ACCOUNTING AND BALANCE

In 2020, the COVID-19 pandemic affected the whole world, changing the balance of economic relations and forcing to take additional measures to mitigate social consequences.

Total financial support provided last year to fight the coronavirus globally is estimated at $14 trillion. This has had a major impact on the overall public finances. The fight against the pandemic decreased the ratio of the state budget deficit to world GDP by 11.8%, in developing countries - 10.3%, and in oil-producing countries - 10.6%. In Azerbaijan, this indicator was only 2.4%, i.e. five times less than the world average. Although, according to International Monetary Fund (IMF), in Azerbaijan the mitigation of the fiscal balance in 2020 was the greatest among developing and middle-income countries. The government continues this trend this year too.

Group leader

Because of the uncertainties with the pandemic, expanding economic crisis and despite the active vaccination process in many countries, support measures to restore global economic growth are still relevant. For example, Canada will provide $70-100 million as a fiscal stimulus package over the next three years. Greece will support economic growth through solidarity taxes and social security contributions, while Australia has prepared the JobMaker plan to create necessary infrastructure for widespread introduction of new technologies for enterprises and consumers.

In accordance with global trends, fiscal expansion is also continuing in Azerbaijan to overcome the economic downturn and take measures for social security. However, unlike global trends, in Azerbaijan this process largely depends on the financial resources of the state, not on additional taxes for profitable business areas.

Fiscal mitigation measures were the greatest in Azerbaijan last year, reaching 20% of GDP. This year we are second only to Kuwait, but in 2022-2025 we will again take the leading positions among developing countries, as well as countries with middle income.

Certainly, Azerbaijan's leadership in this area was possible due to the “fiscal space” created in the country. In comparison with 40 developing countries, as well as countries with middle income level, Azerbaijan used the state budget tools the most.

With unprecedented low oil prices and declining production in Azerbaijan in 2020, it was the financial resources of the state that covered the costs of combating drought and pandemic, as well as the victory in the Second Garabagh War. IMF's fiscal report confirms this fact too. In fact, Azerbaijan has become the leader among other countries of the group (China, India, Brazil), with economies many times larger than Azerbaijan’s.

Temporary tax regime

To reduce the economic consequences of the pandemic, Azerbaijan introduced a temporary tax regime last year.

According to the amendments to the Tax Code, from January 1, 2020, hotels and other tourism facilities, tour operators and travel agencies, the catering sector, passenger transportation within the country, including taxis, were completely exempted from property and land taxes for one year.

Also, delivery services, organizers of exhibitions, cinemas, museums, theatres and concert halls, sports and recreation facilities, educational courses, out-of-school educational institutions, and psychological centres were exempted from taxes on property and land. These measures also affected other facilities, which partially or completely suspended their activities due to the lockdown introduced by the Cabinet of Ministers.

Also from January 1, 2020, a number of additional benefits were introduced for the above areas of economy for a period of one year. Income tax payers and simplified tax payers received 75% and 50% tax benefits, respectively. The government also decreased the withholding tax rate on real estate lease from 14% to 7%.

Individual entrepreneurs engaged in the construction and trade were also granted concessions related to the interest accrual on unpaid taxes, as well as the rate of deductions for compulsory social insurance.

Extended benefits

Many entrepreneurs are interested to know whether the tax exemptions introduced in 2020 for private businesses continue this year as well. At the end of the last month, Milli Mejlis adopted the draft amendments to the Tax Code.

The most positive and long-awaited innovation concerns preferential taxation of economic activities in the liberated regions. Presumably, these benefits will be in force for more than a year. Thus, the region will become one of the most profitable zones in Azerbaijan for doing business and living.

Import of machinery, equipment and devices for the production and processing of gold and silver jewellery to ensure the efficient use of gold reserves in Kalbajar is also exempt from VAT tax effective January 1, 2021 for a period of up to 3 years. Full VAT exemption also concerns the sale of gold and silver ingots, coins and pellets. Azerbaijani authorities also exempted the imports of platinum, gold and processed, sorted, framed and fixed diamonds from paying excise taxes until the end of 2023.

Other important innovations in the Tax Code provide for the extension of existing exemptions. Especially, tax exemptions for the import of vaccines against the COVID-19 pandemic and syringes.

Also, due to the crisis and the lockdown, VAT exemptions for the import and sales of grain, as well as the production and sale of flour and bread are extended until January 1, 2022.

Tax exemption for the production and sale of bran used as feed in livestock and poultry farming has been extended until March 1, 2022.

As well, a whole group of food and non-food products will be exempted from taxation. Thus, the government is trying to prevent the rise of prices for these products.

But some goods, on the contrary, will likely rise in price, as deductions from their sale will grow. Smokers will have hard times, for example. All types of smoking tobacco, with the exception of hookah tobacco and industrial tobacco, are included in the list of excisable goods. According to the amendments to the Tax Code, the excise rate on such products is set at ₼30 per kilogram, and for tobacco and tobacco products consumed by heating - ₼12.9 per 1,000 pieces. It is envisaged to increase excise rates even on cigarillos and liquids for electronic cigarettes produced in Azerbaijan.

As part of the amendments to the Tax Code, rates of deductions for compulsory social insurance were also revised, mostly downward. This can also be considered among the measures to support businesses during the difficult lockdown and post-quarantine periods.

Stable Tax Code

Fiscal sector continues to retain its reputation as "dynamically developing", promptly responding to the economic situation in the country and external shocks. At the same time, accounting specialists have repeatedly expressed their dissatisfaction with the complexity of the revised code. In fact, the current Tax Code has been in effect since January 1, 2001, with the number of amendments growing each year. It means accountants have to scrupulously study a large number of third-party sources, documents, etc.

Therefore, it is time to prepare a new version of the Tax Code. According to the head of the Main Directorate of Tax Policy of the State Tax Service, Nijat Imanov, this is part of their plan but in the medium term. He promised that the document will become "more competitive and understandable." In addition, tax legislation will continue to change in accordance with international experience and the improvement of accounting policies. But in the future, to increase the investment attractiveness of Azerbaijan, it is necessary to increase the stability of the Tax Code and ensure integration into international tax relations.

Competent fiscal policy is the basis of economic relations in the country. The level and degree of the shadow economy, comfort of businesses, as well as the inflationary processes depend on it. Therefore, even the slightest changes in taxation can sometimes affect the situation in a particular industry.

Economic situation and tax administration in Azerbaijan in recent years have undergone significant positive changes. Volume of tax payments has grown significantly due to the "whitewashing" of accounting in many areas of business. And competent tax legislation is the basis on which this process will depend.