Study of Small and Medium Enterprises in Azerbaijan - IFC

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