A NEW CODE FOR THE NEW YEAR

In recent years, the ac-celerated rate of economic development in Azerbaijan has resulted in a greater number of taxpayers and in improvement in the quality of taxpayer - as a new generation of businessmen adopts a more responsible attitude towards fiscal law. This, however, calls for the modernization of the tax authorities, improvement in their service, a revision of the tax administration system, etc.

Year on year, amendments have been made to the Tax Code of Azerbaijan, something added and something removed. As a result of these activities, the tax authorities' share of budget revenues increased from AZN 710 million (US$826 million) in 2000 to AZN 5 billion (US$5.9 billion) in 2008. But to achieve further progress, the government has drafted amendments to the tax code this year too; they were approved recently by President Ilham Aliyev and envisage 76 amendments to the code.

Amendments are to be made to the tax law with five objectives: 22 of them are formal amendments, 14 are intended to broaden taxpayers' rights, 8 are designed to improve and develop taxation policy, 10 aim to improve efficiency in tax management, and 22 are to improve tax administration. "The amendments will make the country's economy more attractive for investors and promote the development of the business sector," say Tax Ministry officials.

First of all, VAT

Among the most important changes are improvements to the system of administration of VAT.  VAT deposit accounts are to be introduced in 2008 - for the first time in Azerbaijan: A single treasury account will be used for the payment and recovery of this tax. The introduction of the new mechanism for paying VAT envisages total elimination of cases of evasion.

At the same time, the list of VAT-rated articles will also be extended. Now VAT will be levied on purchases (labour or services) and their import, whether paid by credit or loans from international organizations or foreign governments, or by credits or loans allocated by foreign legal entities or persons on the basis of international or inter-governmental agreements. At present, all transactions which fall under this category are subject to 0% VAT. In addition, budget-funded organizations and legal entities with a state holding of more than 50% which do not have VAT registration should begin to pay VAT on the goods and services they purchase.

According to the amendments, the minimum VAT exemption turnover for residential construction and development companies which become liable for VAT in 2008, is set at AZN 225 (US$264). The Council of Ministers will introduce coefficients for these companies, which will depend on the area of the construction project. The tax system for the residential construction sector changed on 1 January 2007, but the minimum turnover level for VAT liability will be approved only in 2008.  Although those who pay by simplified system are VAT-exempt, the residential construction sector will be an exception: this system of taxation for construction companies will be introduced for a 2-year period and envisages payment of 12.5% of the total payments on a quarterly basis. The ministry maintains that changing the taxation system for the residential construction sector will not lead to an increase in the burden of tax. In addition, it applies only to projects whose foundations were laid after 1 January 2007.

One more amendment: this year, the district and area coefficients for calculating tax on a simplified system for persons involved in the residential construction sector have been set in the following manner.  Baku is divided into 12 zones:  Zones 1-4 cover the centre of the city (coefficients are 5, 4.6, 4.2 and 3.8, respectively), zones 5-7 include areas that are not far from the city centre (3.4, 3 and 2.6, respectively), and zones 8-12 are remote areas of the capital (2.2, 1.8, 1.4, 1.1 and 0.8, respectively). The coefficient for Sumqayit and Ganca is 1.8, Xankandi, Ali Bayramli, Mingacevir, Naxcivan, Lankaran, Yevlax, Saki, Naftalan, Samaxi, Qazax, Samkir, Quba, Xacmaz,  Zaqatala, Calilabad and Goycay - 0.8, and for other towns and villages - 0.5.

The list of activities which do not require mandatory operation of cash registers for cash transactions is also extending next year. The currency exchange branches of banks will be excluded from the list because the actual turnover of these transactions can be monitored by the tax authorities from computer printouts at the exchange desks.

The higher the fines, the higher the tax officials' income

There are also amendments of an interesting nature, so to speak.  To set financial incentives and promote the development of the tax authorities in Azerbaijan, the practice of operating an extra-budgetary fund of the Tax Ministry, which was suspended in 2007, will be resumed in 2008. According to the amendments to the tax code, the extra-budgetary fund will be formed by allocating 5% of revenues from financial sanctions from the national budget in order to create social guarantees for the tax system staff. In the past, before 2007, the fund for material stimulation and development of the tax bodies was formed by accumulating 50% of the amount of tax collected in excess of the projected figure and non-tax revenues. The main purpose of the fund is to further improve tax administration through the development of the tax system and stimulation of the ministry staff.

To enhance the effectiveness of tax control, financial sanctions will double in 2008.  Under Article 58 of the Tax Code, "Financial sanctions for under-declaration of taxable revenues and other tax violations," the sanction will more than double from 20-25% to 50%. A fine will be introduced for failure to sign an employment agreement; in particular, the employer will pay AZN 1,000 for each unregistered employee. This is one of the most pressing concerns today because this issue alone has a considerable effect on tax collection and protection of employment rights.

In addition, business activities which were carried out without a backup certificate from the tax authorities will be subject to a financial sanction of a fine amounting to 100% of the funds received for entrepreneurial activities in accounts of non-resident banks or other non-resident credit institutions. Under-declaration of taxes (including tax on the source of payment), and when the taxpayer evades payment of the full sum of accrued tax, will result in a fine of 50% of the under-declared or evaded amount instead of 25% as today. When the taxpayer violates the fund deduction procedure as prescribed by the Civil Code of Azerbaijan, he or she will be fined 50% of the debit operations instead of the current 25%.

Taxes according to income

The head of state decided it expedient to raise the level of monthly income which is subject to 35% income tax from the current AZN 1,000 ($1,180) to AZN 2,000 ($2,360), although the Tax Ministry proposed to set it at AZN 1,500 (US$1,770) at this stage. So, from 2008, personal income up to AZN 2,000 will be taxed at the rate of 14%, and for income above AZN 280 + AZN 2,000, the tax rate will be 35%. So the annual income limit which will be taxed at the 14% rate will be AZN 24,000, and the rate of 35% will be levied on incomes above AZN 3,360 + AZN 24,000 (today, monthly incomes from AZN 50 to AZN 1,000 are taxed at 14%, and above at 35%). The Tax Ministry argues that the changes in collection of income tax will result not only in legalization of salaries, also in the greater prosperity of the country's population.

The Tax Ministry proposed that public catering facilities should also pay taxes according to the simplified system, but this amendment was not included in the list of the approved amendments. Studies show that introducing a unified tax rate for this sector would reduce the tax burden in this field by 40%. The suggested rate of simplified tax for the catering companies was 10%. The main goal in changing the taxation system for this sector was to achieve greater transparency and to broaden the taxable base, because this would stimulate businessmen to declare their revenues.

According to the tax code, simplified tax applies to legal entities without VAT registration and individuals who do business without establishing a legal entity if the turnover of taxable transactions in the preceding three-month period is less than 22,500 conventional units.

"Single window" against bureaucracy

The decree "On approval of the law 'On changes and amendments to the Tax Code'" also sets out Azerbaijani President Ilham Aliyev's instructions to adopt from 1 January 2008 the "single window" principle of registration of a new business entity. The decision on the introduction of the new principle of registration was made as one of the measures aimed at accelerating the development of the business sector, further improvement of the business environment and simplification of the procedures for starting a new business. As a result of this move, the time for state registration of new companies will be reduced from 20 days to 3-4 days. The entire process, including ordering the seal, registration of the documents with a public notary and opening the bank account, will take up to 10 days instead of the current 30. The number of procedures will also decrease from 13 to five. And in the future, with the introduction of electronic signatures, it will be possible to register a new business online.

This principle will not be applicable to the process of registration of public associations and funds, which, as before, will be registered with the Justice Ministry. The International Financial Corporation (IFC) expressed its readiness to provide assistance with the introduction of the new system. The head of state's reserve fund allocated AZN 4 million for the purpose of organizing the "single-window" state registration of business entities. The money is intended for the licensing software which is required for the introduction of the "single window" principle and for the purchasing and installation of the equipment required. The steps toward simplification of business regulations in Azerbaijan will help the country join the top 20 in the World Bank and Doing Business project in terms of simplicity of registration. In 2007, the country was 64th on this count, and 96th of 178 countries in terms of the simplicity of doing business.