GROWTH FOR RELAXATION OR OTHER WAY ROUND?

In 2022, the Azerbaijani government will kick off the largest tax reform in recent years. Amendments to the tax code include the introduction of fiscal benefits that will exempt a few sectors such as publishing, automotive industry, entrepreneurship, etc. from taxation, while increasing the taxes and fines for various types of violations.

Instead of a thousand changes

On December 3, the parliament of Azerbaijan adopted in the third reading a package of amendments to the Tax Code (TC), despite the opposition to such a large number of amendments. In particular, Ali Masimli, Deputy Chairman of the Economic Policy, Industry and Entrepreneurship Committee, suggested developing a new tax code instead, noting that the existing one was developed twenty years ago under a different model of economic development.

“They are trying to introduce amendments and changes to a relatively new document, hence there are enough uncertainties. The Tax Code of Azerbaijan well deserves a record in the Guinness Book of Records in terms of the volume of changes made so far. I suggest to prepare a new tax code by 2030,” Mr. Masimli said.

“The number of changes is bigger than the code itself. We need to prepare a new tax code for a longer period. It should remain stable for an average of ten years. Businesses consider it important that laws and regulations remain intact for a long time,” MP Vugar Bayramov said.

However, the committee chairman Tahir Mirkishili reassured his colleagues that the works on the new tax code were well underway.

Price of alcoholic beverages, cigarettes and cars will rise

Either way, with the new changes in the Tax Code, the government expects to get additional revenues (about ₼65 million) to the state budget in 2022. How can the government achieve this number?

First, excise tax on the production of each litre of drinking (ethyl) spirit, vodka, fortified beverages and alcoholic materials, liqueur and liqueur products, cognac and cognac wine materials increased from ₼3.2 to ₼4.

Secondly, the rate of excise tax on cigarettes or tobacco substitutes produced in Azerbaijan increased from ₼35 to ₼38.5 for every 1,000 cigarettes.

Also, the list of excisable goods to be introduced starting from 2022 includes tobacco substitutes, disposable electronic cigarettes, hookahs, and their substitutes. Thus, each kilogram of tobacco substitutes will be applied an excise rate of ₼30, while the cost of each unit of disposable electronic cigarettes, hookahs, and their substitutes will increase to additional ₼0.25.

Thirdly, excise tax on imported cars with engine capacity more than 3,000 cubic centimetres and produced more than 3 years ago will also increase. Also, an additional coefficient will be applied to the excise tax on imported vehicles manufactured over 7 years ago.

Fourthly, tax rate for individuals engaged in the collection of recyclables, procurement of agricultural products, etc., but not registered with the tax authority was increased from 2 to 5% applied to total income, including expenses.

It would be wrong to say that the above innovations were welcomed enthusiastically. It is clear that they will automatically increase the prices for these goods, which has always been a painful issue. Minister of Finance Samir Sharifov responded to the criticism of MPs saying that today the rate of duties on tobacco and alcoholic products in Azerbaijan are lower than in other countries. As for cars, in 2018 and in 2020, Azerbaijan imported 28,900 and more than 53,000 vehicles, respectively. In the nine months of 2021, the country imported 63,000 cars. “60,000 of these motor vehicles are passenger cars. We don’t observe any decline in car imports. But whether these cars are old or new is a different question,” Mr. Sharifov said.

He also commented on the rising duties on residence permits for foreign nationals and passports. “There are duties, which have not been revised since 2007. I think they need to be revised periodically. On the other hand, if the budget revenues from duties increase, they decrease in the other direction," Mr. Sharifov said, meaning the decreasing inflow of money to the state budget from tax incentives. Ministry of Finance estimates the benefits provided as part of the new amendments package at ₼50 million annually.

Tax relief

Residents of industrial parks will be exempt for another five years (until May 1, 2026) from paying taxes and customs duties when importing goods.

As for the tax benefits for the population, material aid and benefits provided to members of families of martyrs, as well as servicemen with disabilities due to injury during military operations for the freedom, sovereignty, and territorial integrity of Azerbaijan will be exempted from income tax from 2022 on.

Good news on medical services. Starting next year, it will be possible to return the VAT paid such services. The recoverable amount will be 15% of VAT paid cashless and 10% paid in cash.

In addition, given the rising prices in the healthcare sector, up to ₼10,000 and ₼40,000 provided as lump sum amounts to cover the payment for medical services in Azerbaijan and abroad, respectively, will be exempted from income tax.

From January 1, 2022, the tax on the import and sale of hybrid vehicles with an engine capacity of no more than 2,500 cubic centimetres and not older than 3 years will be suspended for three years. Electric motor vehicles will not be subject to VAT at all, both when imported and on the local market.

At the same time, VAT for the purchase of oil and gas products, cars, alcoholic beverages, and tobacco products is no longer refundable.

Most of the benefits concern VAT. For example, from next year import of books and paper to Azerbaijan will be exempted from VAT. The list of eligible products is approved by the relevant authority. The import of textbook sets, paper rolls or sheets for the production of these products will not be subject to VAT either. In general, all editorial, publishing and printing activities (with the exception of advertising services) for the production of print media and the publication of books are also exempt from VAT. It is assumed that these benefits will contribute to the weakening position of print media in the country, while the interest in the production of paper products is growing.

Among other privileges we should mention tax concessions to the banking sector  of Azerbaijan on operations carried out as part of the Corporate Social Responsibility (CSR) program.

During and after the 2020 war in Garabagh, a number of banks wrote off the debts of the members of martyr families and the injured veterans. Funds allocated by banks for these purposes will not be classified as taxable income any more. Assets created to cover the principal amount of written off debts will be considered as expenses deducted from income.

Cashless operations grow

As part of the project to expand the scope of digital operations in the national economy, the government increases the number of areas suitable for mandatory cashless operations. Since January 1, 2022, the sale and purchase of goods valued at over ₼4,000 in retail trade networks, as well as medical services costing over ₼500 must be carried out in a cashless form.

This will also concern the purchase and sale of cars. Experts claim that the main reason is to ensure the appropriate recording of these transactions to prevent the cases of fraud. For example, often a car is sold using a General Letter of Authority and then the seller may demand (under the law) to return the car. Or they sell a car supposedly in perfect working order, but it then breaks down. At the same time, the cheated buyer has no grounds for filing a claim, any opportunity to prove that the transaction was carried out according to the law. Experts believe that transactions paid through banks transfers will not bring any harm to potential buyers. This is done to protect the citizens from problems, to protect their interests. Another advantage of this measure is to improve the situation with the car dealers and ensure their full subjection to taxation.

Sanctions

Along with benefits, it is planned to introduce a package of sanctions. According to the amendments to the Code of Administrative Offenses, officials will be fined in the amount of ₼300 to ₼500 and legal entities – from ₼1,000 to ₼1,500 for the non-cashless purchase for marketing purposes or selling (except for retail sales) of goods/commodities subject to mandatory labelling.

In addition, taxpayers engaged in entrepreneurial activities without a receipt confirming the payment of a fixed-amount simplified tax and compulsory state social insurance will be subject to new sanctions.

These tightened measures will also affect the individuals involved in cargo transportation operations. They will not be able to deliver goods from regions to Baku without an electronic invoice. To monitor these operations, tax posts will be set up near, for example, the Meyveli market in Baku and carriers of agricultural products without electronic waybills will not be allowed to enter the market.

These changes concern the suppliers of products, since a lion’s share of goods remains unrecorded. Also, the owners of goods or drivers without a distinctive sign for their vehicles will not be able to get electronic passes. Yet this innovation will not apply to rural residents who bring their farm-grown products for personal consumption or for sale to Baku.

According to experts, the intention is to make sure that cargo carriers who purchase goods from farmers and deliver them to markets or processing facilities pay the necessary taxes. Transport operations are then digitalised so that the tax authority is aware of the progress of events and can carry out tax control appropriately.

In a word, new fiscal innovations will affect almost all spheres of the national economy. Their effectiveness will be seen in the growth of the state budget collections in the first quarter of 2022.