US: New Tax Law Fuels Worries of Georgia Becoming Black Money Hub

As published on: civil.ge, Tuesday 23 April, 2024. 

As tensions flare over Georgia’s foreign agents bill, the ruling party rushes through a controversial tax law, fueling fears that the country will become a black money hub to benefit the party’s billionaire leader, among others.

Amendments to the tax code passed by the Georgian Dream majority on April 19 under a fast-track procedure will make it easier to bring offshore capital into Georgia. The change comes as the party brings the widely opposed “foreign agent” law back to life, while increasingly questioning the financial transparency of civil society and media organizations.

Observers fear the law will stimulate the flow of black money into Georgia while allowing ruling party founder Bidzina Ivanishvili and his cronies to evade possible Western sanctions.

“Georgia is becoming a tax haven for black money, not just an offshore, but more than an offshore – a hub to bypass offshores,” Aleksandra Aroshvili, a social policy researcher, wrote on Facebook on April 18.

Aroshvili was among those who found it hard to trust their ears as they listened to lawmakers defend the law, which would offer tax benefits to those who transfer their offshore assets to Georgia. Citing a growing international crackdown on those doing business offshore, the party wants to open the doors to Georgian and foreign companies registered in tax havens.

“Monitoring has increased, transparency has increased, taxes have increased, so many are leaving the offshore,” Georgian Dream MP Paata Kvizhinadze, one of the bill’s authors, told parliament’s finance committee on April 17. Kvizhinadze welcomed those who are withdrawing from offshore to move their businesses to Georgia.

“If they move here and launder their… it’s already laundered, but if it [moves to] Georgia, it will be more transparent and bring more taxes,” Kvizhinadze said.

The amendments exempt such transfer operations from profit and income tax; it will apply to transfers of businesses registered offshore at the time of the law’s enactment and if their transfers to Georgia are completed by January 1, 2028. The tangible assets that may accompany the transfer – including “aircraft, machine tools, cars” – will enjoy a one-time exemption from import duties and will be exempt from property tax until 2030. The law applies to individuals or groups that own the full 100 percent shares of the assets in question both offshore and after their transfer to Georgia.

The opaque nature of the law, as well as the context and speed with which it was advanced, sparked outcry and speculation about its true purpose. Opposition voices have linked the amendment to Bidzina Ivanishvili, a billionaire founder and patron of the ruling party, hedging against possible sanctions amid Western opposition to foreign agent laws.

“Fearing sanctions, Ivanishvili is fleeing from offshore,” opposition lawmaker Roman Gotsiridze commented on the bill, which he said was “passed in two days, in a super-expedited process.”

The offshore dealings of Ivanishvili, whose current wealth is estimated at more than USD 6 billion, have been no secret. In 2021, Transparency International Georgia, a local corruption watchdog, traced 20 offshore companies owned by the ruling party founder. His name has also come up in infamous offshore leaks of Panama Papers, Pandora Papers, and various independent investigations.

After Russia’s full-scale invasion of Ukraine in 2022, there were repeated calls to sanction the billionaire, but no official Western sanctions have followed so far. However, in December 2023, upon his formal return to politics, Ivanishvili claimed that he had been “de facto” sanctioned, citing difficulties in accessing his Swiss bank assets since 2022. The ruling party and government officials have openly confronted the West over Ivanishvili’s banking problems that, they alleged, were used for financial “blackmail.”

Last September, the U.S. sanctioned Otar Partskhaladze, a notorious ex-prosecutor general and Ivanishvili crony who holds Russian citizenship. Now many fear that the new law will also invite Russian oligarchs fleeing sanctions to Georgia and open doors to their criminal money.

“Russian businessmen and oligarchs often use the practice of offshore companies, and with this change in the law, they too will be able to move their assets to Georgia with tax benefits,” TI Georgia said in its April 19 statement.

Part of a larger trend?
The bill’s authors have argued that the amendments are intended to promote greater transparency among companies that operate on Georgian soil but are registered offshore.

Nevertheless, offshore registration remains legal and is known to be popular among Georgian companies. In addition to low, sometimes near-zero, tax rates, secrecy and foreign jurisdiction allow government officials, among others, to engage in corruption without facing accountability. Journalistic investigations have found that sanctioned Russian oligarchs rely on tax havens for money laundering and sanctions evasion.

MP Gotsiridze also questioned the possibility of enforcing the law’s provisions “given the [intransparent] nature of offshores”.

Other analysts, while agreeing that the amendments are tailored to Ivanishvili’s interests, also trace the changes to larger trends. Ia Eradze, a political economist, said the amendments were a “logical continuation” of reforms since 2007 to turn Georgia into a tax haven. This, according to the expert, includes laws allowing the creation of Free Industrial Zones in the country and later – in 2019 – introducing preferential taxation for cryptocurrency trade (the laws greatly – and controversially – benefited Bitfury, the leading cryptocurrency mining company that in 2014-2016 received significant support from Ivanishvili’s co-investment fund as well as Georgian authorities).

In a separate Facebook post, Eradze also attributed the amendments to a “global process”, including growing international efforts to crack down on tax havens. More than 140 countries have joined a Global Minimum Tax (GMT) policy proposed by the Organisation for Economic Co-operation and Development (OECD) which seeks to impose a minimum effective rate of 15% on the profits of multinational organizations.

“At a time when even offshore countries are happy that the 15 percent tax will give them a colossal increase in their revenues, Georgia is offering free! transfer to offshore capital,” Eradze said.

The amendments also follow longstanding complaints by Georgians about having to pay solid import duties on non-commercial purchases from abroad. With rising inflation in recent years, more and more people are turning to online shopping abroad, and any purchase over GEL 300 ($113) is subject to import duties. Now there is widespread anger that the country’s budget relies on poorer Georgians trying to save money by shopping online, while shadowy billionaires are relieved of the tax burden.

The anger also adds to the current backlash against Georgian Dream’s attempts to target civil society by reintroducing the infamous “foreign agent law.”

“Those who want to fund something suspicious in Georgia will bring money from abroad and cash it through crypto[-currency] so that no one can trace it, and not with a grant that is publicly announced and every transaction detail is immediately available to the revenue service in decimals,” Shota Digmelashvili, a corruption researcher, wrote on Facebook.


US Georgia Black Money Tax Laws

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