Tax paradise in Azerbaijan

Hot debates over state budget-2012 at the Parliament of Azerbaijan this week culminated in tax burden theme.Everything began after Board Chairman of the Central Bank of Azerbaijan (CBA) Elman Rustamov told the Parliament that reduction of tax burden in the non-oil sector of Azerbaijani economy in the middle-term future is quite essential. "Tax burden in Azerbaijan should be competitive to let the country enter international markets. To provide a growth of foreign investments, tax burden in Azerbaijan should be lower than that in countries from where the investments flow," Rustamov said.

As the World Bank reported, Kazakhstan keeps the world's 38th position, Georgia keeps the 10th, and Azerbaijan keeps the 95th in terms of tax burden rate. Rustamov suggested shifting tax burden from production to consumption, which is currently one of major trends of tax reforms worldwide. He said it is essential to create a tax system in Azerbaijan, which will stimulate the population to accumulate or invest but not consume.

Shortly speaking, the CBA Chief suggests increasing tax burden for luxurious goods such as jewelries and cars and decreasing social tax rate and taxes in the production sector with the aim of stimulation of production, which will contribute to creation of new jobs and increase of export potential.

Commenting on the proposal envisioning the necessity of reduction of tax rates, Tax Minister Fazil Mammadov on the same day told the Parliament that the tax burden in Azerbaijan is reasonable.

As the Tax Ministry reported, tax burden in the country was equivalent to 11.6 per cent in 2009, 10.3 per cent in 2010, and 11.9 per cent in 2011. This indicator is much lower than international one equivalent to around 40 per cent. Tax rates in Azerbaijan have been descending in an accelerated pace in some recent years: profit tax rat was decreased from 22 per cent to 20 percent, and Value Added Tax (VAT) rate has been decreased from 20 per cent to 18 per cent, which is also reasonable. Such tax rates provide all necessary conditions for entrepreneurs and for attraction of large investments to the country.

The Azerbaijani Tax Minister thinks a decrease of income tax rate and a change of the limit of the monthly taxable income are inexpedient. Currently, physical persons' monthly income in Azerbaijan is subject to taxation on tax rate of 14 per cent if the sum of taxable income does not exceed 2,000 manat. If income exceeds 2,000 manat, the taxpayers should pay 280 manat plus 30 per cent of the sum exceeding 2,000 manat.

Hence, no decrease of tax rates is expected to occur in Azerbaijan next year.In addition, next year there will not be prolonged tax preferences for insurers, re-insurers and banks of Azerbaijan over taxation of the part of profit spent for an increase of the statutory capital (the preferences were put into effect in the early 2009 for a 2-year period). As has been found out, there is currently no need in prolonging these tax preferences as assets of Azerbaijani banks continue to grow so banks most of all think how to place them.

However, this does not mean that no any tax reform will be carried out in Azerbaijan next year. On contrary, as the Tax Minister reported, a series of tax preferences stimulating an increase of non-cash payments may be put into effect right this year. Preferences and sanctions are expected to occur in this field; the Tax Code is likely to be changed, and the Laws "On Central Bank" and "On Bank Operation" will be amended to expand the opportunities of payment for goods and services through plastic cards, and conduct of stimulating lotteries for buyers.
Secondly, the Tax Ministry of Azerbaijan does not rule out the possibility of introduction of tax preferences to stimulate securities market development. The Tax Minister said if the stock market develops intensively the opportunity of provision of tax preferences to this market will be examined.

Tax preferences may also concern Azerbaijan's leasing sector. As is known, the issue of VAT compensation under purchase of equipment has long been urgent for leasing companies. The VAT levied on equipment that is imported from abroad as part of leasing operations is not subject to mutual payment so a lesser is forced to pay VAT twice: on the property bought for leasing purposes and on payments obtained from clients. It looks like a double VAT taxation as another 18 per cent VAT is imposed on the same transaction. By the way, leasing companies are not subject to a temporary tax exempt from part of profit spent for the reasons of capitalization, unlikely the bank and insurance sectors.

Azerbaijani tourism companies also demand for tax preferences for the reasons of tourism market development. Regional tourism facilities were provided certain tax preferences equivalent to 50-80 per cent of their respective incomes about 3 years ago; however, these preferences have not so far become economically viable as the tourism is a field hard to tax. Thus, the Tax Ministry of Azerbaijan does not think provision of tax preferences to tourism facilities is expedient.
For his part, Finance Minister of Azerbaijan Samir Sharifov backs the idea of exempting the payment for study at Azerbaijani educational institutions from taxation. Shamsaddin Hajiyev, Chairman of the Parliament's Science and Education Committee, suggested exempting farmers from either land tax or harvest tax for the reasons of agriculture development.

Whether the said offers will be reflected in the Tax Code next year and to what extent they will be effective remains unknown. But one thing is clear: the role of taxes in growth of economic potential, defense power, and wealth of population of the country is undoubtedly great. The final goal of Azerbaijan's tax policy always was acceleration of economic development, creation of favorable investment mode, and stimulation of entrepreneurship development.


Ellada Khankishiyeva /Trend/