Study of Small and Medium Enterprises in Azerbaijan - IFC

The bulk of individual entrepreneurs and more than half of SMEs operate according
to a simplified tax regime. Although the tax burden imposed under the simplified tax
regime is not very high, a difference between the tax rates under the standard and
simplified tax regimes either discourage businesses from growing bigger, thus holding
back their expansion, or push them into the informal economy, thus encouraging tax
evasion and corruption.
Table 7.2 Azerbaijan in Doing Business 2009
Area
Ranking
Ease of doing business 33
Starting a business 13
Dealing with construction permits 155
Employing workers 15
Registering property 9
Getting credit 12
Protecting investors 18
Paying taxes 102
Trading across borders 174
Enforcing contracts 26
Closing a business 81
Source: IFC/WB Doing Business 2009.
Firms operating in the formal economy face high tax rates and cumbersome tax
administration procedures of the standard tax regime as their businesses grow. On the
one hand, compliance with the tax system – preparing and filing numerous tax reports
and making tax payments – is time consuming and expensive; and on the other hand,
tax compliance is primarily enforced by tax inspectors, who have broad discretion as the
execution of these inspections is not sufficiently elaborated in the tax legislation. This
provides room for corruption and unofficial contacts, and in recent years tax inspections
and rates of administrative fines have increased considerably. For instance, VAT payers
are required to file a monthly return together with enclosures thereto, which is difficult
and time demanding. The 2009 Doing Business report shows that Azerbaijani businesses
spend as many as 376 hours to comply with the Tax Code and social protection laws,
and make the necessary payment arrangements with the tax and social protection
authorities, whereas Kazakh businesses spend on average 271 hours to deal with taxes.
The complexity and vagueness of the tax legislation and low level of entrepreneurs’ legal
awareness also contribute to the above problems, nurturing unofficial settlements.
Aze r b a i j a n Bu s i n e s s En a b l i n g En v i r o n m e n t Pr o j e c t 111