TAXES REDUCED, CONTROL INCREASED

Amending the Tax Code is an annual "ritual" of the Azerbaijani parliament, without which it could not take its winter leave or, for two years now, its summer leave. For the first time this year, amendments to tax legislation were adopted separately from the state budget in the first half-year; this was done to facilitate the process of considering and approving budget forecasts and to give taxpayers enough time to familiarize themselves with forthcoming changes. It must be noted that experienced accountants and businessmen themselves have already begun studying the tax innovations to be introduced from 1 January 2010. Meanwhile, many critics and analysts are still considering the implications of the new package of amendments for the grass roots and businessmen…

Tax lower, salary higher!

In June, the Azerbaijani parliament ratified draft changes and addenda to the Tax Code. There are 46 innovations in total, and they have been distributed throughout the code in four directions: increasing the rights and protecting the interests of taxpayers, improving tax administration, tax control and some editorial changes.

The chairman of the parliamentary committee for economic policy, Ziyad Samadzada, who submitted the draft document to MPs, said that the amendments provide for cuts in the tax burden on taxpayers. Indeed, there is something to make entrepreneurs happy: from 1 January 2010, rates on some direct taxes will be reduced. Naturally, the most important thing for all workers in Azerbaijan is a reduction in income tax. This will directly affect the income of every Azerbaijani family - the reduced rates will "settle" in salaries again, i.e. they will in effect raise salaries. For example, the maximum income tax on workers has been reduced from 35 to 30 per cent and for physical persons engaged in business activity without setting up a legal person - from 35 to 20 per cent. It should be noted that, since 2008, incomes of up to 2,000 manats for physical persons have been liable to 14 per cent tax, while the tax on salaries exceeding 280 manats plus 2,000 manats is liable to 35 per cent tax. The upper limit of annual income liable to the 14 per cent tax is 24,000 manats, with salaries exceeding 3,360 manats plus 24,000 manats liable to 35 per cent tax.

Of course, the authors and executors of this innovation have a greater interest in implementing it than others, because they themselves receive salaries, but we think that in this case they are more concerned about another factor - with the current 35 per cent rate of income tax, the Tax Ministry's department for the preliminary investigation of tax offences regularly discovers cases of tax evasion. For example, according to the results of the Tax Ministry's measures to ensure operational control in May 2009 alone, more than 2,000 violations of the tax laws were discovered. During 2008, 191 criminal cases were opened against physical and legal persons for tax evasion, illegal entrepreneurship and other offences. For this reason, the final goal of the significant cut in the rate is to ensure the maximum "whitening" of expenses and to increase the collection of tax for the budget.

It must be noted that rates of income tax are constantly falling in European and Baltic countries. For example, Estonia and Lithuania reduced the rate of income tax on the population from 1 January 2008. What is more, it will be cut by one per cent every year from 2011. Over three years the tax in these countries will be reduced to 18 per cent. Currently, most states which have an interest in reducing the tax burden and giving additional impetus to economic growth are trying to establish a single rate of income tax. Azerbaijan is also moving in this direction.

Simplified profit

In any case, this is the main goal of the cut in profit tax from 22 to 20 per cent, which was requested from the government by entrepreneurs in the shape of the National Confederation of Entrepreneurs (Employers) and which was recommended by some international organizations. How important an incentive this innovation could be for the development of entrepreneurship is proven by the following figures: since 1 January 2006, the rate of profit tax in Azerbaijan has been reduced from 24 to the current 22 per cent. During this time, the number of legal entities has increased by 6 per cent annually, and it is just this year that the poverty rate in the country has dropped by nine points, which is by no means insignificant. For example, according to the figures for 2006, the level of poverty in the republic dropped from 29 to 20 per cent and in 2007 from 20 to 16 per cent. The number of people engaged in business activity increased by 6.8 per cent during 2006 and totalled 339,147 people.

Another important step towards ensuring the development of entrepreneurship, especially of small and medium-sized businesses, and increasing the desire of "shadow" taxpayers to "step into the light", could also be changes in the system of simplified tax, if its rate is kept at four per cent. According to the current tax law, payers of simplified tax may be those who have not registered for VAT purposes and who are engaged in business activity without setting up a legal person. The volume of these taxable operations during the previous quarter totals at least 22,500 manats.

According to Deputy Tax Minister Natiq Amirov, from 2010 payers of simplified tax will be legal persons whose annual turnover does not exceed 150,000 manats and physical persons engaged in business activity whose annual turnover does not exceed 90,000 manats. "If the limit is exceeded, both physical and legal persons must register as VAT payers with the Tax Ministry within 10 days," Amirov said.

It must be remembered that this type of tax has a number of significant advantages for small and medium-sized businesses: legal persons who pay simplified tax are exempt from paying VAT, profit tax and property tax, while physical persons engaged in business activity without setting up a legal person are exempt from income tax and VAT.

No harm to the budget

As we can see, on the whole, the new amendments are promising for entrepreneurs. But can we say the same for the state budget, to which all taxes are transferred? Will all these cuts affect the state treasury? Will the ambitious forecasts of budget revenues be implemented? It must be remembered that the Tax Ministry will have to transfer revenues of 5.75 billion manats to the state budget (a growth of 6.9 per cent compared with 2008).

The government believes that losses might, of course, take place (for example, the state budget will lose 50 million manats due to the cut in the rate of income tax), but the situation can be rectified, thanks to other amendments and addenda to the Tax Code - through measures to increase tax control, improve the system of tax administration and protect the rights of taxpayers. All these, and an increase in the amount of penalties for failure to pay some types of taxes, will, in the end, raise the level of tax collection, which will compensate for the cuts in rates. Moreover, the lower rates will prompt businessmen to expand their businesses or create new enterprises, which will also finally influence the volume of tax collection.

It must be noted that, based on considerations of least harm to the budget, the rate of VAT will not be reduced this year, despite entrepreneurs' requests. According to Finance Minister Samir Sarifov, "this would yield absolutely nothing" since the budget would lose 140 million manats from a one per cent cut in the rate of VAT. Thus the budget would lose from a cut in the rate of VAT, because the taxable base of this tax is broader than that of income tax paid at the maximum rate, mainly by foreign companies.

At the same time, from 2010, it is also planned to exempt paid institutions of pre-school education from VAT. The submission of electronic invoices is also an innovation towards the improvement of tax administration. As a result, Azerbaijan will become the first country in Eastern Europe and the CIS to use electronic invoices. From next year, it is also planned to pay interest on tax arrears during the year.

Thus we have to admit that the new changes contain more positive elements than questions. The most important thing is that the Azerbaijani government has again demonstrated its desire to continue improving the business climate in the country, which will surely influence rating indicators from international institutions. In turn, this is the main incentive for an influx of investment and capital into the country.