Corporate income tax system evaluation
Monday, 18 September, 2023

The profit tax system that came into force on January 1, 2017, in Georgia aims to create a favorable business environment, accelerate economic growth, and improve tax administration. This system is based on the distributed profit taxation regime, similar to the one implemented in Estonia. Under the new rules, only distributed profit is subject to a 15 percent tax, while the corporate income tax (CIT) on retained earnings has been abolished. The tax rates for profits (15 percent) and dividends (5 percent) remain unchanged. 

The new profit tax model applies to Georgian resident companies and permanent establishments of non-resident companies. However, unlike Estonia, the CIT reform in Georgia does not encompass all business segments. For example, as of now, the financial sector, including insurance organizations, commercial banks, credit unions, microfinance organizations, and other loan-issuing entities, is not covered by the new tax system. 

This report analyzes the impact of the corporate income tax model implemented in Georgia. It provides an in-depth analysis of various aspects related to the reform of the existing profit tax model and international practices, as well as the economic impact of the reform, examining macroeconomic indicators and firm-level financial performance. Regression analysis is employed to assess the causal relationship between the reform and firms' reinvested profits. 

Additionally, the paper explores the fiscal consequences of the reform, including the extension of profit tax reform to commercial banks and insurance companies. The effects of potential changes in the tax code for individual entrepreneurs and the fiscal implications of inconsistencies in the tax code are also examined. The paper concludes by summarizing the key findings.