Author: Khazar AKHUNDOV and Nurlana GULIYEVA
According to members of parliament and experts, Azerbaijan steps into 2019 with a revolutionary budget. Indeed, it has been long since so many innovations have been included both in the budget and the accompanying Tax Code.
It is the first time that the state budget is developed according to new budgetary rules for long-term state finance management, according to which the government will no longer reduce state expenditures regardless of decreasing oil prices. In general, the dependence on oil revenues is planned to be reduced as much as possible thanks to, among other things, unprecedented tax benefits.
In the draft state budget adopted by the Milli Majlis (parliament) for 2019, the revenue forecast is determined at ₼23 billion 168 million, and expenditures at ₼25 billion 190 million, respectively. We should expect a deficit of ₼2 billion 22 million, or 2 5% of GDP. In general, the budget, as in previous years, is treated as socially oriented. As for the financing of the deficit, it will be carried out at the expense of proceeds from privatisation and other sources (internal and external borrowings), the balance on the single treasury account as of January 1, 2019. But based on the experience of 2018 and previous years, it is expected that real incomes will exceed the projected budget deficit by the end of 2019. Also, for the time being, the majority (59.8%) of the revenue forecast will come from the oil sector, while the non-oil sector will provide 40.2%.
New budget rule
Apparently, the price of oil indicated in the budget for 2019 ($60 per barrel versus $55.1 per barrel in 2018) has caused some scepticism among the experts community. But recent developments in the global oil market and forecasts of foreign economists and financial institutions do not give reasons for extreme pessimism, and we can expect that the price of oil next year will not let our government down. However, even if it falls, then nothing will change in the budget, according to the new budget rules. During parliamentary discussions of the state budget in the parliament, Azerbaijani Finance Minister Samir Sharifov said that "when oil prices go down, we should not immediately reduce our expenses, because it will hit our economy for the second time." Mr. Sharifov believes that if Azerbaijan adheres to these rules, it will protect itself from big risks. "On the one hand, the new budget rules will serve to put spending in the medium and long term in order, on the other hand, they will prevent large volumes of foreign currency from entering the market," said Mr. Sharifov. He also added that the supply on the foreign exchange market should be at optimal level, and transfers from the Oil Fund should fully meet market demand.
Later, in his televised interview S. Sharifov suggested that overly strong manat is harmful to the economy of Azerbaijan. In particular, it negatively affects export oriented local producers. This logical conclusion was the reason for speculation around the possible devaluation of the manat, which was immediately followed by a sharp reaction of the Ministry of Finance: "The macroeconomic stability achieved today and its preservation in the future are connected with the observance of fiscal rules and support of the monetary policy pursued by the Central Bank. This ensures and will ensure preservation of the stability of manat’s rate."
Minister added that it was also necessary to take into account regional factors, as the fluctuation of the national currencies of neighbouring countries and major trading partners has a negative impact on the export potential of Azerbaijan.
It is obvious that post-oil economic reforms introduced in Azerbaijan, as well as the increasing financial support for small and medium-sized businesses, and the growth of social and defence expenditures increase the burden on the state budget. Accordingly, the state budget revenues are to be increased, which can be achieved by stimulating business activity in the country, attracting foreign investors by improving the investment climate, optimising taxes, and also legalising shadow capital and making it taxable. "Next year, the government will introduce significant tax reforms, which is a very bold step. The objective is to stimulate entrepreneurs," said S. Sharifov.
The scale of expected tax reforms has been truly unprecedented in the past ten years. On the one hand, they can be considered a sort of tax amnesty in order to reduce the scale of the shadow economy, on the other hand, as a serious tightening of sanctions for popular tax violations.
"The priority of tax reforms is to ensure radical changes in the approach to taxing incomes of employees working in non-oil sector, as well as to regulate the ratio of state social insurance payments between the employee and the employer," said Tax Minister Mikail Jabbarov during parliamentary discussions.
In other words, individuals with a monthly salary of up to ₼8,000 are fully exempted from income tax, while a portion of income exceeding this amount will be taxed at 14%. For comparison, at present the monthly individual income tax rate is 14% from income up to ₼2.500, and above this amount - 25%. Another amendment was the increase from ₼173 to ₼200 of the minimum non-taxable wage. Unlike the previous amendment, this rule will apply to all sectors, including oil and gas.
The changes will also affect the contributions of individuals (not involved in the oil and gas sector) to compulsory social insurance. If the monthly salary of employees in the private sector is ₼200, then social insurance contributions will remain at the current level: 3% and 22%deductions from the salary by employee and employer, respectively. If the employee’s salary exceeds the required amount, it is proposed to apply a different deduction rate. Thus, according to new amendments, the employee will pay ₼6 and 10% of the amount exceeding ₼200, the employer - ₼44 and 15% of the amount exceeding ₼200. To ensure economic attractiveness, these benefits will be introduced for a period of seven years, while the Ministry of Taxes will control payments for social and unemployment insurance.
"Our goal is to expand the tax base not at the expense of increasing the tax burden, but at the expense of reducing the share of the shadow economy. This, in particular, concerns the issues of formalization of labour relations," M. Jabbarov said, commenting on the changes in the tax code. According to him, at present in Azerbaijan there is a problem of informal employment, and it cannot be solved only by administrative methods.
The positive effect of these reforms is obvious - whitewashing the incomes will help, for example, to liven up the banking sector. In other words, citizens with a larger official salary will be able to apply for loans, which will allow banks to get rid of the problem of excess liquidity.
The reforms will also cover the simplified taxation system, which will have unified rates. It is planned to ease the tax burden of metropolitan entrepreneurs paying taxes under the simplified system: today in Baku the simplified tax rate is 4%, in the regions - 2% of the company's turnover, and next year it will reach 2% regardless of the place of business. However, the unification of the simplified tax rate will reduce revenues for this type of tax by 1 5-3%. But this decision contributes to the growth of small businesses in Baku and indirectly affect the expansion of the labour market.
There are also benefits for taxes on profits and property, land tax, value added tax (VAT), when importing production equipment for microbusiness and SMEs for a period of seven years from the date they are registered in the register of the Small and Medium Business Development Agency (SMBDA). For the same period, part of the income that the SMBDA members will allocate to capital expenditures is exempt from tax.
Concessions for micro-business entities include tax exemption of 75% of income and profits, and this category will be exempted from property tax. It is also planned to exempt startups engaged in micro- and small business activities from paying income and profit taxes for a period of three years from the beginning of their activities.
In order to increase the share of non-cash payments (payment through POS-terminals) in the total money turnover, the government plans to introduce temporary benefits for entrepreneurs. At the same time, certain benefits are provided for individuals, in particular, during non-cash payments, part of the VAT will be returned to consumers.
The amendments to the Tax Code also provide for the extension of tax holidays for agricultural producers for another five years, until 2024: agricultural enterprises will be exempt from paying all types of taxes, except for land tax.
Sanctions and fines
Due to loss of revenues on certain types of tax as a result of the above concessions, the government expects to compensate it by removing real businesses from the shadows. And here come the penalties. In particular, the amendments to the Tax Code imply a tightening of sanctions for evading the accounting of funds and operational tax control, as well as in the absence of documents (invoices, etc.) confirming the purchase of goods. It is therefore proposed to raise financial sanction from 5% to 10% for the amounts exceeding ₼1,000, and from 10% to 20% for amounts exceeding ₼1,000 in case of repeated violations related to failure to register such funds. It is also proposed to impose sanctions for non-compliance with the rules for recording income and expenses for 10% of unrecorded expenses in the case of the first violation during a year, and 20% if the violation was repeated and 40% in the case of three or more violations during a calendar year. Similar sanctions will be applied even if the traded goods do not have electronic invoice or tax invoice (if these documents are required by the Tax Code).
It is planned to introduce serious penalties for entrepreneurs who create conditions for hiding (reducing) personal income. In this case, a fine of ₼2,000 will be applied. Recurring violations (second and third time) during a calendar year will increase the penalties by ₼4,000 and ₼6,000 respectively. For comparison, currently the financial sanction for this offense is ₼1,000. It is proposed to introduce fines for the storage and sale of excisable goods without an excise stamp and products without its presence, which are subject to special labelling. In this case, sanctions will equal to the amount of the market value of the goods; repeated violations will double the amount of sanctions.
Financial institutions will also be subject to tougher penalties. In particular, a sanction for late submission of electronic report with information on financial transactions carried out by legal entities and individuals in foreign countries on the territory of Azerbaijan, or improper provision of the report will be increased ten-fold reaching ₼10,000.
In addition, the Ministry of Taxes is planning to introduce a single rate of sanctions for violation of the rules of cash payments (except for cases of wholesale trade). In the case, the first violation during a calendar year will entail sanction equal to ₼1,000 (presently ₼400), repeated violations - ₼3,000 (presently ₼800). Recurring violations during a calendar year will raise the sanctions to ₼6,000 (presently ₼1,200).
However, the state budget for 2019 will be replenished not only with fines. In 2019, indirect tax rates may increase: in the amendments to the Tax Code, it is planned to increase excise taxes on imports of buses and cars.
According to the Chairman of the State Customs Committee, Safar Mehdiyev, in 2019, the customs authorities will be able to bring ₼3.7 billion to the budget thanks to the collection of taxes and duties. "We will try to exceed this amount," S. Mehdiyev promised.
It is not all the details of large-scale tax reforms scheduled for January 1, 2019. Apparently, the ultimate objective of all of them is to optimise the tax burden and finally help local businesses to get to a qualitatively different level, reduce the scale of the shadow economy, and promote transparent and complete fulfilment of tax obligations.