“First Time’s the Charm”: Lessons from Georgia’s Tax Expenditure Report

By Nino Mikeladze and Victor Mylonas

This blog was also published by the Council on Economic Policies (CEP)

Tax expenditure (TE) analysis plays a pivotal role in the comprehensive exploration of the consequences associated with tax concessions, as well as in critically evaluating their effectiveness vis-à-vis predetermined government macro- and/or socio-economic objectives.

Primarily, TE assessment (TEA) allows governments to identify and measure the fiscal cost of TEs (i.e., the government revenues forgone from having TEs in place). This is a key piece of information for policymakers, since the revenue losses stemming from TE adoption can be significant: according to the Global Tax Expenditures Database (GTED), the average revenue forgone lies at around 4% of GDP (25% of tax revenue) worldwide. In addition, by systematically quantifying and disseminating (the cost of) TEs on a regular basis, TEA allows governments to enhance the transparency and accountability of their public finances.

Georgia has recently embarked on TEA by publishing its first Tax Expenditure Report (TER) at the end of 2022.

This blog highlights key lessons derived from the TER process in Georgia:

1. It takes time… The preparation of the Georgian TER has been a comprehensive and multi-year process, which started in 2020 and involved various crucial stages, beginning with the definition of the benchmark tax system and compilation of a TE inventory.
2. The learning curve is steep… TEA in Georgia relied on substantial staff commitment at the Ministry of Finance as well as technical assistance from development partners, such as the International Monetary Fund (IMF) and the United States Agency for International Development (USAID).
3. Benchmarking is country-specific… For instance, in Georgia, the benchmark tax system for corporate taxation is defined as a dual system including both the Distributed Profit Tax (DPT) and (“old”) Corporate Income Tax (CIT). The main distinction between the (“old”) CIT and DPT regimes is that the latter postpones taxation of corporate income to when dividends are distributed[1]. The TE costing process in Georgia considers the DPT and CIT as separate taxes to reflect these inherent features of the Georgian corporate tax regime. In other words, the DPT was not considered as a deviation from the CIT benchmark and was, hence, not costed as a TE.
4. Legal requirements matter… Georgia has also instituted a legal requirement for TER publication, which minimizes discretion in the TEA process. The country’s TER is also required to be included as an annex to the annual budget (Article 38 of the Budget Law), which ensures that TE reporting becomes an integral part of the fiscal planning and decision-making process. This, in turn, enables policymakers to consider the implications of TEs and make informed decisions about their potential rationalization.
5. It is just the beginning… Estimating the fiscal cost of TEs is not only a key piece of information for policymakers working on revenue mobilization. It is also the first step towards engaging in Tax Expenditure Evaluation (TEE). Examining the economy-wide effects of TEs via TEE is crucial to ascertaining whether TEs are effective in meeting their intended objectives and, hence, the extent to which they align with the country’s general growth and development strategies. Georgia has already begun the TEE process, with a view to conducting evaluations for all key TEs over time, prioritizing them based on characteristics such as their fiscal cost, contribution to employment and the degree of overlap with other government support programs.

Whereas some aspects of the TER process are, indeed, country-specific, there is significant scope for peer learning and exchange among countries at the regional and international levels. The Regional Workshops on TEs co-organized by the Addis Tax Initiative (ATI), the Council on Economic Policies (CEP) and the German Institute of Development and Sustainability (IDOS) - in which Georgia has played an active role - are cases in point.

Other countries that have not yet commenced reporting on TEs can learn from Georgia’s experience, which highlights the importance of dedication, attention to detail, and adopting a medium-term perspective when it comes to ensuring that TEA efforts are both well thought out and successful.