 2017 data,[1] of 147 countries, Georgia is ranked 35th with 21.7% ratio.
Analysis
The Deputy Prime Minister and the Minister of Regional Development and Infrastructure of Georgia, Maia Tskitishvili, in her speech at the European Reconstruction and Development Bank (EBRD) Eastern Partnership Investment Summit’s high level discussion panel: “Fueling Growth: Opportunities for Investors” stated that [Georgia] is ranked the third in the world in terms of lightness of tax burden.
Of note is that in general, tax revenue to GDP ratio is the indicator used to measure tax burden in a country. Maia Tskitishvili is referring to total tax payable as share of gross profit, which is one of the components of the World Bank’s Ease of Doing Business ranking. Since Ms Tskitishvili was speaking of business conjecture, it is appropriate to use the aforementioned indicator. However, eventually, there is a lack of specificity and the statement does not fully reflect situation in the country in regard to tax burden.
Tax burden dynamic in 2005-2019 is given at graph 1. In 2006, as compared to the previous years, tax burden (total rate % of profit) dropped by 18.4 percentage points, which was stipulated by adoption of the new Tax Code of Georgia by the end of 2004. As a result of that change, number of taxes was cut from 19 to 7 as well as tax burden in 2009 dropped from 38.6% to 15.3%, which was again the result of amendments enacted in the Tax Code. In that period, social tax was abolished (was merged with the income tax) and income tax was set at 20%. Of note is simultaneously with reduction of the tax revenue to profit ratio, budget tax revenue to GDP ratio was increasing gradually, which might be explained by eliminating corruption in the tax system, putting budget accountancy process in order and improving tax administration.
Graph 1: Business Tax Burden and Tax Income to GDP Ratio in 2005-2019
Source: World Bank
As stated by the Minister of Infrastructure and Regional Development, business tax burden in 2018-2019 is 9.9%, making Georgia one of the top three countries in the world, after Vanuatu and Brunei. This reduction in tax burden is associated with the introduction of the so called “Estonian Model” of the profit tax in the beginning of 2017, which implies zero taxation of undistributed income. Usually, Ease of Doing Business report of a specific year is based on data of the previous two years and therefore, 2017 conjecture was reflected in 2018 report. In regard to tax revenue to GDP ratio, according to the World Bank’s 2017 data,[1] of 147 countries, Georgia is ranked 35th with 21.7% ratio.
[1] In 2017, World Bank measured data of 147 countries, whilst in 2018 the number of countries was 62. Therefore, discussing 2017 conjecture is more informative, since Georgia’s position in 2018 altered insignificantly as compared to the previous year.
