TAX HOLIDAYS

In circumstances when the world energy crisis is intensifying in the country measures are being taken to boost the development of the economy’s non-oil sector. It will be called upon to play a key role in diversifying the country’s economy, and in future it will become an important source of foreign currency earnings. Moreover, forming an export-orientated industry producing a high level of added value has been defined as an extremely important aim. 

But, owing to the reduction in the state’s investment possibilities, the market entities themselves, like local banks and companies, should act as the main sponsor of non-oil industry growth, and as much foreign capital as possible should be attracted. But providing a stable flow of an imposing volume of investments in the non-raw-material sector is impossible without serious reform of the tax and customs legislation and offering producers some kind of financial incentives. Naturally, complete transparency in the financial accounting system needs to be ensured for this purpose. 

Reform of the tax system and entrepreneurs’ proposals regarding specific incentives were the topic of discussion at the fifth annual tax conference held recently on the initiative of the American Chamber of Commerce (AmCham) in Azerbaijan. “We need to introduce a zero tax rate with regard to value added tax (VAT) in a number of fields, for example, in tourism, as well as on some food commodities,” the head of the Tax and Legal Department of the audit company KPMG Azerbaijan, Musfiq Aliyev, stated. 

He also noted that temporary tax breaks could be offered to entrepreneurs operating in the regions and it would also be appropriate to simplify the process of refunding overpaid taxes.

The company KPMG also proposed introducing the practice of drawing up preliminary tax agreements (Advance Tax Ruling) taking into consideration all the tax liabilities in relation to new investment projects. 

In its turn, the international audit company Deloitte and Touche proposed that the Azerbaijani government should introduce discounted tax rates on cash-free payments, for example, offer discounts on the sum of VAT in the retail trade. In the view of Deloitte Azerbaijan head Nuran Karimov, for the purposes of developing cash-free payments a complete restriction on cash operations in certain spheres could be applied, for example in the motor vehicle trade. Yet another measure to stabilise the monetary turnover could be restrictions on the volume of sums of money that can be converted into cash by an individual daily, and in turn it was proposed that banks should cut the commission on card payments for goods. The representative of Deloitte and Touche also suggested limiting the expenses that companies could deduct from their profits in the event of them being realised in the form of cash. 

Even more radical proposals on reform of the tax legislation were voiced by representatives of international audit company PwC [PricewaterhouseCoopers] Azerbaijan. It was proposed that the structure of the tax burden should be altered, creating certain tax breaks for entrepreneurs and shifting some of the burden onto the consumers. According to PwC experts’ studies, the structure of the tax earnings for 2014 confirmed that the main tax burden falls on the entrepreneurs, while a successful tax concept is being applied in world practice providing for the development of the economy, whereby the tax burden is spread more evenly between business and the consumers. 

In particular, it is a matter of changing the amount of taxation levied on wealthy citizens. Thus, the tax rate on real estate could be increased in the event of a property’s area exceeding the 300-400-square-metre limit. It is proposed that a higher income tax rate should be introduced on a monthly wage of more than 20,000 dollars, and also a higher rate should be applied to the owners of helicopters, yachts and so forth. It would also be appropriate to raise VAT, if the value of imported items of jewellery is more than 10,000 dollars. In the current, extremely complicated economic conditions it would be justified to raise the VAT rate on alcoholic beverages and on cigarettes and tobacco. 

The company PwC Azerbaijan thinks, on the other hand, that a number of tax breaks need to be introduced for business, to include permission to set up off-shore zones on the territory of Azerbaijan in order to relax taxes for companies registered in the country, more than 50 per cent of whose turnover comes from operations abroad. At PwC they think that tax reforms in Azerbaijan should be conducted in three directions: administrative reforms, differentiation of tax rates depending on the region and depending on economic activity. The latter is extremely important since the country’s economic zones have excellent potential and natural possibilities, so VAT rates could vary from region to region correspondingly. Besides this, in order to boost investments in the regions, tax-free dividends or tax breaks on dividends need to granted to enterprises operating in the regions. 

At the same time, exemption from VAT could be applied in different sectors, in particular in granting tax breaks, primarily with regard to agricultural production in the food industry. 

For the purposes of encouraging non-oil exports and developing industry, PwC is proposing introducing special tax discounts for producers. For example, to lower the 50-per-cent income tax rate for seven years and also to provide the opportunity for swifter amortization for industry requiring a considerable amount of capital investments, which will markedly speed up the return on the investment turnover. 

It should undoubtedly be admitted that not all the business-structures’ proposals listed are justified in the current conditions when the reduction in oil revenues and the decline in a number of branches of the economy are creating serious threats to the treasury collecting the revenues it needs. Nevertheless, quite a few of the proposals made by business circles regarding a relaxation of the financial regime have been reflected in the government’s and parliament’s recent decisions. In spite of the difficulty posed by an overall introduction of tax holidays on a sectoral principle, a decision has been adopted in the country on the temporary abolition of VAT on grain imports, as well as on the production and marketing of flour and bread.

A considerable package of tax breaks is awaiting investors who invest their money in non-oil production. A few days ago, the Milli Majlis sanctioned the amendments to the Tax Code and the law “On customs tariffs” in connection with the introduction in the country of certificates to encourage investments. The holders of such a document will be exempt from payment of the 50-per-cent income tax rate and also from land and property taxes for a period of seven years. In keeping with the amendments to the law on customs’ tariffs, the individual or entity will be exempt from payment of customs’ duties and VAT on imports of machines and equipment for investment purposes and on other apparatuses needed for the economy in priority sectors. The activity of industrial parks is included in the priority segments, as well as the setting up of industrial enterprises, the conducting of scientific research work and so forth.