The types of in Tax Inspections/audits conducted by the Georgian Revenue Service (GRS)
Note: With our extensive experience in providing services to our clients and representing them in all types of tax inspections, including tax audits conducted by the Georgian Revenue Service and/or tax disputes against the GRS, we have gained significant expertise in these areas. The article below is based solely on our practical experience.
The word “company” in this article can mean Georgian companies, a Georgian branch/ permanent establishment of a foreign company, an organization, an individual entrepreneur, or even an individual.
Let’s delve into the two distinct types of tax inspections: the “formal” or “official” audit and the “informal” or “unofficial” audit. Understanding these categories will equip you with the knowledge to navigate the process more effectively.
Generally, the Audit Department of the Georgian Revenue Service conducts so-called “formal” or “official” tax audits based on an official order/note of a tax inspection, which results in a tax audit report/act being issued.
During an “unofficial” tax audit, a representative of the tax authority may contact your company and request specific documentation. Your active participation in providing this information and the correct and effective communication with GRS is crucial, as it forms the basis of a tax risk assessment.
I will call an audit “formal” when the GRS has already issued a tax audit order/note based on which a tax inspection is officially initiated.
Such a tax inspection can be on-site (when tax inspectors come to your company’s office and conduct an audit there) or a desk audit (when representatives of the tax administration request documents/information without coming to your company’s office and conduct an audit from their address).
Types of Tax Inspections in Georgia
The types of tax inspections can be further subdivided into thematic or full tax inspections/audits.
Let’s review each of them:
Full Tax Inspections in Georgia
A full tax audit means that all taxes in a certain period for which your company may be liable are audited.
Any audit is subject to a three-year statute of limitations. For example, for a full audit beginning in May 2024, the GRS would only be entitled to audit a company’s operations after January 1, 2021. Audits beginning in 2025 can only cover the period from January 2022, as 2021 will already be outside the statute of limitations (please note that there are exceptions here as well).
A tax audit report is issued once the full audit is completed; this document is called a tax inspection act from the Georgian Revenue Service. After issuing a tax inspection act, the audited period (in case of a full tax inspection) or topic (in case of a thematic inspection) will be considered as a so-called closed period/topic, which means that without a court decision, the tax authority has no right to re-inspect the company for that period/regarding that topic.
On the other hand, the tax authority has the right to terminate a tax audit or change its scope (for example, replacing a full tax audit with a thematic tax audit or vice versa). The termination of a tax audit usually occurs when, during the audit process, it is found that no tax liabilities will arise as a result of the audit. When a tax audit is terminated, no tax audit report/act is issued, and the audited period is not treated as a closed period.
Thematic Tax Audits in Georgia
A thematic tax audit is a tax inspection of a specific tax, transaction, or issue.
Examples of thematic audits include an audit of transfer pricing issues, an audit of VAT for a specific period, an audit of one or more specific VAT declarations, an audit of VAT calculations on the basis of one or more specific electronic VAT invoices, an audit of a tax liability arising from a particular transaction (for example, the realization of shares by a company), and more.
Once the thematic review is completed, the entire period is not considered ‘closed’ because the review covers only one specific topic.
Requests by the Georgian Tax Administration for information under Article 70 of the Georgian Tax Code during an “informal” or “formal” audit
During a so-called “informal” audit, a request for information or documents may be made by email, official letter, or simply verbally.
In the official written information request, the GRS usually refers to Article 70 of the Georgian Tax Code, which states that a company must provide the requested documentation/information to the GRS within a given timeframe.
If the tax office officially requests information or documents, a company has five working days to submit them. If the information is not submitted, a fine of GEL 400 is charged, and if the request is repeated, a fine of GEL 1,000 applies.
Please note that the five-day deadline can be extended if necessary. To do so, a company representative must submit a written request to the Tax Service to extend the deadline for submitting documentation/information and justify why it is necessary to extend the deadline and for what period of time. If GRS accepts such request on the deadline extension, you will have more time to collect and provide the information.
A formal request for information does not automatically entail the initiation of a formal tax inspection. To begin with, a tax inspector checks whether any of your company’s activities are problematic. An “informal” audit aims to conduct a preliminary analysis to assess the company’s risks and identify issues that could potentially result in additional tax liabilities for your company.
If, during such preliminary investigations, the auditor/inspector/GRS specialist finds risks/problems resulting in additional tax liabilities for your company, they recommend correcting the previous period’s tax return and paying additional tax. If you do not take this advice, do not correct your past declarations, and are not able to provide the GRS with convincing counterarguments about why additional tax liabilities have not arisen, then the so-called “unofficial” audit will probably be switched into an “official” audit, which is likely to be followed by the imposition of additional tax liabilities and possibly fines.
Therefore, in most cases, when the tax authority recommends paying additional tax, one should either correct the declaration/declarations for the previous period(s) and pay the additional tax per the GRS’s recommendation (in this case, penalties are not applied, but additional tax and potentially late payment interest will have to be paid) or immediately prepare for a tax dispute.
I recommend you consult with a tax specialist before making any decisions. The specialist will assess the risks and chances of your company winning a tax dispute or chances of convincing GRS that no additional tax liability was arisen; You can make the right decision whether to correct past declarations only after receiving qualified advice from a tax consultant.
So, in short, the main difference between what I call an “informal” tax inspection and a “formal” tax inspection is that if additional tax liabilities arise from an informal tax audit, the company can address this issue and pay the tax due without the obligation to pay the penalty (but late payment interest will apply unless the company has paid surplus tax in previous periods). Conversely, if such additional tax liabilities are discovered during the so-called “official” tax inspection, this will cause an additional tax penalty and likely late payment interest also, and the topic will be reflected in the tax audit act. Another difference is that after completing the “official” tax inspection and issuing the tax inspection act, the audited period/topic is considered closed. In contrast, during an “unofficial” inspection, a tax inspection act is not issued, and the period/topic is not considered closed.
Tax Inspections on Transfer Pricing Issues in Georgia
The tax inspections conducted by the GRS regarding transfer pricing are quite specific and require you to engage not simply a tax consultant or a lawyer but a consultant/lawyer who is a specialist in transfer pricing issues (in Georgia, only a small number of tax consultants/lawyers specialize in this area). We are among handful accounting firms in Georgia who are specialized in Transfer Pricing issues.
A transfer pricing audit may also be “official” or “unofficial.” In the case of an “official” check, a thematic audit order is issued and sent to the taxpayer together with the request for transfer pricing documentation, for which, according to the Georgian Transfer Pricing Law, 30 calendar days are given (the legislation determines this period).
The results of tax inspections conducted by the Georgian Revenue Service
As a result of the “official” tax audit, the Georgian Revenue Service’s audit department will issue a tax inspection act indicating the amount of additional levied taxes and penalties per topic (the reason for new tax liabilities arising).
Audit Act issued by the Audit Department of the Georgian Revenue Service
The tax inspection act will also describe why your company was charged additional tax and/or penalties, referring to the relevant law of the Georgian Tax Code based on which the additional tax assessment was made.
The result of the tax audit act may be zero (when, as a result of the audit, no additional tax liabilities were charged), or rarely, an audit act with negative results can also be issued (i.e., paid taxes will be returned to your company from the budget because of the audit).
According to recent practices established at the GRS, tax inspectors cancel a tax inspection when they cannot find any additional tax liability during the tax audit. The disadvantage of such an approach for companies is that a tax audit act is NOT issued in case of canceling a tax inspection. Therefore, the period or topic is not closed and can be rechecked without the court authorization.
If additional tax liabilities were imposed on your company according to the act of tax audit, then in addition to the basic tax and fine already mentioned above, you will likely be charged additional late payment interest (if you do not have a sufficient amount of surplus payments to the budget in previous periods).
The amount of late payment interest is not indicated in the audit act. However, it is indicated in the company’s taxpayer account on www.rs.ge and in the document called a “Tax Payment Request,” which, together with the tax audit act, will be sent to your company on the company’s RS.GE page after the tax inspection ends.
Steps after completing a tax inspection by the Georgian Revenue Service and issuing the tax audit act
If, based on the tax audit act, additional tax liabilities and penalties have been imposed on your company, you have several options:
- To appeal the tax audit act and the related documents in the system of the Ministry of Finance (first instance – the Department for Dispute Resolution of Georgia Revenue Service; second instance – the Council for Dispute Resolution of the Ministry of Finance. This is the approach we recommend in most cases).
- To appeal the tax audit act and the related documents directly in court.
- Do not appeal and pay the imposed taxes and sanctions (payment can also be made according to an arranged schedule if the GRS agrees to such a restructuring).
- Do not appeal and apply to the Revenue Service for a tax agreement (for example, request a waiver on the penalties and late payment interest and pay only the principal amount if the GRS accepts such a request).
A combination of several of the above options is also possible. Which of the above way is best depends on the chances of winning the case and each case shall be analyzed individually. However, generally speaking the most winning option is first to initiate tax dispute in the system of MOF (after appealing in the system of MOF, even if losing the case, you still have a chance to appeal to court or apply for a tax agreement).
Representation of companies with the Georgian tax administration in tax inspections
A tax inspection typically lasts several months. During this process, it is vital that a qualified tax professional answers all questions and provides all information requested by the GRS and that communication with the GRS is navigated correctly; in some cases, there is a certain level of risk that the answers you give and the documents you provide will be used against you by the tax authority during a tax assessment and/or tax dispute.
Please bear in mind that correct and effective communication with tax inspectors during a tax inspection is crucial to escaping the inspection without any additional tax or penalty charges. Ineffective communication with tax inspectors is a frequent reason for the imposition of additional taxes and penalties on companies.
Also, GRS representatives must have the feeling during a tax inspection that your company is backed up and represented by a highly competent tax professional so that each of their actions against your company will be subject to harsh criticism and appeal, which can prevent your company being unfairly charged additional taxes and penalties (for example, when the law is interpretative, it is imperative to convince the GRS during the process that according to the correct interpretation of the law the company is not liable for additional taxes, otherwise, if they do not see strong arguments from your side they may charge taxes/penalties).
You should remember that the risk of a tax charge against your company exists even if it aims to pay all its tax obligations in full and in good faith because no one is immune from making mistakes. In addition, regardless of a company’s good faith, the interpretative provisions of the Georgian tax law can still lead to such risks.
Therefore, if a tax inspection (official or unofficial) is initiated in your company, it is necessary to involve a tax consultant/lawyer in the process as an official representative of the company so that all communication between the tax authorities and your company will only be carried out through a qualified tax expert. This will eliminate the risk of any miscommunication with the GRS.
TPsolution offers representation during the tax inspection and tax disputes
As mentioned above, the GRS may formally initiate a tax inspection or check certain topics regarding your company without issuing an official tax inspection note. Both types of tax audits may result in additional taxes and/or penalties and potentially late payment interest.
It is essential that in the process of an “official” or “unofficial” tax inspection, the interests of your company are represented and protected by a tax expert (tax consultant or tax lawyer), through whom all communication with the tax authority will be carried out. Please note that I do not mean a bookkeeper as a tax expert. Bookkeepers are not obliged to have an in-depth knowledge of Georgian tax legislation. Tax consultants/lawyers and bookkeepers are different professions.
Representation by a qualified tax professional will avoid miscommunication and increase the effectiveness of communication with the tax authority, minimizing the risk of your company having additional tax liabilities and penalties.
TPsolution offers representation services to companies during tax inspections. In the scope of this service, TPsolution will be your company’s representative during the entire tax audit period – from the beginning to the end of the inspection – in verbal or written communication with the GRS.
During the tax audit, at the same time as representing your company, the tax experts of TPsolution LLC will carry out an independent assessment of your company’s tax risks. Before answering any questions the tax authority asks, we will assess the significance and probable consequences of the issues that the tax authority may raise in advance.
TPsolution LLC’s contact information:
Website: https://www.tpsolution.ge/
Email: info@tpsolution.ge
About the Author: Gela Barshovi is the founder of the consulting/accounting company TPsolution LLC and a tax consultant specializing in Georgia’s tax code, transfer pricing, and double taxation treaties. Gela is always personally involved in representing our clients during tax inspections or tax dispute processes.