BUSINESS RISKS

The post-pandemic economic recovery in Azerbaijan is progressing at a fairly fast pace. Moreover, the non-oil sector shows good results. In January-May, the value of non-oil exports increased by 25.4% compared to the same period last year.

According to the heads of large local companies, the prospects for business growth also look quite optimistic, although there is a fear that the strict lockdown regime is re-applied. At the same time, they propose a number of important reforms that will help develop the private sector and increase its contribution to Azerbaijan’s GDP.

Lessons learned

Representatives of Azerbaijani business community believe that both the global and local economies will end this year in positively. Moreover, as follows from the next poll of heads of companies in Azerbaijan conducted by PWC-Azerbaijan, 42% of 120 respondents expect profit growth in the next 12 months, and 56% - in the next three years, although the overwhelming majority of them still consider the pandemic and other health problems in shaping their business development strategy.

“The pandemic caused a turmoil and uncertainty throughout the world, and Azerbaijan is no exception. Despite unprecedented times, company leaders are dynamically developing and rethinking how to use new opportunities, performing common tasks in unusual ways,” Movlan Pashayev, Managing Partner of PwC Azerbaijan said.

As for the "unusual ways", Mr. Pashayev most likely means the digital transformation of the economy, which due to the pandemic has accelerated significantly. Naturally, businesses of any size had to adapt to new challenges and transfer a significant part of their activities online. For many, this was an unexpected surprise - as it turned out, there is a shortage of employees capable of quick adaptation to new conditions, not everyone had a high-quality and, most importantly, well-protected digital platform. Therefore, one of the main tasks of the private sector in Azerbaijan will be to increase investments in digital transformation. 60% of our respondents (compared to 49% in the world and 50% in Central and Eastern Europe) promised to invest more money in technologies based on artificial intelligence, robotics, elimination of cyber threats, etc.

Oddly enough, Azerbaijani businessmen are also more worried about exchange rate volatility than entrepreneurs in the world and CEE countries, although the manat has been on its feet throughout the pandemic, despite extremely heavy external pressure and an internal economic downturn. According to experts, the sudden and repeated devaluation of the national currency 5-6 years ago left its negative effect on this issue - businesses were so shaken that since then any economic turmoil has been accompanied by panic attacks over the prospects for the depreciation of the manat. Meanwhile, as analysts say, there is no reason for concern, at least as long as oil prices maintain at a stable level and forecasts are favourable for the Azerbaijani economy.

Traditional taxes

Also, the main topic of concern for business in Azerbaijan is traditionally the taxes. However, the situation is not static anywhere in the world - the fiscal sector must develop in accordance with the requirements of the time. Only now, according to entrepreneurs, this should be done for the benefit of the business, and not vice versa. So far, 38% of CEOs named rising tax liabilities as one of their top business risks. In addition, they do not like the presence of some uncertainty in tax policy. “Currently, the tax system of Azerbaijan is in the process of transformation. A lot of work is being done for digitalization of the system and in other areas. It is too early to talk about the outcome and success of this endeavour, but there is some progress, such as the benefits for the non-oil sector, improved inspections process,” Pashayev believes.

Meanwhile, members of the American Chamber of Commerce in Azerbaijan (AmCham) have gone even further and made specific recommendations to the government on income tax. So, they advise applying a single scale tax regardless of the scope of activity of business entities. According to the data indicated in the White Paper published by AmCham, the current tax burden on income tax and other mandatory payments for the state and oil and gas sectors is up to 55%, which is quite high, especially in comparison with neighbouring countries.

“Therefore, we recommend that the government use a single scale when calculating income tax, regardless of the field of activity," says the document.

The high level of contributions to compulsory social insurance is also indicated: “With the increase in the retirement age in Azerbaijan to 65 years, the average work experience is 45 years. Since 60% of the average salary is sufficient for calculating pension benefits, and 90% of compulsory social insurance contributions are paid over 12 years, it can be determined that a social insurance rate of 17.8% is sufficient to cover this. And given the real increase in salaries and the indexation of pension savings by an annual average of 3%, this figure is reduced to 11.5% ", says the White Book. Based on the above calculation, AmCham considers it appropriate to revise and reduce the social insurance rate or limit the size of the calculation base.

Minimum term

Another area, which requires additional reforms from a business point of view, is the customs. Business always have enough claims to the customs and tax services, constant contacts and interaction quickly reveal weaknesses and shortcomings.

According to AmCham, the existing customs control mechanism creates serious obstacles to the free movement of goods. "The presence of very heavy legal requirements, excessive requirements for documentation, lack of customs inspectors, ultimately lead to the accumulation of vehicles at the checkpoints," says the White Paper. Therefore, it is recommended to provide in the new version of the Customs Code, which is currently under development, the rights of business priorities over the mechanisms of customs control. In addition, AmCham proposes to specify in the code the responsibility of customs authorities to business for damage caused during supervisory activities.

AmCham members note that the timing of the introduction of the new code is also quite an important issue for business. The new Customs Code must be announced at least six months in advance, while the introduction of new conditions - at least a year. This proposal was given for a reason - during the last major reform of tax legislation, most of the business experienced difficulties with adaptation due to the short period given to study innovations.

Meanwhile, in addition to the fiscal sphere, entrepreneurs feel the need to work on many legislative acts, which currently limit the development of business in the country... According to experts, oddly enough, it was the pandemic that made many entrepreneurs be more active, business readily negotiates with government to resolve contentious issues and remove obstacles. It seems that the reaction from the other side will be soon too: a satisfied business means good income for the economy, more income means a stronger and more stable economy, a stable economy is the main condition for business development. In a nutshell, mutual trust and cooperation is an unconditional factor for both parties.