OBVIOUS SUPPORT

The devaluation of the manat at the end of last year, although it had a negative impact on all sectors of the economy and business life of Azerbaijan, led to a variety of beneficial changes and lucrative prospects. The number of initiatives in the field of private sector development has been growing literally day by day. Almost all inspecting bodies unanimously declared a moratorium on any "side" inspections of business entities, and there appeared new programmes and proposals on state support for businesses. On top of that, Entrepreneurs' Day was established.

Inspired by the growing attention of the country's leadership, businessmen began to actively put forward their own proposals to improve the business climate - and sometimes quite controversial ones...

"Build-Operate-Transfer"

New initiatives are mainly aimed at promoting the development of large businesses able to cope with the implementation of large projects and the manufacture of export-oriented products. It is in this sphere that, we must admit, there are many gaps in Azerbaijan today - although there is a sufficient number of empty niches, entrepreneurs do not show much activity in the creation of enterprises that combine all links of the production chain. There are a couple of good examples, for instance, in food production, when a holding company owns farms that grow food, enterprises that process it and points of retail sale where the finished products can be sold.

In world practice, this form of the organization of the business process is very common, because it is endowed with many advantages and has proven its effectiveness. Therefore, the initiative put forward recently at the national level for the implementation of the model "Build-Operate-Transfer" (BOT) in the field of construction can be considered one of the most successful in investment projects. For example, under the decree of President Ilham Aliyev on the application of the law "On special financing for investment projects in connection with construction and infrastructure projects", investment costs under the BOT model will be reimbursed to investors through the purchase of their products by authorities or consumers. However, if this form of payment is not possible in whole or in part, then the investor will be paid financial aid. A similar funding model is planned to be carried out during the construction of bridges, reservoirs, sewage installations, educational institutions and other major strategic objects. By the way, the term of agreements concluded within the BOT model cannot exceed 49 years. As can be seen, by this model entrepreneurs receive some sort of safeguards against possible losses, which is extremely important given the fact that projects of this magnitude require large investments. Minimizing the risks in theory should be a powerful impetus for real investors to boldly take up major construction projects.

However, this model, apparently, is only one of the strokes in the picture created in Azerbaijan today of a completely new environment for the promotion of investment. According to Azerbaijani Deputy Minister of Economy Niyazi Safarov, thanks to presidential decrees, almost the entire territory of Azerbaijan has become favourable for investment. 

As part of the innovations, entrepreneurs in Azerbaijan will be provided with a document of investment encouragement. With the receipt of this document, 50 per cent of the income of an individual entrepreneur and the revenues of a legal entity will be exempt from tax for seven years. First of all, the benefits will be extended to the importation of production equipment and installations imported into the country by legal entities and individual entrepreneurs. Their imports will be exempt from customs duties and VAT for seven years. Entrepreneurs will also be exempt from property tax and land tax for a period of seven years (from the date the document is received).

Activities undertaken to encourage investment, according to the deputy minister, cover almost all areas of the non-oil sector. "They cover not only traditional spheres for Azerbaijan, but also new ones. I want to note that very important evaluation work was carried out in connection with the definition of the minimum amount allocated for an investment project, and administrative-territorial units. Investment amounts were differentiated based on potential, the existing economic situation, the level of employment and other aspects and were defined in accordance with spheres of economic activity in each region," he said.

In addition, the Ministry of Economy has prepared additional proposals on lending benefits to enterprises that manufacture export-oriented products and has already begun accepting applications from entrepreneurs through a new investment mechanism, which provides for the division of the country into five regions by the minimum investment limit.

Similar work - putting forward proposals to encourage business and investment activities - is actively carried out by other government agencies, particularly the State Customs Committee and the Ministry of Taxes. In turn, entrepreneurs themselves, involved in the process, put forward their own ideas on how to improve the business environment in the country. But not all these proposals, as already mentioned above, can be called objective and unambiguous.

Put in a word for "poor" supermarkets

In the light of the aforesaid, the most sensational, so to speak, event was an appeal from the owners of a number of supermarkets (Bizim Market, FRESCO, SEBET, Makro-mart, ARAZ, Neptun and Bolmart) to Minister of Economy Sahin Musta-fayev to apply a zero VAT rate for socially important staple products made in the country: meat, fish, milk, flour, eggs, rice, oil, fruits, vegetables and baby food. And at the same time, the managers of the country's largest chains of supermarkets are hinting at what the rejection of their proposals by the government may lead to. In particular, a letter sent to the Ministry of Economy states that since the transition to the floating exchange rate of the manat it has been impossible to keep the previous staff and business profitability without raising food prices. Financial problems lead to staff cutbacks and the closure of supermarkets. In their view, to solve the problems it would be appropriate to reduce the tax burden in retail trade or apply tax incentives.

The response from the ministries was not long in coming - Minister of Economy Sahin Mustafayev received the petitioners and promised to consider their request, while the Ministry of Taxes sent time study inspectors to these supermarkets.

However, in this case, there is no need to rain accusations on fiscal services - time study, roughly speaking, is just an inspection of the real volume of the trade turnover, although the traders' claims were met by the tax authorities, to put it mildly, with bewilderment. For example, according to the head of the main tax risks analysis and control department of the Ministry of Taxes, Elsan Huseynov, the latest statistics show that entrepreneurs operating in the sphere of trade take advantage of the decrease in tax control measures, reduce the tax payments to the state budget and try to evade taxes: "Recent monitoring in one of the major retail chains revealed that the taxpayer understated the volume of the February trade turnover by 6 times in the declaration and did not indicate the trade turnover for March. If we consider the growth of trade in connection with the Novruz holiday, then there is no need to comment."

Oddly enough, most economic experts who are usually happy to oppose the tax authorities and call for a cut in the tax burden supported their outrage this time. Indeed, it is obvious that the business of large retailers is quite successful at least in Baku. Yes, prices rose for almost all imported and local products. Yes, the devaluation of the manat affected the purchasing power of the population. But in this case, it is necessary to take into account that we are talking about processes affecting the entire economy. That is, if economic growth falls and if government revenues significantly decline, of course, it can affect all participants in the economic life of the country. In this case, it is at least illogical to expect profitability to be the same as before without making extra efforts.

For example, an expert in the field of crisis management and business financing, Farhad Hacinski, also believes that supermarket chains in Azerbaijan need to optimize their costs and review their sales policies in the current conditions.

"This problem affects, in the opinion of the owners of supermarkets, only a few items of goods and accounts for about 30 per cent of the turnover. The statements that supermarkets have not increased prices of goods also need to be adjusted. This statement is more applicable to staple goods, but I cannot agree that the prices of the entire range of supermarket goods remain as they were until 21 December 2015, i.e. before the devaluation and the transition to the floating exchange rate of the manat. This means that, theoretically, there is potential to fully or partially compensate for losses from the remaining 70 per cent of the turnover. It is also necessary to optimize the cost, which are differently structured in different supermarkets. Simply it is necessary to pay attention to related resources and free them up," Hacinski said.

"The statement that suppliers are not going to lower prices because they have an alternative in the form of small shops is a weak argument. I am confident that the combined actions of the owners of supermarkets in relation to suppliers would certainly have a serious effect, and suppliers will be forced to compromise," the expert added.

According to economist Samir Aliyev, the problem is that previously supermarkets managed to evade taxation by indicating a smaller turnover. Now, they are given the choice between the payment of VAT or a 6-per-cent simplified tax regime with stringent control measures by the fiscal authorities. That is, in fact, they have to disclose the full amount of their profit and turnover and pay real taxes. The Ministry of Taxes notes that the fiscal authorities are happy to differentiate the VAT, but only in relation to non-cash payments in order to stimulate their development. In all other cases, it is not appropriate and may seriously affect the income of the state budget - VAT forms about 30 per cent of all tax payments to the state treasury.

In short, in this case, the claims of supermarkets sound at least unconvincing. We can only hope that the hype created around them will not overshadow other more sensible suggestions from the business circles of the country...