Georgia: Government Plans Makeover of Get-Tough Financial Police

A proposal to revamp Georgia's aggressive financial police is raising red flags among some Georgian economists, who see the planned restructuring as contradicting the Georgian government's libertarian economic outlook.

The tax police's image is still defined by the hardball tactics that the agency employed in 2004-2006, a period when masked and heavily armed officers routinely stormed private businesses and apartments to go after suspected tax dodgers. The tax police's behavior alienated Georgia's entrepreneurial class, and some business leaders claimed the government used the agency as a means to persecute its political opponents.

In 2007, President Mikheil Saakashvili combined the financial police with the tax and customs department in a bid to "decriminalize" relations between the government and business community, and to respond to misgivings associated with the televised arrests.

But now, under a tax-code proposal advanced by the Ministry of Finance, the financial police, renamed the Investigative Services Unit, could once again operate on its own. The agency would be answerable to the minister of finance, but the president would appoint its head. Parliament on November 23 is expected to set a date for a vote on the reform plan.

Details of the plan have not yet been released. But the fact that President Saakashvili would appoint the Investigative Services Unit head is prompting some local observers to believe that the agency will enjoy broad powers. "The structure will be the same, but I guess [it] will get more power," said Davit Aslanishvili, a specialist with the Georgian Investment Group, a Tbilisi brokerage, consulting and market research company. "There is no benefit for business."

The reform's timing also is a source of concern for Aslanishvili. Many Georgian businesses have been struggling to survive after months of economic crisis, he noted. The government has predicted that the economy could shrink by 1.5 percent in 2009, although some recent estimates have forecast a 4-percent contraction. At the same time, tax revenues for the first half of the year fell beneath their target by some 7 million lari (about $4.16 million).

"If you look around, there are decreasing sales, decreasing prices," Aslanishvili said. "The economy is shrinking, actually. Probably this is kind of a tool to press [companies for revenue via taxes]."

Finance Minister Kakha Baindurashvili missed a scheduled interview with EurasiaNet to explain the plan for the financial police, and has not responded to subsequent requests for comment.

In a November 11 interview with the Georgian newspaper Banks and Finance, though, Baindurashvili skirted a question about what effect a stronger financial police would have on business. He commented that taxpayers are still complaining despite a reduction in corporate taxes; corporate tax rates were slashed from 20 percent to 15 percent in 2008, while a 20-percent social welfare tax was abolished.

"[S]hould I allow taxpayers to hide [their assets]?" Baindurashvili was quoted as asking. "The law is the law and it needs to be fulfilled."

Ani Katamidze, the executive director of the Georgian Young Economists Association, asserts that a stronger financial police is not the best way to collect needed tax revenue. Tax inspections should be sufficient to show "if companies are doing the proper accounting and if everything is legal and so on," maintained Katamidze.

Given the government's record of economic "liberalization," attempts to beef up the financial police are "a little strange," Katamidze added.

The proposal to restructure the financial police comes just weeks after Saakashvili announced a package of libertarian economic measures that would make tax increases subject to a referendum and place constitutional caps on budget deficits, state spending and debt. [For background see the Eurasia Insight archive].

Other pro-business initiatives have followed, including a presidential plan to return to companies a reported 35 million lari ($20.8 million) in Value Added Tax payments six months ahead of schedule.

Deputy Parliamentary Speaker Levan Vepkhvadze, an opposition member of parliament who supports the financial police plan, likened the co-existence of libertarian economic policies and a stronger financial police to a carrot-and-stick approach "With one hand, we are beating [businesses] with a whip, and with the other hand we are offering them new [pro-business] laws," Vepkhvadze said.

Katamidze asserted that that duality is a reflection of a larger problem -- the lack of a long-term vision for the economy. "We are in one economy. Every decision has its own impact. ... It [the tax police restructuring] should be the part of one big picture," she said. "We see the parts, but we don't see the picture. We don't know what the picture is about."

Katamidze noted that she has not heard any official explanation of why the financial police should be restructured, or what its function will be. The lack of specified structural oversight presents cause for concern, she added.

The financial police's activities should "not be dependent on the decision of one person. It doesn't matter if it is the president or prime minister of [the] head of . . . parliament," Katamidze objected. "There should be rules there and procedures."

Deputy Parliamentary Speaker Vepkhvadze asserts that establishing checks on the financial police is a major point of concern for MPs as well. "I think [the change] will be passed, and I think it should be passed," he said. "The important thing is that with that step we don't create a new monster."