VAT Disputes - 18% of Turnover, Not Profit, Which Is Why These Are the Most Expensive Assessments
A VAT dispute differs from other tax disputes in one respect: the sum is calculated on turnover, not profit. A supplier the Revenue Service deems "fictitious" wipes out a whole year of input credits with one contract; an export missing one document is taxed at 18%; a service to a foreign client whose "place of supply" turns out to be Georgia loses a fifth of its price. And these assessments double with penalty and interest.
This page describes the VAT issues disputes actually arise from: how input credits are denied and how a lawyer protects a good-faith taxpayer, how the place of supply is determined and the zero rate proved, what reverse charge means and who must pay it, how excess VAT is refunded and what audit it triggers, and what happens when the 100,000 threshold was crossed "unnoticed". The general audit and dispute procedures are on separate pages.
Updated · Practice area: Tax lawyer
Six Typical VAT Disputes and Where the Line of Defence Lies in Each
Most VAT assessments fall into one of these categories, and each has its own standard of proof and set of documents.
Defending a Credit Against a "Fictitious Transaction" Allegation - The Stages
Identifying the basis of the allegation
What the Revenue Service relies on: the counterparty's status (deregistered, non-filer, "risky"), absence at the address, its non-payment of VAT, no employees, inconsistent bank turnover. The lawyer establishes whether the allegation concerns the transaction (it did not happen) or the counterparty (it happened but they did not pay); the line of defence differs.
Proving the reality of the transaction
Goods: purchase, warehouse, transport, waybills, onward sale in the same quantity, a chain that shows physical movement. Services: the result (a report, software, a campaign, photos of the repair), correspondence during performance, acceptance acts. A credit on a transaction that really happened should not be cancelled for the counterparty's fault; that is the central thesis of the defence.
Proving good faith
What the buyer checked before the deal: the registry, VAT registration, the contract, the signatory's authority, the market price, bank payment (not cash). A taxpayer who exercised reasonable care does not answer for the counterparty's later conduct; court and council practice recognise this standard.
Obtaining evidence from the counterparty
The counterparty's confirmation of the transaction, its returns and payments (often accessible), the signatory's statement. If the counterparty has "vanished", statements from its former employees, the transport company, the warehouse. The lawyer looks for evidence where the auditor did not.
Disagreement, appeal, council
A disagreement on the act along both lines, reality and good faith, citing practice; appeals through the instances. VAT credit cases at the council and in court are often decided in the taxpayer's favour where the reality of the transaction is proved, so a dispute is almost always worth it.
Prevention for future transactions
A counterparty-check procedure in the company (who checks what, when, and keeps it), a standard for contracts and documents, a ban on cash payments above the limit, monitoring of "risky" counterparties. One dispute survived protects the company's VAT procedure for years.
Services to Foreign Clients - Where the Transaction "Takes Place" and When It Is Taxed in Georgia
A significant share of Georgian companies sell services abroad: IT development, design, consulting, marketing, outsourcing. Under the VAT rules the "place" of such services is often the recipient's location, that is, outside Georgia, and the transaction is outside VAT or zero-rated. But the rule depends on the type of service: certain services (connected with real estate, events, transport) are taxed where performed, and the Revenue Service often assesses precisely by reclassifying the type.
The tools of defence are in the contract: a precise description of the service that fits the right category; documents on the recipient's status (business or not) and location; invoices and acts that match the contract; evidence that the recipient used the service in its own country. The lawyer reviews service contracts from the VAT angle before an audit; rewriting them afterwards does not help.
Reverse charge is the other side of the same rule: a foreign company's service to a Georgian recipient is taxed in Georgia and the recipient must self-assess the VAT: a software licence, an advertising platform, a consultant. For a VAT payer this is neutral (assessment and credit in the same period), but undeclared reverse charge triggers a penalty; for a non-VAT payer it is a real cost. The lawyer's work is setting up the list of foreign services and the declaration procedure before an audit writes it into an act.
What a VAT Dispute Turns On
- 18%
- The standard rate on turnover: the assessment base is always the full value of the transaction, not the margin. That is why VAT disputes involve the highest sums.
- 100,000 lari / 12 months
- The mandatory registration threshold in any continuous 12 months of taxable transactions; the obligation arises from the day it is crossed regardless of registration. Calculating the threshold (which transactions are taxable and which exempt) is often itself in dispute.
- Credit deadline
- The right to credit must be used within the statutory period from receipt of the tax invoice; after it expires the right is lost. A late-issued invoice is a frequent subject of dispute.
- Refund of excess
- Excess VAT (credit exceeding output, typical for exporters and in the investment phase) is refunded or offset on application; a refund generally triggers an audit, so documents must be ready before the request.
- Penalty
- The penalty on understated VAT is a significant percentage of the assessment, with interest for every day; an amendment before the audit materially reduces the penalty. Undeclared reverse charge means a penalty even where the credit makes it neutral.
- Exempt transactions
- Financial services, certain residential real estate transactions, medical and educational services: without a right to credit; in mixed activities the credit proportion is a separate subject of dispute.
What a Company Must Have for Every VAT Transaction - The Credit Protection Set
- A contract with the counterparty, signed, with a specific description of the subject and price; a one-page "service agreement" will not protect a 200,000 lari credit.
- A tax invoice with correct details, on time, confirmed electronically; an invoice and acceptance act that match the contract.
- For goods: waybills, a transport document (who, by what, from where), warehouse records, onward sale documents; the physical chain.
- For services: evidence of the result (reports, files, photos, campaign statistics), correspondence during performance, the identity of those who performed.
- A record of the counterparty check on the day of the deal: a registry extract, VAT registration status, the signatory's authority, dated.
- Payment by bank transfer referencing the contract and invoice; cash payment above the limit puts the credit itself at risk.
Three VAT Disputes
A supplier that "vanished"
A construction company lost 6 months of credits on a materials supplier that was later deregistered and had not paid VAT. Lawyer: the physical chain of materials (waybills, receipt on site, use in the project per the estimate), bank payments, the counterparty check at the time of the deal (it was active then), the carrier's statement. The council restored the credit in full: the transaction was real and the buyer in good faith.
IT services for a European client, taxed by "place"
The Revenue Service taxed software development for a European company in Georgia because "the service was performed here". Lawyer: this type of service is taxed at the recipient's location, the client's status and location (registry, contract, invoices), use of the service abroad. The assessment was cancelled in full at the first administrative stage.
A threshold crossed "unnoticed"
A sole entrepreneur exceeded 100,000 within 14 months and registered 8 months later; an assessment of 18% on 8 months of turnover with no credit, plus penalty. Lawyer: recalculation of the threshold (some transactions turned out to be exempt, moving the crossing date by 3 months), restoration of credits on purchases in the period, reduction of the penalty. The assessment fell by 60%.
Questions About VAT Disputes
The counterparty did not pay VAT; why should I lose the credit?
Legally you should not, if the transaction is real and you acted in good faith: the right to credit is the buyer's, the obligation to pay is the counterparty's. The Revenue Service merges the two in practice; the council and the courts separate them. The defence is documents of reality and good faith, both lines at once.
The counterparty issued the tax invoice 2 months late. Do I have the credit?
The right to credit runs for the statutory period from receipt of the invoice; late issuance does not in itself cancel it if the transaction is real and the invoice was confirmed. The penalty for lateness is the counterparty's. The lawyer counts the period from the day the invoice was received and advises taking the credit while the right is in force.
I am an exporter with excess VAT. How long does a refund take and what is the risk?
On application within the statutory period, often through the automatic refund system for a compliant taxpayer; a large sum or a first request generally triggers a desk audit of the export and credit documents. The lawyer checks the full document chain before the refund request; a refund that turns into an assessment is a typical scenario for an unprepared company.
Must I pay reverse charge on foreign platforms (advertising, software, cloud)?
As a rule, yes: a foreign company's service to a Georgian business is taxed in Georgia and the recipient must self-assess the VAT. For a VAT payer this is neutral through the credit, but declaration is mandatory and omitting it is penalised; for a non-VAT payer it is a real cost. The lawyer sets up the list of foreign services and the declaration procedure once.
Do I owe VAT on selling a flat? It is in the company's name.
Certain residential real estate transactions are VAT-exempt; supplies of commercial and under-construction property are taxed; there is no right to credit on an exempt transaction, and in mixed activities a proportion is calculated. The status of the specific property (residential or commercial, new or second-hand) and the seller's activity are decisive; the lawyer checks before the deal, not after.
Lawyers for VAT Disputes
A VAT dispute is won on a documentary chain of the transaction's reality and the taxpayer's good faith, and on prevention that protects the credit before an audit. Within 15 minutes the coordinator connects you with a lawyer who handles VAT credit, export and reverse charge disputes.
No published lawyers in this category yet
That does not mean we cannot help. Call us - we will match you with a specialist for a remote consultation or from a nearby city.
Call: 568 330 318Other Tax Law Services
Credit Cancelled, Export Taxed, or a VAT Refund Turned Into an Audit?
In a free consultation the lawyer tells you what the allegation in your act really is, about the transaction or the counterparty, which documents will protect the credit and what must change in the company's procedure so it does not happen again. The coordinator reaches out within 15 minutes.