Georgia: Tax Case Fans Fears of Return of Arbitrary Government Collection Methods

A tax dispute in Georgia involving one of the country's largest retailing chains is highlighting concerns about due process and the rule of law. Some legal experts say a recent change to Georgia's tax code has paved the way for the return of government arbitrariness on taxation matters.

The case in question involves Elit Electronics, which for the past two years has been disputing a $4.15 million fine imposed by the government. Despite the lingering court battle, the retailing chain continued to operate as usual - that is until the government succeeded in pushing through an amendment to the tax code this summer. The amendment made it easier for authorities to freeze accounts and assets in taxation disputes.

On September 1, Elit Electronics closed 34 of its stores. Privately held Elit Electronics franchise stores were able to remain open. According to Director Anzor Kokoladze, the company was forced to close after tax officials seized company assets, relying on the recently adopted tax code amendment to provide legal cover for their actions.

Subsequent to the amendment's adoption, Kokoladze told EurasiaNet that the company's accounts were frozen on August 10. Elit Electronics tried to keep operating on a cash basis, but then officials took action to seize its cash on August 21. The retailer was formally "sequestered" on September 1, precipitating the store closings. According to Kokoladze, the company really owes the government 120,000 lari (about $71,000) due to an accounting error. Elit Electronics employs over 1,000 people directly; and the company estimates that an additional 900 people are affected indirectly.

Davit Gvetadze, the managing partner of UBC International, an auditing and tax firm in Tbilisi, said the Elit Electronics case was sending ominous signals to entrepreneurs in Georgia. "The concern is that they [officials] have the right actually to seize, to put the [lock] on your bank accounts for the amount that they are claiming before even finding out if you have to pay - without giving you the possibility to prove that maybe there is a mistake," Gvetadze said.

"We understand that the [state] budget needs money and nothing is for free, but that is extreme," Gvetadze added, referring to the Elit Electronics case.

The Ministry of Finance did not respond to requests for comment in time for publication.

The Elit Electronics case is helping to foster a "perception that the tax authorities are over-aggressive" according to an International Finance Corporation report on Georgia's competitiveness that was prepared in June.

Simon Nihal Bell, the consultant who wrote the report, told EurasiaNet over 30 percent of the businesses, business organizations and donor organizations expressed concerns about the methods used by tax authorities. "It was striking how common this complaint was," he said.

Ketti Kvartskhava, a partner at the legal firm BLC that handles many tax cases, said the Elit Electronics dispute was not an isolated case. "Since the government has a shortage of funds, the tax authorities have become more aggressive. And that is really bad. That scares businesses, and businesses are not doing well due to the financial crisis," she said.

Tax revenues were down at the beginning of the year. The Ministry of Finance reduced the budget by 500 million lari [nearly $300 million] to account for gaps in collection. According to data on the Ministry of Finance website, tax revenue is responsible for funding 75.1 percent of the state budget.

Zaza Bibilashvili, the director of BGI Legal, said the tax-collection system is showing signs of backsliding after several years of progress. During the first two years of President Mikheil Saakashvili's administration, tax collection methods were, in many instances, heavy-handed, Bibilashvili recalled. But after 2005, a greater degree of systemization was evident, Bibilashvili added.

But now things seem to be regressing back to the pre-2005 mode of operation. The danger now is that a vicious-cycle of arbitrariness and evasion will kick in: the more arbitrary government methods seem, the more businesses try to hide their assets and avoid paying taxes. Already, Bibilashvili noted, many businesses have become "less disciplined" about paying taxes.

"We are seeing things that we have not seen for two or three years, such as aggressive closings of businesses," he said. "It is a very short sighted way of doing it because you may get immediate cash at the expense of long term investment."