Study of Small and Medium Enterprises in Azerbaijan - IFC

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The IFC survey demonstrates that the simplified tax regime is used by about 80 percent of individual entrepreneurs and SMEs (See Charts 7.1 and 7.2). Such a large percentage is indicative of the simplified tax regime’s effectiveness, while it may also be regarded as a sign of the widespread shadow economy. Chart 7.1 The bulk of SMEs use the simplified tax regime 80% 60% 40% 20% 66% 34% 60% 52% 22% 26% 28% 12% Simplified tax regime Standard tax regime Exempt from all taxes 0% Capital 1% Regions Total Chart 7.2 The bulk of IEs use the simplified tax regime 100% 80% 60% 40% 20% 0% 93% 7% Capital 95% 96%3% 1% 4% 1% Regions Total Simplified tax regime Standard tax regime Exempt from all taxes 114 St u d y o f Sma l l a n d Me d i u m Ent e r p r i s es in Az e r b a i j a n
The IFC survey reveals that one in five entrepreneurs in Azerbaijan conceals about 30 percent of its income from the taxation and one in three entrepreneurs spend 20 percent of his or her profit on unofficial payments, thus increasing corruption. The impact of corruption on SMEs is usually more negative and conspicuous than on large-scale enterprises, as such enterprises normally are in a more vulnerable position. Also, the effect of corruption on SMEs is felt more, as in most countries the SMEs’ contribution to the economy, especially on employment, is greater than that of large enterprises. Table 7.3 Unofficial payments made to government officials IEs SMEs Unofficial payments 36% 31% Earnings 7% 5% Turnover concealed from taxation IEs SMEs Concealed turnover 22% 14% Earnings 30% 28% As the figures and analysis above show, Azerbaijani tax reporting and payment procedures need to be simplified, especially for individual entrepreneurs and SMEs. In the most progressive countries, smaller enterprises benefit from more simplified tax reporting as it is generally understood that simplified tax reporting is sufficient to cover the business transactions conducted by such enterprises. The application of simplified tax reporting reduces both the entrepreneurs’ cost of compliance and increases tax revenues by cutting government’s expenditures on tax administration. Moreover, the VAT threshold is affected by strong inflationary pressures in Azerbaijan as the threshold is not indexed for inflation, which further aggravates the problem. 7.2.1 The shift from the simplified to the standard tax regime results in a considerable increase of tax burden, thus creating incentives to avoid entering formal business or discouraging registered businesses from further expansion The simplified tax regime with 2-4 percent tax rate is rewarding for new businesses, as it provides newly established businesses with time to establish themselves and grow. However, the difference between the tax burdens of simplified and standard tax regimes is very substantial. An SME moving to the standard tax regime has to pay 18 percent VAT instead of 2-4 percent turnover tax, 22 percent CPT on its corporate profit, property tax, and has to bear the administrative cost associated with bookkeeping, more in-depth tax inspections, and making at least 12 tax payments a 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 115
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Study of Small and Medium Enterpris
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Study of Small and Medium Enterpris
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5. Business Permits................
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Foreword and Acknowledgements IFC,
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critically examines all areas of op
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of each formality. Special attentio
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Policy Recommendations Business Reg
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Problems Sources of Problem Recomme
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Business Taxation Problems Sources
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Capital: Baku Country’s populatio
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The state, ultimately responsible f
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1. Methodology 1.1 Background The s
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the share of economically active co
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Scope of activity Official statisti
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2. SMEs in Azerbaijan The aim of th
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Meanwhile, the number of small and
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Table 2.2 Statistical information o
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The “typical” small enterprise
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According to the IFC survey, more t
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2.5.3 Legal disputes Most entrepren
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3. Business Registration In January
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According to the law previously in
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3.4 Economic impact estimate Accord
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tion duplicate is addressed to the
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the local tax inspectorate for regi
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3.10.3 Introduce the electronic reg
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3.10.7 Simplify the liquidation pro
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Business registration before ‘one
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Process map of one-stop-shop busine
Page 65 and 66: Registration for individual entrepr
Page 67 and 68: 4.1 Licensing: the legal framework
Page 69 and 70: Chart 4.1 Number of activities requ
Page 71 and 72: While the Rules specify limits for
Page 73 and 74: Chart 4.6 Economic impact of licens
Page 75 and 76: Annex 4.1 Checklist of issues for d
Page 77 and 78: Based on the IFC survey estimates,
Page 79 and 80: 5.2 Permits coverage The Azerbaijan
Page 81 and 82: Box 5.4 An example of overlapping p
Page 83 and 84: 5.4 Permit expenses Azerbaijani leg
Page 85 and 86: Chart 5.9 40% Average percentage of
Page 87 and 88: 2.4. Specifying in the law a unifor
Page 89 and 90: Annex 5.1 Procedure for obtaining c
Page 91 and 92: Annex 5.2 Checklist of issues for d
Page 93 and 94: The most significant legal act in i
Page 95 and 96: 6.1.2 There is no effective mechani
Page 97 and 98: 6.1.4 Entrepreneurs are not aware o
Page 99 and 100: IFC’s analysis showed that only h
Page 101 and 102: 6.2.2.1 The inspections process and
Page 103 and 104: View from an entrepreneur: “The s
Page 105 and 106: Chart 6.11 Average registration in
Page 107 and 108: going in the opposite direction. In
Page 109 and 110: clearly defined circumstances, or a
Page 111 and 112: Annex 6.2 Presidential Decree No. 7
Page 113 and 114: The bulk of individual entrepreneur
Page 115: Items 1-9 are collected at the firs
Page 119 and 120: Table 7.5 Main tax obligations of a
Page 121 and 122: Chart 7.3 IFC Survey: Complexity of
Page 123 and 124: 7.3.2 Tax inspections negatively af
Page 125 and 126: 7.3.5 The cumbersome VAT administra
Page 127 and 128: • Introducing clearer and more el
Page 129 and 130: Chart 8.1 Development of Credit Ins
Page 131 and 132: More than 90 percent of entrepreneu
Page 133 and 134: Chart 8.9 The loan interest rates o
Page 135 and 136: Case study of a Baku-based glass an
Page 137 and 138: View from a bank employee: “One p
Page 139 and 140: Box 8.2 Examples of a successful cr
Page 141 and 142: Box 8.3 Examples of alternative mec
Page 143 and 144: 9. Foreign Trade The volume of fore
Page 145 and 146: Box 9.1 Customs regimes under the C
Page 147 and 148: As Chart 9.1 illustrates, 98 percen
Page 149 and 150: Table 9.1 A comparison of the proce
Page 151 and 152: The comprehensive system of mandato
Page 153 and 154: Table 9.2 Average costs for imports
Page 155 and 156: Box 9.5 Customs payments The Custom
Page 157 and 158: Box 9.8 An excessive number of docu
Page 159 and 160: Moreover, due to the underdeveloped
Page 161 and 162: Expected impact More comprehensible
Page 163 and 164: 9.5.6 Accelerate WTO accession of A
Page 165 and 166: Chart 9.5 Goods importable upon app
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Azerbaijan has been long pending a
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List of Laws 1. The Tax Code of the
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Statistical Annexes Aze r b a i j a
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Chart A1.3 Individual Entrepreneurs
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Chart A1.7 Individual Entrepreneurs
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Chart A1.14 Three Major Types of Ob
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Registration Chart A2.1 Entrepreneu
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Chart A2.8 Three Major Problems Occ
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Chart A3.3 Existence of Licenses by
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Chart A3.9 Three Major Obstacles to
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Chart A4.4 Obtaining of Any Permits
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Chart A4.10 Time Required to Obtain
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Chart A5.4 Application for Credit o
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Chart A5.12 Average Interest Rate (
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Chart A6.3 Entrepreneurs That Under
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Chart A6.8 Authorities That Made In
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Chart A6.13 Breakdown of Number of
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Chart A6.19 Average Duration of One
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Chart A6.25 Small and Medium Enterp
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Chart A7.3 Small and Medium Enterpr
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Chart A7.8 Reported Share of Busine
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Chart A8.3 Usage of Optional (not c
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Azerbaijan Business Enabling Enviro
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Study of Small and Medium Enterprises in Azerbaijan - IFC

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