TAXES IN FAVOUR OF BUSINESS

Major reforms in the tax system are launched in Azerbaijan. The presidential decree “On approval of the “Directions of tax reforms to be implemented in 2016 and the improvement of tax administration”, providing for reforms in more than 20 directions, indicates the magnitude of the upcoming events.

To prevent the rise of prices

The transition to floating exchange rates in late December, accompanied by a devaluation of the manat, has demonstrated that these tools were not enough to effectively control consumer prices. To prevent drastic increases in prices, the government has implemented a series of measures including the exemption of imported grains, production, and sale of flour and bread from VAT.

These measures taken to stabilize the prices of flour and bread aim at strengthening the social protection of the population. But this is not enough to solve the problems of social protection. The measures should cover a wider range of goods and services in the consumer market.

In this regard, the most important point in the presidential decree is the differentiation of VAT based on a number of social goods. Currently, the Ministry of Taxes is studying the international experience on differentiated VAT rates, as well as the lists of goods and services, which traditionally include baby foods, school supplies, medicines, medical equipment for disabled people, books and a variety of services. As a result of these works, the Ministry will prepare a draft of amendments to the Tax Code.

The objective of the VAT differentiation is to decrease consumer prices. It will be an important market tool of the government to ensure social protection of the population and to prevent the rise of prices for a number of social goods and services.

Yet another innovation aimed at stimulating the retail trade, as well as preventing the price increases will be amendments to the tax legislation, involving tax calculation based on the amount of added value of the goods subject to VAT.

The reduction of taxes

Another important aspect of the tax reform should be the improvement of the investment climate through the reduction of taxes. The businesses feel difficult to compete in the region, where tax rates in neighboring countries are much lower. According to the report of the World Bank Group, “Doing Business in 2016: quality assessment and management efficiency” (the rating of all countries as of June 2015), Azerbaijan is ranked as the 63^rd country with easies opportunities to do business, while Georgia ranks the 24^th, Kazakhstan – 41^st, Turkey – 55^th.

According to the Ministry of Taxes, the total tax rate (% of profit) in Azerbaijan is 39.8%, which is below the average in the developed member countries of the Organization for Economic Cooperation and Development (OECD) - 41,2%, but is higher than in European and Central Asian countries - 34.8%.

According to the same WB report, the total tax rate in Georgia is 16.4%, in Kazakhstan - 29,2%, and in Turkey - 40.9%.

Given the above, to improve the competitiveness of Azerbaijani products, it is essential to optimize and to reduce the taxes on the business community. In particular, this will concern the current VAT rate of 18% and the income tax of 20%.

The government should also solve the issue of levying VAT on agricultural products sold through the trade networks. The commercial facilities will be encouraged to hold separate records on farming products, which, along with the promotion of small and medium-sized businesses, will increase competition in the retail trade.

The earlier attempts to differentiate tax rates met strong opposition from the international organizations claiming that these regulatory measures would allow the businesses to evade tax payments and would reduce the budget revenues.

However, today the Ministry of Taxes has broad capabilities including state-of-art information and communication tools to detect attempts on tax evasion, which negate the fears regarding fraud operations.

Improving the country's image

The tax reforms to actively use the system of Tax-free and cashless payments will also help to improve the country's image.

As known, Azerbaijan is taking active steps to promote tourism but up until now, the internationally recognized tax-free system was dormant in Azerbaijan same as the current situation with cashless bank transfers.

The Ministry of Taxes is the operator responsible for the implementation of the tax-free system. Since the date of launch of the new system (16 June 2016), the nationals of 45 countries were returned VAT in the amount of more than 104 thousand manats. This implies that in such a short period, the foreigners have purchased tax-free goods amounting to more than 2 million manats. At the same time, this system is currently effective only at the Heydar Aliyev International Airport.

Eventually, as part of the tax reforms, the Tax-free system will be implemented at various other checkpoints within the country. Thus, the foreign tourists will be encouraged to make purchases directly while resting in Azerbaijan. By the way, according to the latest data, the influx of tourists had a positive impact on the turnover of large retail properties, which were practically on the verge of closing.

The introduction of cashless payments is more difficult. The Ministry of Taxes is preparing a number of proposals designed to develop this sector of economy. These proposals include, for example, limiting cash transactions to one thousand manats per day, possible VAT concessions, or concessions on other types of taxes applicable to cashless transactions at the trading facilities. However, this issue concerns not only the Ministry of Taxes. In particular, there are aspects related to the service tariffs paid with bankcards. In short, this very old problem requires a comprehensive approach.

At the beginning of the current year, the Ministry of Taxes has announced that the purchase of alcoholic beverages would be carried out only by means of non-cash payments. But the collusion of manufacturers and sellers has created interruptions and the deficit of beverages leading to a temporary cancellation of the ministerial measure.

In any case, there is no alternative for non-cash payments in Azerbaijan, if the country hopes to become a leading country in attracting foreign tourists to the country.

Rising the budget revenues

The improvement of the business environment and the social protection are not direct obligations of the Ministry of Taxes. The main task of this regulatory body is to increase tax revenues. Given that the Azerbaijani government does not provide for an increase in tax rates, the Ministry will try to solve this problem through the expansion of the tax base.

The Ministry is working on the development of measures aimed at increasing tax revenues by attracting new sectors of the economy.

The Ministry is currently focused on taxation of entrepreneurs providing digital services. Based on international practice, the Ministry is developing a taxation mechanism for e-commerce: sales of mobile applications, online-games, e-books, paid movies on the Internet, as well as other payments made through the World Wide Web.

Recently, the Ministry has paid attention to Azerbaijani companies operating abroad including those providing services in the offshore areas. The tax code will be relevantly amended in order to make such companies taxable. It is envisaged to create effective mechanisms of control over the operations of enterprises established by Azerbaijani residents in offshore zones, as well as to detect and to prevent tax evasion.

The tax authorities once again raise the issue of bringing housekeepers, personal chauffeurs, tutors, and others who provide paid services to taxation. By the way, it is possible that the patent system, in which the issue of patents and the amount will vary depending on the region (Baku, cities, districts), will be implemented on the basis of international experience.

In short, the tax system will soon have to go through a new phase of reforms, after which it must become more flexible and operating on the basis of innovative technologies and better adapted to the rapidly changing economy.