In recent years, the number of disputes between the Revenue Service of Georgia (“GRS”) and taxpayers (the “Tax Disputes”) increased substantially due to the increased number of tax audits conducted by the GRS.
Currently, Georgian legislation provides for a complex system for the resolution of Tax Disputes. In particular, there are a number of forums for Tax Dispute resolution, including: (i) mediation councils at the GRS; (ii) the tax dispute resolution council of the GRS; and (iii) the Tax Appeals Council of the Ministry of Finance (the “Tax Appeals Council”). Finally, the common court system of Georgia also deals with the resolution of Tax Disputes. This article will provide you with a short overview of how tax disputes are handled in Georgia.
Generally, mediation is a form of alternative dispute resolution process which coexists with the formal court proceedings. Parties to the disputes resort to the mediation process in an effort to resolve the dispute through negotiations with the assistance of a mediator. The mediator is usually an impartial and independent third party assigned with the task to facilitate resolution of the dispute between the parties and avoid court litigation.
Mediation, as an alternative method of dispute resolution, is mainly used in private (commercial, family and workplace) areas. However, in the case of GRS, mediation denotes a formal legal process aimed at the amicable resolution of a dispute between the auditors of the GRS and the taxpayer.
In order to fully understand the mediation process within the GRS, it is necessary to understand the process of assessment of additional taxes and tax penalties on taxpayers.
A tax reassessment in Georgia usually takes place according to the following procedure: auditors of the GRS conduct a tax audit of the taxpayer; upon completion of the tax audit they issue a Draft Audit Report stating the GRS auditors’ position relating to the taxpayer’s compliance with tax regulations. Based on this report, the director general of the GRS or his trustee issues an order with an assessment of additional taxes or tax penalties on the taxpayer and issuance of a tax demand. The tax demand (the “Tax Demand”) is a written document (administrative act) demanding from the taxpayer payment of additional taxes and tax penalties. Further to the issuance of the Tax Demand, the GRS usually imposes certain measures (e.g. tax lien or tax mortgage) upon the taxpayer to secure the claims under the Tax Demand.
The taxpayer may then initiate a mediation process prior to the GRS endorsing the tax audit results and issuing the Tax Demand; or alternatively, the taxpayer may initiate a formal dispute resolution procedure after the issuance of the Tax Demand.
Specifically, upon completion of the taxpayer’s audit, the GRS auditors draw up the Draft Audit Report (the “Draft Audit Report”). Prior to the formal endorsement of the Draft Audit Report and issuance of the Tax Demand by the GRS, the Draft Audit Report is presented (save certain exceptions) to the taxpayer; the taxpayer has ten days to present his position on this draft report to the Council of the Audit Department of the GRS (the “Audit Department Council”) and request amendments to the Draft Audit Report; if this request is not successful, the taxpayer has another chance to submit this request to the mediation council of the GRS (the “Mediation Council”). Thus, the mediation usually follows a two-stage process.
At the first stage of the mediation, the Audit Department Council usually conducts hearings of the taxpayers’ position (requests) with respect to the Draft Audit Report. As a result of this hearing, the Audit Department Council renders one of the following decisions: (a) full or partial satisfaction of the taxpayer’s requests; (b) denial of the taxpayer’s requests; (c) declaration of taxpayer’s requests as inadmissible; (d) suspension of the hearings; or (e) a combination of any of these options.
If the Audit Department Council fully or partially satisfies the request of the taxpayer, the Draft Audit Report is modified accordingly. Depending on the request of the taxpayer, this modification may result in the non-issuance of the Tax Demand or the issuance of the Tax Demand for less than the amount of taxes and tax penalties set out in the Draft Audit Report.
The taxpayer is notified of the Audit Department Council’s decision in writing; the taxpayer has five business days to appeal said decision to the Mediation Council.
Notably, the Audit Department Council has a right, without considering the merits of the request of the taxpayer, to forward the request of the taxpayer to the Mediation Council.
The mediation at the level of the Mediation Council is the second stage of mediation at the GRS. The Mediation Council is composed of the highest ranking officials of the GRS, which as of the date of this article includes the head of the GRS, the head of the dispute department of the GRS and two of his deputies, the head of the legal department, and the deputy head of the audit department of the GRS.
The Mediation Council is authorized to make one of the following decisions: (a) full or partial satisfaction of the taxpayer’s requests; (b) denial of the taxpayer’s requests; (c) declaration of the taxpayer’s requests as inadmissible; (d) suspension of the hearings; or (e) a combination of any of these options.
If the Mediation Council fully or partially satisfies the taxpayer’s request, the Draft Audit Report is modified accordingly. Depending on the taxpayer’s request, this kind of modification may result in non-issuance of the Tax Demand or issuance of the Tax Demand for a lower amount of taxes and tax penalties.
It should be noted, that under special circumstances (e.g. the mediation process may result in the statutory limitations for the presentation of the Tax Demand to the taxpayer expiring) the GRS has a right to issue the Tax Demand without submitting the Draft Audit Report to the taxpayer. This effectively deprives the taxpayer of the opportunity to turn to the mediation process.
If additional taxes and tax penalties are payable by the taxpayer after completion of the mediation, the GRS will issue a Tax Demand. The taxpayer has a right to appeal the Tax Demand and the tax audit report on the basis of which the Tax Demand was issued at the GRS. The taxpayer has this right in addition to the rights under the Mediation process.
Tax Disputes at the GRS
The taxpayer may appeal the Tax Demand within 30 days of the day the Tax Demand was served to the taxpayer. After expiration of the 30-day period, the Tax Demand may only be challenged if new evidence or an event pertinent to the tax dispute is uncovered.
Importantly, the Tax Code of Georgia explicitly prohibits the aggravation (subject to a few exceptions) of the taxpayer’s tax liabilities during tax dispute hearings. This is an important guarantee and safeguard for the taxpayers, which encourages them to challenge the Tax Demand without being afraid that the tax dispute may expose them to greater risks.
Generally, tax dispute hearings are conducted with the participation of the taxpayer. However, the GRS has a right to conduct hearings without the participation of the taxpayer if all facts material to the case are at the GRS’s disposal.
If it is impossible to reach the taxpayer or if the taxpayer fails to appear at the hearings, the taxpayer’s claim may be considered by the GRS without the taxpayer’s participation.
The taxpayer may challenge the unfavorable decision of the GRS on the taxpayer’s appeal at the Tax Appeals Council or the competent court in Georgia within 20 days from the day of receipt of this decision. If the taxpayer fails to challenge said decision in the court or the Tax Appeals Councils within this timeframe, then said decision enters into force.
Tax Disputes at the Ministry of Finance
The Tax Appeals Council is a tax dispute resolution body existing at the Ministry of Finance (the “MoF”). The taxpayer may only bring his claims against the GRS after the Tax Demand at the GRS has been challenged unsuccessfully.
Members of the Tax Appeals Council are endorsed by the Government of Georgia. This council is headed by the Minister of Finance and the members include two of his deputies as well as: heads of different departments of the MoF, a representative of the Ministry of Economy and Sustainable Development, the executive director of the non-profit organization Association of Young Economists, a tax ombudsmen expert, the director general of the Georgian Chamber of Commerce and Trade, and the acting deputy director general of the Agency for Competition.
Thus, unlike the tax dispute resolution council of the GRS, the Tax Appeals Council at the MoF is composed of representatives of the public as well as private non-profit organizations. Notably, this council enjoys a high level of trust among the taxpayers.
The Tax Code of Georgia also explicitly restricts the Tax Appeals Council from aggravating (subject to a few exceptions) the taxpayer’s tax liabilities during the tax dispute.
Subject to certain exceptions, the Tax Appeals Council considers the taxpayers’ claims only with respect to those matters which had been appealed to the GRS.
The Tax Appeals Council is authorized to make one of the following decisions: (a) full or partial satisfaction of the taxpayer’s appeal; (b) denial of the taxpayer’s appeal; (c) declaration of the taxpayer’s appeal as inadmissible; (d) suspension of the hearings; or (e) a combination of any of these options.
The taxpayer may challenge the decision of the Tax Appeals Council before the competent court in Georgia within 20 days from the day of submission of this decision to the taxpayer.
The decision of the Tax Appeals Council enters into force 21 days from the date that the taxpayer is notified of this decision. If the taxpayer fails to challenge said decision in the court within this timeframe, then said decision enters into force.
Tax Disputes before the Georgian courts
If the taxpayer is not happy with the results of the dispute resolution process at the GRS or the Tax Appeals Council, he may pursue this dispute within the court system of Georgia, which includes the court of first instance, the court of appeals (i.e. court of second instance) and the Supreme Court.
The court of first instance must render its decision on the tax dispute within two months from the date of acceptance of the respective tax claim. In the case of complex cases, this time may be extended for another two-month period.
The court of appeals must render its decision on the tax claims within two months from the date that the tax claim is accepted.
The courts are independent from the GRS and the MoF; however, only a minor proportion of tax disputes are submitted to the courts by the taxpayer. The taxpayers are usually reluctant to continue the dispute process to the courts, one of the reasons being the relatively high costs associated with this process.
Georgian legislation offers a comprehensive system for the resolution of tax disputes. The Tax Appeals Council of the MoF is the most trusted institution for the taxpayers to resolve tax disputes.
However, the increasing number of audits and tax assessments has resulted in this council becoming congested. Moreover, the Tax Appeals Council does not have the attributes and resources which the courts have; these and other factors underpin the assumption that the court should be the best forum for the resolution of tax disputes. However, the recent attitude of taxpayers involved in such disputes does not confirm this intuitive assumption: in a number of independent surveys, a majority of taxpayers clearly gave preference to the Tax Appeal Council over the courts.
This can be explained by the fact that the Georgian court system does not have special tax courts or tax tribunals. Therefore, tax disputes are considered by judges with a professional background in general administrative law or civil law; while, the tax laws of Georgia are largely based on accounting standards and economic concepts.
Proper resolution of tax disputes requires good knowledge of these standards and concepts. Therefore, judges lacking a background in economics or accounting resolving tax disputes is a challenge. In comparison, a large number of Tax Appeals Council members are not lawyers and most of them have a strong background in economics and accounting. This may be one of the reasons the taxpayers prefer the Tax Appeals Council's dispute resolution process.
In light of all these factors, as well as the importance of the judiciary to the overall development of a predictable and trustworthy tax system, we believe that the creation of tax courts would be a welcomed addition to Georgia’s judicial system. Introducing tax courts or tax tribunals could a valuable development in terms of the protection of taxpayers’ rights in Georgia.