Georgia Plans to Offer Tax-Free IT Zones

They’ve tried wine and they’ve tried tourism. Now the Georgian government is banking on tax-free IT zones to draw foreign investment and boost local businesses.

Parliament will vote in September on draft legislation that would set up “several” zones in which Georgian and foreign IT companies could operate without paying income, excise, sales, customs or profit taxes.  Other privileges are still under discussion; the government says that it expects to hammer out the details by September.

“What is known for sure is that the exports of both resident and non-resident IT companies operating in Georgia and producing their products locally will be exempted from taxes,” Deputy Finance Minister Natia Mikeladze told EurasiaNet.org.

The government estimates that companies operating in the zones could reduce their business expenses by roughly 70 to 80 percent.  But altruism does not figure into this calculation; the plan is for Georgia’s underdeveloped IT sector to benefit from the tax break, too.

The legislation would require that local staff make up 70 percent of the employees working at each non-Georgian company operating in the zone. Given Georgia’s 16.9-percent national unemployment rate, that condition could make interest in acquiring IT know-how grow exponentially, bill supporters believe.

“The aim of the bill is to develop this sector by creating a demand for highly skilled professionals,” elaborated Vazha Goginashvili, head of the Ministry of Finances’ Financial Analysis Service’s Systems Administration Department and one of the bill’s authors. “Demand [in its turn] can give an impetus to developing education and it all will result in business development, ultimately.”

No official statistics exist about the current size of Georgia’s IT sector or its yield in tax revenues, but Goginashvili and IT community members concede that the sector is miniscule.

The employment requirement for zone participants, however, faces one key drawback that Goginashvili and others recognize exists – the lack of highly skilled IT professionals and IT-focused education programs within Georgia.

Instead of touting the country’s scores of whizbang IT geeks, the government is promoting lower costs to bring technology firms into Georgia.

“An IT company spends about 80 percent [of its budget] on human resources, and if we cut down these expenses, plus give tax preferences, our idea will be competitive,” affirmed Goginashvili. “For example, if we offer Microsoft a specialist for $15 per hour in Georgia, while it pays $100 per hour for an American specialist, plus offer an income tax exemption, salaries will be its single  expense and the company  can sell its product at a similar price and enjoy a big profit margin.”

Davit Nadaraia, the head of iTex International, a Tbilisi-based software development company that works on software outsourcing projects, terms the draft bill a breakthrough for Georgia’s IT sector, but cautions that without an IT-specific education program to prepare specialists, the zones will only show results in 10 to 15 years.

“Big international companies like Microsoft are not going to rush into Georgia immediately if you do not guarantee that they will have skilled personnel, “ noted Nadaria. Such a skill base could develop gradually as the zones “lay the groundwork for the development of small IT companies, which will create demand for specialists . . . [b]ut it needs a unified approach,  involving tax preferences, education and promotion of the IT sector,” he said.

One other Georgian IT executive argues, though, that the real problem for the IT sector lies elsewhere. Georgian IT specialists do not lag far behind their international peers from an intellectual point of view, but IT company management skills are lacking, asserted Irakli Tushishvili, executive director of Alta Software, a Tbilisi-based software company that develops software services for local banks.

Management skills could also play a role in preparation of the bill itself. Mirian Nadaraia, the head of another local IT company, Saatec, called for tight definitions of what IT technologies would be applicable for the tax benefits. “When a foreign company is looking for a cheaper and high-quality IT product, it focuses on India because it has never heard of Georgia,” Nadaraia said. “This bill can solve this problem, but there should be a clear definition of . . . what activities are covered because it can lead to confusion [and loopholes] about what product is exempted from taxes and what not.”

Tushishvili, nonetheless, expressed confidence that foreign firms will ultimately take the tax-free bait and come to Georgia’s IT zones. He claimed that some of Alta Software’s Ukrainian and Serbian partners have already expressed interest in the zones, but did not provide their names.

“All companies are supposed to cut down costs; even a one-percent reduction for Microsoft means a profit of billions due to its huge turnover . . .of course, they will be interested,” he said