COMING OUT OF THE SHADOWS

The Ministry of Taxes has been charged with the responsibility for key elements in the long-term "Azerbaijan-2020: looking to the future" development concept drawn up by the government: this concept envisages doubling GDP and a qualitative growth in the non-oil sector of the economy. Since last year the Ministry has been implementing a new stage in the reforms aimed at reviving the business environment, liberalising the fiscal legislation, completing the automation of administrative procedures and also providing incentives for people to pay tax voluntarily. In order to realise the above-mentioned plans, the Ministry of Taxes is preparing to announce a wide-scale tax amnesty, so that roughly by 2020 they can introduce a universal declaration of incomes system in the country. 

If there's problem, it needs to be solved 

The effectiveness of the liberal economic policy and upgraded mechanisms for administering the tax system have been confirmed by the change in the structure of state finances over the last few years. The non-oil sector is definitely predominant when it comes to the treasury's tax receipts, for it accounts for more than 55 per cent of the total receipts. For the fifth year in a row now the Ministry of Taxes is focussing much more on extending the taxable base in the non-oil sector of the economy. One of the basic tasks formulated by Azerbaijan's president, Ilham Aliyev, is that in the next few years all the state budget's outgoings should be covered mainly by tax receipts from the non-oil sector, and that transfers from the State Oil Fund should primarily be channelled into financing major investment projects. 

However, if this task is to be resolved in this manner, marked changes need to be made in the state tax policy, first and foremost, that all potential tax-payers should pay their share of the fiscal turnover. This means in particular that the capital and manpower still involved in the "shadow economy turnover" should be embraced by the legislation as well. The ultimate outcome of this reform is that all the strata of the population capable of working should join in the income-declaring mechanism.

 Besides the consistent upgrading of the tax administration system, the Ministry of Taxes is preparing to introduce a country-wide tax declaration system," Tax Minister Fazil Mammadov has reported. "This is a large-scale sophisticated project and the process of drawing it up will take several years, since before the practice of universal declaration can be introduced to start with, the mechanisms for offering a tax amnesty and legalising the property and capital currently in the shadow economy have to be worked out. These measures are sufficiently topical in our country whose actual economic state of affairs is similar to that of the other states of the former Soviet Union."

"What we are actually talking about is legalising the property and incomes acquired by tax evasion, both by companies registered and operating in the legal sector of the economy as well as that of 'shadow economy' business. It should incidentally be said that over the last few years the manifestations of illegal enterprise in Azerbaijan have been continually reduced thanks to the efforts of the Ministry of Taxes and other state structures. According to State Statistics Committee research, approximately 10 years ago the share of companies' unregistered production and undeclared profits amounted to something like 20 per cent of the country's GDP. The acuteness of the problem ensuing from businesses operating in the shadow economy has become markedly less: last year only just over 3,000 entrepreneurs were exposed for operating without paying taxes, and approximately 6,700 tax-payers were discovered offering services without special permission (licences). That is a comparatively small number, if we take into account that previously hundreds of thousands of such cases were detected annually. These positive changes have been facilitated by a growth in tax awareness and the changing state of affairs on the market; today it is pointless and simply not a reality to do business without being registered and taking advantage of the conditions available such as e-registration and on-line banking," F. Mammadov stressed. "Whereas previously the Ministry's department for tax fraud investigated hundreds of such cases, over the last few years they have on average dwindled to ten a year. The number of violations connected with using hired labour without concluding work contracts has decreased several-fold."

 "Nevertheless, a certain number of entrepreneurs are still operating in Azerbaijan, primarily in small shops and services, without registering with the tax authorities, and are operating without the appropriate licences, using unregistered manpower or finding other ways to evade paying taxes. It is much rarer to come across medium and major industrial and refining enterprises that are not registered with the tax authorities."

Deadline 2020

For the moment, the Ministry of Taxes has not set definite deadlines for the amnesty or named the direct mechanisms through which it will be implemented. However, the universally accepted practice throughout the world and the strategic plan approved in the spring of last year to develop the tax system from 2013 to 2020 provide grounds for outlining some measures and administrative methods that can be applied to the process of legalising the unregistered economy. Thus, in the medium-term the department intends to shape new mechanisms for tax monitoring. An e-auditing system will be introduced country-wide; the practice has been worked out for regulating transfer charges; experience gained abroad with regard to e-business has been studied and implemented; the application of cash-free payments has been extended. The transfer to the preliminary filing of tax declarations and systematising of the rules for carrying out financial checks are planned and also the working out of a system of tax breaks is expected. Preferential taxes are already being applied as one of the incentives to develop innovations in the economy. Thus, to act as a stimulus to activity at industrial parks natural and legal persons have been declared exempt from taxes for seven years and the operators and administrators of these parks are tax-exempt indefinitely.

All these measures are promoting the building up of a healthy business environment in the country and, as a result, will help to get rid of most of the manifestations of "shadow" business by 2020.

Drawing on international experience, the following conditions will have to be met if we are to conduct a tax amnesty productively. Serious guarantees of immunity from criminal prosecution will have to be granted and information about companies that wish to legalise the unregistered part of their business will have to remain confidential. As a rule, a tax amnesty envisages the repayment of any of the tax-payers' tax debts and other payment commitments, but release from paying fines and the interest on the sums of voluntarily made payments into the budget and non-budget state funds. 

As far as unregistered companies and those that have not been included on any register are concerned, in a number of cases the amnesty rule will also extend to their main assets - real estate, production and other equipment. However, the stocks in warehouses - raw materials, parts, manufactured output will be subject to the appropriate taxes after an inventory has been drawn up. Naturally, the tax amnesty should not be about confiscation of assets, but should be combined with extensive explanatory and propaganda campaigns. At the same time, the amnestied companies should be aware of the real threat of punishment in the event of their further concealing incomes. The tax amnesty will be a one-off, and all the entrepreneurs' future activity should be pursued in compliance with the appropriate articles in the tax and civil codes. 

It is expected that the successful conducting of the tax amnesty in Azerbaijan will make it possible for our country to go over to a system of universal declarations of income and property by citizens by 2020. "The preparatory work on universal income declaration should be completed in six or seven years. The introduction of universal income declarations is a strategic goal that the ministry has been set. It is an extremely complicated process, in which the general public should be involved," the tax minister's advisor, Alakbar Mammadov, stated. He said that something like 538,000 tax-payers were registered in Azerbaijan at the current time, who were assisted by 2,300 taxmen, but after the introduction of the system of universal declaration, there will be millions of tax-payers. The population of Azerbaijan already numbers 9.4m and those among them who are active in the economy number 5.4 million. Therefore the fiscal bodies are faced with a major task to be fully ready for that process and the sharp rise in the number of tax-payers.

INTERNATIONAL EXPERIENCE OF TAX AMNESTIES

A textbook example of conducting a tax amnesty is that of Ireland in 1988, when the arrears owed to that country's budget amounted to 2.5 per cent of GDP. The tax amnesty in Great Britain was just as successful, "highlighting" a considerable number of owners of undeclared off-shore companies and bank accounts abroad. Amnesties are regularly conducted in individual states in the USA: from 1982 through 1997 35 states conducted various tax amnesty programmes, in the course of which the local budgets were boosted by at least 2.1bn dollars. Yet another example is that of India where small firms and individual businessmen predominate. During the Indian amnesty organised in 1997, which embraced more than 466,000 tax-payers, roughly 2.5bn dollars were collected. Besides this, assets (previously acquired with undeclared untaxed incomes) worth 8.2bn dollars were declared. Tax amnesties have also been conducted with varying degrees of success in CIS [Commonwealth of Independent States] countries such as Moldova, Russia, and Kazakhstan. In Moldova from May through July 2007 they managed to get 32,000 people to declare their incomes and in Kazakhstan 6.8bn dollars were legalised during the amnesty. In short, Kazakhstan is planning to go over to a system of universal declaration of citizens' incomes and property in stages from 2015 through 2017.