FREEDOM OF CAPITAL

Tax policy is a challenge facing the government in any country. It is not easy to find a middle ground to fill the country's budget without damaging the development of entrepreneurship. It is necessary to improve constantly the tax collection mechanism, observe complete transparency in monitoring, reform legislation and maintain parity.

Perhaps this is why the fiscal authority tries to hold discussions, as often as possible, of ongoing and planned steps in this area, evidence of which is the recent fifth tax forum titled "Azerbaijani tax system: realities and prospects".

At the cutting edge of modern technologies

Over the past 16 years, the Tax Ministry has become one of the leaders among government agencies that actively apply achievements of information and communication technologies. As a result, 90 per cent of tax declarations are currently submitted electronically. "Also as part of e-government, the ministry renders 62 types of services, i.e. more than any other government agency," Deputy Tax Minister Sahib Alakbarov said at the forum.

He noted that as part of ongoing reforms of tax administration, the ministry would continue to make active use of innovative methods, in particular, implement the "Electronic audit" (e-audit) system, which makes it possible to remotely inspect business people's accounting documents. After e-audit revealed violations, financial sanctions were applied to unscrupulous taxpayers to the tune of a total of 100m manats.

It is the use of modern technology that ensured to some extent that taxes were paid to the state budget last year to the tune of 7.118bn manats, which was 100.1 per cent of the forecast. This is against a backdrop of a four-fold decline in global oil prices. Moreover, successes in tax administration in the past five years almost doubled to 622.1m manats in the regions. 

At the same time, taxpayers do not always agree to the amount of taxes that tax authorities say they owe. For example, in 2015 the number of appeals to the Azerbaijani tax authorities averaged 90,000, of which 3.5 per cent were complaints. In addition, in January appeals to the Tax Ministry decreased by 20 per cent, which was the result of a reduction in inspections.

However, over the past few years the amount of tax arrears in this country has reached 2.4bn manats, and about 50 per cent of it is generated in the public sector. Alakbarov conceded that almost 30 per cent of tax payments that the ministry forwards to the state budget comes from the collection of tax arrears, and the ministry is doing its best to reduce this amount.

Even representatives of show business had to pay taxes at the end of last year had. Some of them had normally been among the worst defaulters. In December 2015, representatives of show business paid more in taxes than in January-November in the same year. Despite the "complexity of the process", according to the deputy minister, the main thing is that "the process kicked off", although a lot of work still needs to be done to educate this category of taxpayers and explain to them the need to pay part of their income to the state treasury.

To prevent businesses from going into shadow

Meanwhile, due to changes in the economic situation, there is an emerging need for additional adjustments to this country's tax policy. According to the head of the Baku office of the World Bank, Larisa Leshchenko, the sharp decline in oil prices not only causes difficulties but also provides an opportunity to develop the non-oil sector. "Over the past few years, the Azerbaijani leadership has done considerable preparatory work for a scenario that includes lower oil prices," she believes. However, according to World Bank estimates, oil prices will remain low, and this is a long-term trend, which means reforms need to be continued. Otherwise, in this difficult period businesses will start to go into the shadow sector.

Leshchenko said that according to various estimates, the shadow sector constitutes up to 50 per cent of the Azerbaijani economy. Accordingly, businesses resort to various methods to reduce the tax burden. From this point of view, it is very important to continue to take measures to reform the tax system.

In this context, Nuran Karimov of the American Chamber of Commerce (AmCham) believes that Azerbaijan needs to introduce tax amnesty. "Following the devaluation of the manat, goods and money that are in entrepreneurs' hands are different from what is on paper. It would be appropriate either to re-estimate these funds or revise the policy of tax audits. This will encourage entrepreneurs who took money out of the country to bring the money back and invest it in the country," Karimov said.

AmCham also suggests that the practice of signing contracts to protect foreign investment in the non-oil sector should be introduced. "Foreign investors must know that the rules of the game will not change after they start working in this country," Karimov said.

He also put forward the idea of applying an advance tax ruling with the calculation of all payable taxes on new investment projects. According to him, these measures could help get back the funds that entrepreneurs took out of the country.

According to the chairman of the Centre for Economic and Social Development (CESD), Vuqar Bayramov, the Tax Ministry has proven to be the government agency most prepared for the current situation, because innovative work done and the implementation of e-services have made it possible to minimize contacts between officials and business people. Along with this, it is necessary to boost the implementation of reforms, in particular reforms to develop cashless payments that will enhance transparency in the financial system. To this end, a limit in the amount of 1,000 manats in one transaction could be set on cash payments. Another suggestion from a civil society representative was that domestic e-commerce be exempted from value added tax. According to the person, this is not about online orders from other countries but about entrepreneurs who sell goods over the internet inside the country.

Tax benefits - a tactical move

At almost all of the five tax forums held, representatives of civil society and business circles requested tax exemption or tax benefits.

We should note that agriculture workers are currently exempted from almost all taxes (except land tax). According to calculations done by the tax authorities, over the period of time that there has been exemption from taxes, the budget has not received 2bn dollars. Different kinds of tax benefits have been provided for the establishment of enterprises in industrial parks. As is known, entrepreneurs have recently become exempted from value added tax on import of flour and grain.

In this regard, the provision of tax benefits is a tactical maneuver aimed to develop priority areas. As objectives set are achieved, tax benefits should be eliminated. But the main thing in this matter is to ensure that the tax burden does not become an unbearable burden for this country's business circles, on the one hand, and that there is enough money in the state treasury, on the other.