THE RATES HAVE BEEN SET

It is common knowledge that tax legislation in Azerbaijan is constantly being improved, and since 2008 amendments to the Tax Code have been made separate from the state budget, which eases the process of reviewing and approving budget forecasts, and also gives taxpayers time to study the expected changes. The latest package of such amendments is due to be submitted to the country's parliament before 15 May. However, we already know that we can expect a reduction in the rate of income tax, an extension of the tax assessment basis, a change in the rates for certain types of taxes (in particular VAT) and tax relief to stimulate non-cash settlements and restrict cash circulation.

A feasible burden

There has been a trend to reduce taxation rates in Azerbaijan for several years and it is aimed at accelerating the country's economic development, creating a favourable investment climate and boosting the development of business. In comparison with the figures of 6 or 7 years ago, the number of types of taxes in the country has been reduced, and profit tax rates have been reduced. The last changes in tax rates in Azerbaijan were made in 2010. As a result of these the rate of profit tax was reduced from 22 to 20% and the maximum level of income tax for individuals fell from 35 to 30% and for private businessmen to 20%. Thus, interest rates on profit tax have been reduced in 20 years from 35 to 20%, VAT from 28 to 18%, and income tax for individuals from 55 to 30%.

The reduction in the tax burden for these types has led to the development of various branches of the economy and in the long term has created favourable conditions for a growth in budget revenue for them.

As in any other country, there are many people in Azerbaijan who are in favour of a further reduction in taxation rates. Their arguments may be divided into three categories: (i) the tax burden in Azerbaijan is relatively higher than in the neighbouring countries, and therefore the rates should be lower - that is the view of business circles; (ii) Azerbaijan should reduce direct taxes (in particular, income tax) and keep indirect taxes (VAT) at the current level - that is the view of international economic institutions; (iii) and, finally, there is the position of the government, which is that Azerbaijan must prove itself more competitive among the neighbouring countries and be attractive for investment.

It will be recalled that it was precisely the simplification of the payment of taxes and a reduction in the expenditure of taxpayers which became one of the main criteria whereby in the latest report of the World Bank and the International Finance Corporation Doing Business-2012 our country rose from 69th to 66th place, and in level of payment of taxes from 105th to 81st place.

At the same time, it has to be admitted that in Azerbaijan today the problem of the tax burden is not so acute. International experience shows that if taxes deducted from the taxpayer are over 30-40% of his total income, then the level of economic activity is reduced and the volume of investments deposited in the country is reduced accordingly.

By way of an example, in our country the level of the tax burden does not exceed 20%, which is a relatively low figure. Whereas in Azerbaijan the rate of VAT has been set at a level of 18%, in other states of the CIS, for example Russia and Belarus, it is 20%, in Armenia 26% and in Ukraine and Tajikistan 25%. A number of countries of the European Union from 2012 have also been maintaining a policy of increasing VAT rates or have stated their intention to do so.

However, it is precisely against the background of recent factors that experts are arriving at the opinion that a further reduction in profit tax rates and VAT in our country could give new strength to the economy at a time of a world financial crisis, help to attract investments and, at the end of the day, increase the volume of tax revenue. As research by western experts has shown, although a reduction in profit tax rates by 10% does cause a reduction in budget revenues, this is a temporary thing, and in the future there will be a growth in revenue of an additional 5%. In the long term this will enable the level of production of goods and services to be increased and also provide more jobs. As a consequence, the taxation base increases and state revenues start to grow.

In any case the government has no intention at the moment of changing anything in VAT and profit tax rates, especially as with regard to the latter the situation in the country is considered to be acceptable. For example, the International Monetary Fund believes that a rate of 20% is normal because it is on a par with the figure in Russia and other countries of the region (it is only in Georgia that it is 15%).

At the same time, in the fund's opinion, the reduction of the minimum rate of income tax from 35 to 30% in Azerbaijan from 2010 is insufficient compared with Kazakhstan (10%), Russia (13%) and Georgia, which in 2008 combined income tax with social tax, raising its accrued figure to 20%.

Taking this into account, a reduction in the maximum income tax rate to 30% and an increase in the top bar of monthly taxable income to 2,000 AZN, which has been at this level since 2008, is again on the agenda. In the opinion of Minister of Taxes Fazil Mammadov, according to calculations, a reduction in income tax rates will not be of special significance for state budget revenues, but the principle of social justice must be adhered to. He believes that an average monthly income of 2,000 AZN is a stable one, and therefore a rate of 14% is believed to be an acceptable level. "In general the income tax rate may be one-two degrees lower or higher to ensure social equality," the minister claims.

The country's government is also now getting many requests for a review of tax rates on property, land and trade and a gradual reduction in the top income tax rate. At the Finance Ministry they believe that the main task in relation to land and property tax is to extend the tax base by bringing prices for land and property in line with real market values. This will also help to define the true potential of municipal budgets, as well as carry out independent activity. It should be noted that the proportion of land tax to budget revenues was reduced from 4.4% in 1995 to 2.5%. However, there is great potential in this sphere and its effective use and increasing investments in this sphere would raise the specific ratio of land tax in budget revenues.

There will be a new code

Among the important components of fiscal policy for the next few years is the implementation of the task set by Azerbaijani President Ilham Aliyev on the full funding of budget expenditure from tax revenues and the direction of transfers from the State Oil Fund solely to major investment projects. This assumes a significant increase in state budget revenues which, naturally, can be implemented not by increasing the tax burden but by raising the rate of economic growth, extending the tax base by strengthening tax control, creating partnership relations with businessmen and applying tax administration and boosting economic development.

In the opinion of the minister of taxes, the country has great potential for attracting tax, in connection with which the Ministry of Taxes has embarked on research aimed at applying tax control to such a sensitive sphere as the formation of transfer prices.

The purpose of studying progressive experience in the sphere of transfer price taxation is also tied up with the fight against tax evasion. The point is that transfer prices are formed during operations between subsidiary structures of major companies and lead to an artificial increase in expenditure. This has already turned into a negative trend in tax evasion. That is why Azerbaijan is studying the experience of different countries in this field in order to improve the legislation contained in the Tax Code and in a separate local draft bill.

This year it is also proposed to improve the mechanism for the taxation of public notaries in the country. Agreement has already been reached between the ministries of taxes and finance on imposing a 10% tax on the overall amount of incomes of notaries (excluding expenses) received during a quarter.

As far as introducing additional tax privileges is concerned, they cannot be expected this year. It is already known that separate spheres of the economy, including agricultural producers and the banking sector, have for a long time now been taking advantage of tax privileges and preferences. At a certain stage of economic development there was a need to offer certain privileges, which has enabled certain objectives in this area to be achieved. For example, as a result of benefits offered to producers in the agrarian sector, expenditure was reduced in agriculture and a fairly large volume of funds remained at the disposal of agricultural producers. Also effective were the privileges offered to the banking and insurance sectors (in the course of three years the profits directed towards capitalization were exempted from tax) with the purpose of minimizing financial losses during the global economic crisis, as a result of which the banks and insurance companies regained their liquidity.

However, in the opinion of Natiq Amirov, First Deputy Minister of Taxes, after a certain stage of economic development these privileges should be reassessed. The analyses carried out show that today, through privileges and preferences offered to the economy, the volume of uncollected taxes is approximately 25-30% of the total volume of collected taxes. That is why there is a need to monitor the privileges and preferences currently being offered to the economy. And only then will it be decided in which sphere tax privileges should remain, which are important and which need to be continued, Amirov believes. 

"Today there are many spheres of activity and people wishing to obtain tax privileges. Everyone wants privileges, from the banking and licensing sectors to book producers. We believe that the privileges should be target-focused," the deputy minister said.

That is why the Ministry of Taxes has asked the Cabinet of Ministers to compile a list of publications of state importance which are exempt from VAT. On the basis of this list explanations regarding their exemption from VAT will be inscribed in the tax legislation.

And, finally, taking into consideration the new changes and amendments which the Tax Code has undergone in recent years, the government considers it necessary in the medium term to draw up a new TC. It will be recalled that the current one was endorsed on 11 July 2000 and came into force from 1 January 2001. In drawing up the new edition of the code a leading role will be played by a commission of experts made up of working groups set up in the field of tax administration, tax policy and tax legislation. It was set up in August 2008 to carry out research and prepare recommendations to improve the tax system in the light of the acceleration of socio-economic development in Azerbaijan. The commission's task includes preparing proposals for analysis and the optimization of the tax burden in the economy, improving the institution of the tax ombudsman and researching the role of taxation policy in order to improve the country's investment appeal.

"We believe that by working closely with public organizations and business circles in the process of improving tax legislation, and by studying their proposals we shall be able to make definite changes to the tax legislation base in the mid-term," minister Mammadov said.

First and foremost, he believes, the country's tax system, which is the basic condition of the success of implementing long-term strategic development plans, must be stable and predictable.

In short, in any event the innovations and amendments adopted this year will make their contribution to the shaping of the new Tax Code, which is one of the pillars of legislation to which the economy clings.