THE FOUR POINTS OF THE REFORMS

In order to solve the priority task for the next 20 years of creating an effective and innovative economy, the Azerbaijani government must now define ways of reforming the main components of economic development. And since the tax system in this instance is as it were the main foundation of the country's business solvency, it is it which has to make the first step towards improving its situation. And so the Azerbaijani Ministry of Taxes has already defined the main tasks for the development of the tax system. "We believe that the reforms in the tax system must be directed towards the development of electronic services and that tax procedures must be simplified in order to support business and switch to the voluntary payment of taxes," Fazil Mammadov, the Minister of Taxes, said, among other things.

Electronic innovations…

It will be recalled that not so long ago Azerbaijani President Ilham Aliyev issued an instruction to the government to draw up a concept "Azerbaijan-2020: a view to the future". In this context the Azerbaijani tax system faces important tasks. In the ministry they are grouped according to four important points.

First, in the opinion of representatives of the country's fiscal department themselves, the tax system should be stable and predictable. "The Tax Code was adopted 11 years ago. I believe that we should have another look at tax legislation and this question has already been discussed with all the interested structures," minister Mammadov said. According to him, in January-February there began a broad discussion of the Tax Code with the country's leading experts in this sphere, representatives of business and the relevant state structures. "We believe that by working closely with public organizations and business circles in the process of improving tax legislation and studying their proposals we will be able to make certain changes to the tax legislative basis in the mid-term perspective," the minister reasoned.

Second in the list comes a clause on turning the tax system into as convenient a "tool" as practically possible for "users". In this case the question is to ensure that at all levels, starting with registration and ending with submission of tax returns, relations between entrepreneurs and the tax bodies are carried out with the use of the latest achievements of information and computer technology. It has to be said that there have been a number of advancements in this sphere in recent years. For example, according to the relevant reports of the World Bank and the International Finance Corporation, in Azerbaijan today the amount of time spent on compiling and submitting tax returns, including the realization of tax payments, outstrips both the equivalent average figure for Central Asia and Eastern Europe and the average world figure.

According to Mammadov, in the country today about 90% of tax declarations are submitted electronically, and now the main objective is the use of state-of-the-art electronic technology at all stages of relations between tax payers and the tax bodies, beginning with registration and submission of declarations and ending with tax payments and supervision.

It will be noted that on 7 February the Ministry of Taxes introduced a system of on-line payment of taxes and state duty via the Internet, although it only started to operate in real terms after the signing of the collective agreement with the banks and other relevant structures. In connection with this, the Central Bank of Azerbaijan (CBA) is working on setting up a portal for the payment of taxes and state duties based on the Komis platform (a centralized information system for mass payments), and by the end of this month an opportunity will be created for carrying out payments using the Komis system for 90 types of payments. The next step, Deputy Minister of Taxes Sahib Alakparov says, will be the launching of a system allowing taxes and state duties to be paid by mobile phone.

In conjunction with this, the Ministry of Taxes has also presented a system of electronic on-line registration of commercial corporate bodies which will enable the number of procedures to be reduced from six to three. On-line registration will take 20 minutes, fast-track five minutes and the time for checking data by the Ministry of Taxes - up to three days. Alakparov made a valid point: "The adaptation of on-line registration by private individuals in the country from July 2011 and the electronic registration of corporate bodies from the beginning of 2012 will help to save both time and means. This will also play an important role in the implementation of the policy to fight corruption in the country." According to him, in July-December 2011 10,075 people registered with the tax bodies electronically, which is 34.5% of the overall number of registered tax-payers.

It has to be said that electronic innovations targeted towards the convenience of the tax-payers also bring financial dividends. And so, as a result of applying the principle of a "single window" when registering business in Azerbaijan, the country's private sector saved over $23m in paperwork.

…and lower rates

Going back to the tasks proposed by the Ministry of Taxes, we should mention that another important point, in the opinion of representatives of the fiscal department, is enhancing the stimulating role of the tax system. "In the next few years we face the task of obtaining current state budget revenue through tax levies. To achieve this we need to increase tax proceeds to the state budget, but not by increasing the tax burden, but by more effective cooperation with business and extending the tax base, of which we have considerable potential," the minister noted.

Let us quote some interesting figures. According to Camil Alizada, head of the department for tax policy and revenue of the Ministry of Finances, in the last 20 years Azerbaijan's state budget revenues have increased 75,000 times and expenditure 83,000 times, average annual growth of budget indices was 40.4% and of expenditure 40.1%. At the same time, tax proceeds to the state budget in 2011 increased 20.8 times and 15.9 times in the non-oil sector compared with 1995. The average ratio of tax proceeds to budget revenues fluctuated from 70 to 80%.

At the same time, experts and the taxmen are confident that there is great potential in the country for attracting more tax. To actuate this potential the Ministry of Taxes has begun research aimed at applying tax control to such a sensitive sphere as establishing transfer prices. The department is also supporting the development of non-cash transactions. "We believe that increasing the volume of non-cash transactions is one of the main sources of a considerable extension of the tax base, and Azerbaijan must attain the level of the advanced European countries in this in the near future," Mammadov said.

Another stimulating factor could be a reduction in taxation rates, which would encourage some entrepreneurs to bring their business "out of the shadows". Adalat Muradov, the head of the department for economic policy, analysis and forecasting of the Ministry for Economic Development, is confident that the regular reduction in taxation rates has had a positive impact on the country's economic growth. "There are broad possibilities for the use of this factor in the future for economic growth," he noted. Tax proceeds to the state budget are increasing along with an increase in taxation rates only to a certain level, he says, whereas with an increase in rates above this level tax proceeds are reduced.

"In Azerbaijan an increase in the tax burden of 1% raises tax proceeds by 2.3%. This may also be explained by the fact that the tax burden in the country is not so high compared with economic growth," Muradov said.  In the last eight years tax proceeds to the state budget via the Ministry of Taxes have increased 6.7 times and the country's GDP increased sevenfold in this period. "Thus, the ratio of tax proceeds to GDP was reduced from 11.5% in 2003 to 10.9% in 2011, which gives grounds for speaking about the positive impact of taxation rates on economic growth," Muradov stated.

By the way, the country's finance ministry is of the same opinion. According to statistics, corporate profits tax rates have been reduced over the past 20 years from 35 to 20%, VAT from 28 to 18% and personal income tax from 55 to 30%. "The reduction in the tax burden in these areas has led to the development of various branches of the economy and, at the end of the day, has created favourable conditions for a growth in budget revenues for them," Camil Alizada said.

Incidentally, the taxmen do not deny this state of affairs, and what is more the head of the financial department said that the Ministry of Taxes supports a review of the personal income tax rate. Today the personal income tax rate in the country is 14% with a monthly income of AZN 2,000, and the tax rate ceiling is 30%. "We are able to review the personal tax rate because it has a particular impact on budget revenue, but at the same time we must stick to the principle of social justice," the minister said. According to Mammadov, an average monthly income of AZN 2,000 is a stable indicator, and therefore a rate of 14% is believed to be an acceptable level. On the whole the personal income tax rate could be one-two rungs lower or higher to ensure social equality. As far as the personal income tax ceiling of 30% is concerned, talks are being held with the Finance Ministry on this.

To sum up, all this will help to implement the fourth task of the tax reforms - to ensure that that the tax system provides competition.

"Azerbaijan possesses a state-of-the-art tax system. I am confident that Azerbaijan will successfully implement the commitments it has undertaken to improve and develop a strong tax system," Ambassador Roland Kobia, the head of the European Union delegation in Azerbaijan, said. Thus, one may claim that a start has been made to the next stage of tax reforms which must be more successful if only because there is already a good foundation - all it needs is to be developed and strengthened.